You've probably read about the tsunami of bank failures over the past several years. And you may be aware that hotel profits have fallen off a cliff -- leaving many hotels struggling to meet their interest payments.
As an investor, I automatically wonder how I can profit from these trends.
When the FDIC seizes and sells a bank, whoever buys it often typically takes on only the healthy parts of the bank, usually leaving the FDIC with most of the so-called toxic assets. In short, the buyer makes out like a bandit.
The same goes for hotel buyers. With hotels in default on their loans, buyers can snap them up at fire-sale prices, either debt-free or with very low-interest loans, making it easier for them to turn a profit.
I see the opportunity. Unfortunately, I can't just go buy a failing bank or hotel. I don't have that kind of cash, and besides, I'm no expert at running either of those businesses.
Problem? What problem?
Problem solved. I can invest in publicly traded companies created solely to take advantage of these deals. The masterminds behind Hilltop Holdings (NYSE: HTH ) , Pebblebrook Investment Trust (NYSE: PEB ) , and Leucadia National (NYSE: LUK ) , which have landed some of those opportunities, are my favorite way to profit from them.
Gerald Ford (no relation to the former president) is a billionaire because he's exceptional at one thing: successfully turning around banks. Ford has been around the block and then some. Over the two decades following his start in 1975, he bought 30 banks and five thrifts, eventually selling them for a total of $605 million.
That sum is impressive, but it's pocket change compared to Ford's next play. In 1994, he and a partner bought First Nationwide Bank for $1.1 billion. After rolling up a few other banks, they sold it in 2002 to Citigroup for $5.3 billion.
Clearly, this guy knows what he's doing.
Now he's at it again -- and this time, you can come along for the ride. Ford is chairman of Hilltop Holdings, a shell company sitting on $780 million in cash earmarked to buy up failing banks, turn them around, and sell them at a profit. Unlike Ford's previous investment vehicles, this one is publicly traded, giving us the opportunity to invest in Ford's bank-buying acumen during a time of record numbers of bank failures.
Pebblebrook Investment Trust
Roughly $30 billion in hotel debt has either come due in the last year, or will in the next two. That has already left many hotel owners high and dry, since they haven't been generating nearly enough profit in the last couple of years to pay off their loans. As those loans come due, we're seeing more and more hotels go into default.
Enter Jon Bortz, who's made a living taking advantage of debt-laden hotels. He started out by working his way up the ranks in real estate company Jones Lang LaSalle (NYSE: JLL ) , eventually starting its hotel investment division. In 1998, he branched out on his own, forming LaSalle Hotel Properties (NYSE: LHO ) , which saw a tremendous run-up in the subsequent 10 years as the company bought up 31 hotels.
After retiring from LaSalle Hotel Properties in September 2009, Bortz didn't remain on the golf links long. He launched his new venture, Pebblebrook Investment Trust, last December, raising $350 million in an IPO. In less than a year, Bortz has already bought up five hotels, with deals in the works for more.
And he isn't just buying up any old hotels. Bortz is focusing on iconic hotels in major coastal cities -- great assets that have stumbled recently because of oversized debt commitments, such as the Sir Francis Drake in San Francisco and the Hotel Monaco in Washington, D.C. Pebblebrook picks up the hotels without the huge debt burdens they previously bore -- and through the company's shares, we have the ability to put our money in Bortz's able hands.
Often described as a miniature Berkshire Hathaway (NYSE: BRK-B ) , Leucadia National operates much like Warren Buffett's brainchild. Just as Buffett took over Berkshire's textile business and redeployed its capital to better investments, star investors Joseph Steinberg and Ian Cumming took over commercial financing company Leucadia (then called Talcott National), using the cash it generates to invest elsewhere.
Why do I include Leucadia on this list? After all, Steinberg and Cumming are generalists, not experts in a particular area like Ford or Bortz. However, Leucadia's leaders are taking advantage of opportunities I'm not even seeing. They've made great deals in iron and copper mines, timberland, casinos, and vineyards, just to name a few. The results speak for themselves: Over the last 30 years, Steinberg and Cumming have compounded book value per share by 18.5% per year -- and the stock price has more than kept pace with that growth.
Invest in great investors
You might not be able to buy First Nationwide Bank or the Sir Francis Drake Hotel, but that doesn't mean you can't profit off them. You just need stock in the companies controlled by the investors making these deals. Then, sit back and let the experts do their thing.