What are those Real Estate Trailblazers recommendations?

Checking out another Motley Fool pitch

The Motley Fool got into real estate investing last year with a service called MillionAcres, which largely focuses on buying into real estate more directly, but they’re now building on that service with some newsletters and portfolios. The one they launched recently is called Real Estate Trailblazers, with a focus on investing in real estate stocks… and over the weekend they had a teaser pitch about some of their ideas, and, of course, about the huge growth potential.

Real Estate Trailblazers is set up more or less like the various Discovery services at the Fool, you buy in for a premium-priced subscription ($999 in this case), there are no refunds, and you get access to a portfolio of stocks that they recommend for that sector, with allocation suggestions and updated coverage as things change.

I’ve also started seeing ads for a new service within MillionAcres called Real Estate Winners, which seems less growth-focused and probably looks more at REITs and dividend payers, though that’s a guess at this point (that one’s starting at $249)… no big teasers yet from that service.

So let’s take a look and see if we can get you started with a little perspective on this Trailblazers service… and perhaps a stock idea or two.

The “name” guy for this promo is Eric Bleeker, who has been pretty visible in the Fool’s tech-related promos in the past, and they’re pitching their ideas as a “reopening trade” — here’s a little taste of the ad:

“At long last, The Motley Fool’s No. 1 trade on the full reopening of the American economy has arrived…

“As the technology stocks that fueled our portfolios throughout 2020 get hammered, it’s time for us to turn toward the new reality of a full U.S. economic reopening.”

And there’s a “catalyst” date they can drop on us, too, to increase the urgency:

“Discover why a rapidly approaching June 15th ‘tipping point’ signaling the full reopening of America could trigger an explosive windfall for well positioned early investors!”

So yes, the general “reopening” trade is that people are going to swarm into real estate, with retail and offices reopening and people continuing to want to upgrade their homes… and the “tipping point” that they talk about as being June 15th is just tied to the largest economy in the US, California, because that’s when Governor Gavin Newsom will remove most of the pandemic restrictions (on capacity and masks and the like, even Disneyland reopens to out-of-staters on June 15), and that will send a signal to other states that it’s OK to take those steps.

And real estate is a huge sector, of course, and is responsible for a ton of economic activity (building, leasing, renovating, moving, buying and selling, etc.), so they make the point that this is a far larger market to be “disrupted” and impact the economy than other “tipping point” industries they’ve looked at before and that have created some huge investing wins, like Telehealth or 5G or e-commerce. This is how they get the hyperbole going…

“… the market we’re discussing today has a $52 trillion estimated total value.

“To put that into perspective again, that’s:

“66X eCommerce sales
“174X telehealth market
“78X the 5G market

“Perhaps most amazingly, 10X the value of all technology combined!”

Lots of apples to oranges comparisons being made there, but yes, “real estate” is a huge sector of the economy, and presumably there are plenty of interesting investment ideas in that space. What is it the Foolies are looking for?

They focus a lot on the housing part of the real estate market, and indicate it’s both likely to be a play on inflation and on reopening, with a historic shortage of housing availability helping to drive up prices because not enough homes have been built in the past decade or so…

“And now, we’re seeing the exact same pattern unfolding during the COVID-19 recession – immediate drop in housing starts, and I think every reason to anticipate the same pattern as we exit this recession with the June 15th economic “tipping point” as America begins to fully reopen.”

That’s a little disingenuous, housign starts had a brief blip in the second quarter thanks to COVID last year, but have roared back and all the builders have been going flat out trying to build as fast as they can (with some challenges, as building supplies and appliances have been facing rolling shortages thanks to the COVID shutdowns last year and other supply bottlenecks… and as labor has been hard to come by).

More from Bleeker:

“… it’s obvious to me that tech was where to invest throughout the pandemic. That’s when we hit the “tipping points” in eCommerce, telehealth, 5G, and many, many others.

“But now the economic realities have turned, and we face a widely predicted economic boom with the reopening of America that frankly looks like a once-in-a-lifetime opportunity.

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“And I want to help investors get full exposure to this estimated $52 trillion industry, because I’m confident this massive market is central to the unprecedented opportunity we’re seeing.”

And he points out that real estate has quietly performed very well for investors…

“… when you look at rolling 20-year returns over the last decade, real estate investment trusts (or REITs) have outperformed stocks 100% of the time.”

A lot of that is because of 40 years of gradually falling interest rates, but yes, REITs in general have been a solid bulwark for a lot of portfolios (including mine).

The pitch isn’t “real estate in general,” though, it’s a particular portfolio of selected stocks in that sector — per the ad:

“Just like with the stock market, there are specific sectors and companies within the real estate market that we believe have particularly strong opportunities.

“So naturally, we’ve focused our research in these areas to position our ‘reopening trade’ for maximum upside.”

And there are some parts of real estate that Bleeker doesn’t like, to help us narrow things down…

“When folks say stocks that own hotels like Marriott International and Apple Hospitality should be in a ‘reopening trade’ to get real estate exposure, I just have to shake my head.

“Think about what drives demand for hotels… it’s primarily business travel.”

OK, that’s fine, lots of folks don’t think business travel is coming back in a hurry. But what do they like?

“… our ‘reopening trade’ here at the Fool is focused on a handful of sectors and real estate stocks that we believe could be poised to deliver strong outperformance even vs broader real estate as the final reopening of America takes hold following June 15th’s predicted tipping point.”

Sheesh, not even some more broad talk of sectors? Homebuilders? Brokers? Insurance? Materials? Lumber stores? Appliance makers? Real estate tech stocks?

Nope, we’re left to guess on that front… but they do get into teasing at least two of their ideas:

“The Real Estate Trailblazers portfolio will initially include 16 picks across four separate, unique real estate trends (including full deep dive write-ups on all stocks and trends) that we’ll release over the next few weeks, and the second you join you’ll get instant access to the first trend and our top stocks to pursue this unique opportunity.

“I’ll share a little detail on a couple of those stocks….”

Woohoo! Finally some clues! Lay it on me!

“Real Estate Trailblazers Stock No. 1 is a little-known U.S. company going public via SPAC targeting over 1,000-fold business growth. That’s right – management estimates their total addressable market is more than 1,000X their current annual revenue. This is one of the most exciting companies I’ve ever seen, yet because it’s NEVER been recommended by The Motley Fool this is a chance to get in at the very beginning.”

There are a few real estate tech companies coming public via SPACs these days, but the most compelling match here is probably Offerpad, which is one of several “fast and easy online homebuying” tech platforms. They’ve agreed to come public by merging into Supernova Partners Acquisition Company (SPNV), and that also helps to spur interest here — mostly because it brings on a big name in real estate tech, one of the Supernova chairs is Spencer Rascoff, who was a co-founder of Zillow (Z) and led that company as CEO for about a decade (and was often talked up by the Motley Fool, which recommended Zillow many times). Rascoff is participating in two other SPACs that have raised money as well, Supernova II (SNII) and Supernova III (STRE), though neither of those has found a target company yet.

The deal to take Offerpad public should close in the next few months — here’s how the company describes itself:

“Offerpad, which was founded in 2015, is a leading real estate solutions platform that projects to generate revenue of $1.4 billion in 2021. Offerpad’s tech-enabled platform and team of real estate solutions experts empower homeowners to buy and sell homes online quickly and easily. Homeowners can request a free, 24-hour cash offer online in less than three minutes, partner with Offerpad to list a home with a back-up cash offer, or buy one of the thousands of homes available on Offerpad.com. Add-ons, such as show-ready home services; home improvement advances; extended stay options; and title and mortgage services allow customers to personalize the home buying and selling experience even more.”

The Offerpad investor presentation lays out an ambitious growth agenda, as is typical for SPAC deals (the SEC lets SPAC targets get away with a lot more forecasting than regular IPO filers — which doesn’t mean they can’t hit their targets, but does mean we should be a little skeptical)… and yes, they highlight the fact that they think they have gotten roughly 1% penetration of the $1.6 trillion real estate market and are likely to follow the trajectory of other analog-to-digital industries (digital market share in car buying is still at 1%, restaurant delivery at 5%, grocery delivery now at 10%, etc.)

They do actually think their target market share is 4% vs. the 1% they have in their existing markets, so that’s a little more rational than the predictions of 1,000X growth that the Foolies include — but if they can go from $1 billion in annual revenue to some foreseeable future of $20 billion, that would obviously present an opportunity for some stock price appreciation. They’ve roughly doubled in size (number of markets, revenue, number of homes sold) in three or four years, and there is some advantage of scale even if their work on things like renovations might hit the same market stresses that all homeowners who are looking to do kitchen renovations or landscaping projects are feeling right now.

The SPAC market has obviously softened since this deal was announced, so the SPAC shares are trading right around the $10 “fair” value on which the deal was based, so they’re valued right now at about $3 billion if the deal goes is consummated near $10, though that could shrink by up to $400 million if the SPAC shareholders elect to redeem their shares instead (it’s below $10, so if that continues some probably will). It’s a reasonably appealing idea at roughly 3X revenues (or 2X expected 2021 revenues), I don’t know what their profitability is going to look like as in-person selling becomes more viable again, or if, God forbid, there’s another crash in home prices that leaves them flat footed, but certainly there will be a lot of people looking for faster, easier real estate buying and selling opportunities in the future (they do say they expect “Adjusted EBITDA” to be positive by 2023… but they rely a lot on debt for their flipping operation, so not counting the “I” for interest doesn’t make much sense). Do keep in mind that although these are fairly high-growth kinds of stocks, in a pretty hot market, they’re not comparable to high-growth software stocks that have much higher margins — Offerpad might have gross margins of 8% on a home flip, so we can’t compare that to companies who primarily sell highly scalable software or services (like advertising, etc.) and have 70% gross margins.

Probably the most interesting part for me is their steady progress in building scale and becoming profitable in new markets, with their original markets now quite profitable and a pretty steady pace of new markets becoming profitable after a couple years… and like most of these “iBuyer” companies they also rely on outside capital, which is part of what makes them efficient (big facilities of bridge loans, effectively, that help them buy houses quick, renovate, then sell again without tying up too much of their own money), and that also means they’re reliant on short-term funding from partners so could see some pressure on their business model if interest rates rise.

That’s my initial response to Offerpad, at least — it strikes me as an interesting idea, but that’s true of a lot of companies after looking at aspirational SPAC presentations and I haven’t really dug for any dirt. There have been a bunch of other interesting high-growth real estate companies that have made or completed SPAC deals to come public in the last few months, including Opendoor (OPEN), Porch (PRCH), Latch (LTCH) and Matterport (merging with Gores Holdings (GHVI)). Matterport is the one that strikes me as most “different,” given their huge library of spatial data, their virtual tour and 3D scanning platform, but that, like everything, is also a competitive space… and like almost all SPAC deals, the valuation is probably aspirational.

What’s the second one? Clues…

“Real Estate Trailblazers Stock No. 2 is working to disrupt the homebuying experience by bringing it digital. Unlike Redfin, this company is working to remove the agent entirely from the equation (consider that 90% of their homeowners now sell directly without an agent). With just 2% market share and what looks to me like a clear pathway to multiplying their revenue 10X, the opportunity here is huge.”

OK, so again there are a lot of possible matches for this… but 2% market share and the language about “removing the agent from the equation” points us at Opendoor (OPEN) as the best match. OPEN claims to have roughly 2% market share in the US homebuying market… and we know that it has already been disclosed as a recommendation of the Motley Fool. (Plenty of other folks have tossed it around as a recommendation, too, including Luke Lango in his Investorplace “free presentations”). If you’d like to compare the Offerpad and OpenDoor deals, incidentally, OpenDoor’s original SPAC merger presentation is here.

Opendoor and Zillow are currently the two biggest “iBuyer” companies, with Opendoor the biggest player with probably about 50% of that market. Lots of companies in this space are trying to make online buying and selling really fast and easy, essentially taking the risk onto their balance sheet as they try to buy, renovate and flip homes nationwide (though that’s only part of Zillow’s business, of course, they’re also a huge and ad-driven lead-generation/matchmaking machine for realtors and homebuyers), and there’s a useful comparison of them here from the perspective of someone in the real estate business (if you’re a home flipper, Opendoor and Zillow and the others are big competition for you… if you’re in the services businesses or have homes to sell, they may be big customers and might be willing to overpay).

Like many “disruptor” startups, OPEN and Offerpad are using SPAC cash infusions to grow by losing lots of money, like Redfin (RDFN) and Zillow and the other slightly older firms who are building iBuying platforms and trying to actually flip houses as part of their strategy… it’s a hugely capital intensive business where shaving a few days off the time you have to hold on to a “dead money” house could mean a big difference in profits and let you recycle that capital for another transaction, and, along with lots of big investors who are buying up single family homes for the rental market, they’re genuinely disrupting the traditional homebuying market in a lot of places and probably exacerbating price inflation as they try to seize market share.

So I guess I’d call both of those “disruptors” in real estate, generally tech-driven disruptors who are trying to smooth and accelerate the buying and selling process for single family homes. There’s a lot of that going around, from Grandpappy Zillow to upstart Redfin, and they’re all super-expensive and growing fast… and they’re also competing with each other to build big national platforms in a business that is still overwhelmingly local. How will it go? I dunno.

I’m a little wary of trying to pick a winner in this group of companies who are all sacrificing lots of capital in order to grow quickly, partly because it seems pretty likely that they’ll be very cyclical businesses once they do mature, but they are disruptors of a genuinely huge and ready-for-disruption market (who doesn’t hate the long, complex and irritating process of selling a house, let alone buying one?), so perhaps fortune will favor the bold.

For my part, I like real estate as a way to provide some ballast in a portfolio, preferably with pretty steady returns and cash flow that can keep up with or surpass inflation. If you’re curious about my not-so-disruptive investments in this space I’d separate my current personal real estate holdings in a few buckets: there’s the “asset management” group that builds portfolios of real estate both for themselves and for other institutional investors, earning both rents and asset management fee income, including smallish Kennedy Wilson (KW) and giant Brookfield Asset Management (BAM); the homebuilding segment, into which I’d throw my favorite homebuilder Dream Finders Homes (DFH) as well as master planned community developer Five Point Holdings (FPH), which could see a lot of buzz (and lot sales) as model homes open in their new LA-area development this summer; the niche growth REITs American Tower (AMT), Crown Castle (CCI) and Innovative Industrial Properties Trust (IIPR), and the income REIT Medical Properties Trust (MPW). There will probably be more buys in those areas for me in the months ahead, I’m guessing.

We could maybe throw in a few others as well, mini-conglomerate Boston Omaha (BOMN) buys billboard properties and is a major DFH shareholder, and real estate is one of the potential targets for their Yellowstone Acquisition SPAC (YSAC), DocuSign (DOCU) benefits from the revolution in touchless real estate closings, the insurance brokers (Goosehead (GSHD), Brown & Brown (BRO), A.J. Gallagher (AJG)) should see a boost in demand for homeowners’ insurance as sales continue to pick up (that’s much more important for GSHD than the others, since their more consumer-focused)… and I imagine we could shoehorn a few others in there as well. So I don’t feel under-exposed to the big real estate market, I generally like REITs and real estate-related companies, particularly those who have some growth potential… and I’ll take a look at these two teased speculations and other disruptors in the space, though I don’t own any of them at the moment.

When it’s your money on the line, though, it’s your thinking that matters — pondering some more exposure to real estate? Like the Fool’s ideas, or any others to get exposure to the growing demand for housing, or for the reopening trade in other parts of the real estate world? Agree that we’re hitting that “reopening” tipping point for the economy now? Let us know with a comment below.

Disclosure: Of the companies mentioned above I own shares of Dream Finders Homes, Kennedy Wilson, Brookfield Asset Management, American Tower, Five Point Homes, Dream Finders Homes, Crown Castle, Innovative Industrial Properties, Medical Properties Trust, Yellowstone Acquisition, Boston Omaha, DocuSign, Goosehead Insurance, Brown & Brown and Arthur J. Gallagher. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.

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