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Why is Blum Capital Downsizing its Position in This Real Estate Company?

In a recent filing, Richard Blum and Blum Capital Partners downsized its long-time stake in the commercial real estate services firm CBRE Group Inc. (NYSE:CBG). Blum Capital reduced share ownership from 21.6 million to 14.7 million, and now has only a 4.5% stake in the company. The sale of 6.9 million shares, or almost 32% of its prior stake, represents the first time that Blum Capital’s share ownership has dipped below 20 million shares since 2006.  At its peak ownership, Blum Capital held 38 million shares of CBRE and an almost 15% stake during 2008.


Richard Blum founded the San Francisco based investment firm, Blum Capital, in 1975 and continues to focus on small- to mid-cap companies in both the public and private markets. Formerly named CB Richard Ellis, CBRE has certainly experienced tough times over the past few years given its real estate-centric business model, which covers office, retail, industrial, multi-family and other types of commercial real estate. Having reached a high of over $41 per share in mid-2007, the company saw its stock price fall over 90% as the real estate market toppled, reaching a low of $2.36 per share in March 2009.

CBRE has indeed found its way back, so to speak, thanks to a solid geographical diversification, and now trades at over $18 per share. The company’s revenues from North America totaled 27.7% of its 2011 revenues, and it generated 31.6% of revenues from other major international countries throughout Europe, the Middle East, Africa and Asia. CBRE is the proverbial juggernaut of the commercial real estate servicing industry, but Jones Lang LaSalle Incorporated (NYSE:JLL) is a formidable opponent, operating in over 70 countries. Jones Lang is a bit little over half the size of CBRE, but does trade at a lower P/E multiple and beta. Jones Lang’s trailing P/E is 20 and its beta is 2.0, versus CBRE’s trailing P/E of 24 and 2.53 beta.

We do not see Blum Capital’s reduction in its CBRE stake as a negative sign. We believe that Richard Blum continues to see value in the real estate sector and this move is more or less an attempt at diversification, especially given Blum Capital’s almost doubling of its first quarter stake in Marriott Vacations Worldwide Corp (NYSE:VAC). See all of Blum Capital’s recent activity here. Blum’s rotation from CBRE to Marriot Vacations is interesting given the fact that it is still a real estate manager. However, versus commercial properties, which are CBRE’s specialty, Marriott Vacations manages and sells vacation properties.

D.E. Shaw of D.E. Shaw & Co., LP and Ken Griffin of Citadel Investment Group are among other notable hedge funds that increased their stakes in Marriot Vacations by over 100 percent during the second quarter. According to Form 4 filings for Marriot Vacations, there was a number of insider purchases prior to Blum’s entry in the stock. The insider activity of late has been insider sales by the Marriot family, who are likely just looking to lock in gains, given that the stock has nearly doubled since December 2011.

For Marriot Vacations, the competition is generally with conventional hotel names that sell vacation properties, such as Wyndham Worldwide Corporation (NYSE:WYN), Starwood Hotels & Resorts Worldwide, Inc. (NYSE:HOT) and Hyatt Hotels Corporation (NYSE:H). All three of these competitors operate with much larger market caps than Marriot Vacations. Although Marriot Vacations had negative earnings for its most recent period, versus these three competitors who had positive EPS, Marriot Vacations has outpaced all three in terms of price performance. For the last twelve months, Marriot Vacations’ stock price has gained over 85%, with Wynn up 56%, Starwood up 14% and Hyatt up only 7%.

As Blum Capital is downsizing its position in CBRE, Jeffrey Ubben, founder of ValueAct Capital, is upping his. ValueAct Capital manages close to $6 billion dollars and looks to make only a few investments per year in order to acquire significant stakes in companies that it believes are undervalued. Prior to founding ValueAct Capital in 2000, Jeffrey Ubben spent five years as managing partner at the aforementioned Blum Capital.

The fact that Jeffrey Ubben has as strong past affiliation with Blum Capital and has taken notice of the company at the exact same time Blum Capital is downsizing, leads us to believe that Richard Blum is merely freeing up capital for other investments, as at the the close of the second quarter in 2012, CBRE represented over 28% of Blum’s portfolio.

We believe that Jeffrey Ubben, with the help of Richard Blum, has taken notice of CBRE’s broad array of services and global diversification. CBRE has unique advantages that include a large global presence, in which no other competitor can claim. Assuming a steady economic recovery, both of these real estate companies, CBRE and Marriott Vacations, should provide positive results. Year-to-date through August 31st, the S&P Real Estate Services Index is up 15.1%, compared to 11.7% for the S&P 1500 Index.

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