A Billion Dollar Real Estate Bet

This nation was built by men who took risks – pioneers who were not afraid of the wilderness, business men who were not afraid of failure, scientists who were not afraid of the truth, thinkers who were not afraid of progress, dreamers who were not afraid of action.  ~Brooks Atkinson

A fascinating  Real Estate story yet to unfold is  the bet by Hedge Fund Manager, David Tepper  whose fund is called Appaloosa Management who has won big and lost big…he is a true contrarian.

During last February and March, his  hedge fund called  Appaloosa Management  was busy buying up shares of  Bank Of America and Citigroup.

At the time, investors, colleagues and even his friends thought he was nuts – a move akin to lounging on the deck of the Titanic while everyone else abandons ship.

But in yet another example of how it’s often wise to take a contrarian investment stance, the bet not only paid off handsomely for Tepper’s firm, but for Tepper personally. Appaloosa is up nearly $7 billion on the trade, while Tepper stands to pocket a very cool $2.5 billion in profit for himself.

Tepper’s no one-hit wonder either…His track record includes huge payouts for his investors in Korean stocks, Russian debt, junk bonds and commodities over the last decade. We should all be so astute…

A Lonely Voice in a Sea of Pessimism

Tepper is quietly purchasing commercial mortgage-backed securities [CMBS]. His purchases include large chunks of real-estate debt.

At the end of each quarter this year, Mr. Tepper noticed that investors were dumping holdings of troubled bonds backed by commercial properties. He had never dabbled in these investments, but he and his 10-person team did some research and judged them attractive, with some seemingly safe debt trading at yields above 15%.

Mr. Tepper slowly spent more than $1 billion to gain ownership of between 10% and 20% of highly rated slices of commercial mortgage-backed securities, or CMBS.

His bet: If the economy improves, he’ll earn hefty interest payments on the bonds. But if the properties can’t make their payments, Mr. Tepper believes he owns so much of the debt that he’ll have a big say in how the properties get restructured. That means he could ultimately end up ahead.

Mr. Tepper says the worrywarts have it wrong: “If you think the economy will be fine, as we do, then we’re going to do very well”  (Credit WSJ)

This is a bet worth following.


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