Tim Melvin: Finding Value Where Wall Street Isn’t Looking

Blue Rock Real Estate Fund

• Tim Melvin · Community Bank InvestorBullish

  Blue Rock Real Estate Fund trades at a 45% discount to NAV, and his cost yields over 13%.

  When the fund faced redemption requests it could not meet, because the funds it held would not liquidate, it listed on the exchange. Public marks now let institutions exit at a steep discount, and the shares trade at about 45% below NAV. The fund holds funds from CBRE and Ares and reinvests liquidations in directly owned real estate. Management owns a lot of stock, has raised the dividend, and generates about 7.5% internal cash flow. At 55% of NAV, Melvin's yield is over 13%.

  “This thing is trading at about a 45% discount to net asset value.”at 36:04

• Tim Melvin · Community Bank InvestorBullish

  BPRE's ~45% discount to NAV will narrow as it shifts into directly owned real estate.

  The fund trades at a roughly 45% discount to NAV, and Melvin says its actual yield on NAV is over 13%. He expects the discount to narrow as managers move money from institutional funds into directly owned real estate at today's prices and yields, which should push yield higher. He cites the managers' real estate experience and past deals that worked out, plus an activist (Saba) that already holds a position and may push for the discount to close. He says commercial real estate is beaten and battered and still very unpopular, and that the fund has heavy insider skin in the game. He frames it as a patience-plus-activism trade.

  “So our actual yield on this thing is over 13%.”at 36:52

Hoyne Bancorp

• Tim Melvin · Community Bank InvestorBullish

  Hoyne Bancorp, at 84% of tangible book with 34% equity-to-assets, is a bank he is comfortable owning.

  Hoyne is a recent thrift conversion in Illinois. Melvin's firm bought it at roughly 75-77% of tangible book value, and it now trades at 84%, which he still considers buyable. Its equity-to-assets ratio is 34%, against a 6% minimum for being well capitalized, and it has essentially no loan losses. It holds a heavy residential mortgage book and securities, so it may take marks that hit book value a bit, but he doesn't care given the capital. Management is older and may be seeking an exit. Buybacks can start about a year after conversion, which typically pushes the stock up.

  “They have no loan losses, you know, to speak of. ... they're gonna take some marks in here, and it may hit book value a little bit. And I truly do not care because we're 34% equity to asset ratio.”at 12:57

VICI Properties

Across the shows: 1 speaker in other episodes, 1 bullish and 0 bearish calls, past 30 days

• Tim Melvin · Community Bank InvestorBullish

  VICI's 8% yield at about 80% of NAV is ridiculously cheap for Strip casino real estate.

  VICI trades at about 80% of Melvin's internal net asset value estimate and yields about 8%. Its Las Vegas casino properties are on very long-term leases of 20 years or more with escalators, which builds in natural dividend growth. Its tenants did not miss a rent payment during COVID or the Great Financial Crisis. Vegas is cyclical and may be slumping as inflation and energy costs squeeze the bottom half of Americans, but he expects it to come back and sees the downturn as the time to buy. He also notes diversification beyond the Strip and 40 acres of raw land next to it.

  “So for this thing to be trading at this price with this yield, which is, I think, it's 8% now, is just ridiculous.”at 19:37

Gaming and Leisure Properties

• Tim Melvin · Community Bank InvestorBullish

  Gaming and Leisure Properties is liked alongside VICI for its long-term casino leases with escalators.

  Melvin groups GLPI with VICI as a casino real estate REIT. The same logic applies: long-term leases with accelerator clauses that build in natural dividend growth. He says he likes both, with less detail on GLPI than on VICI.

  “So, you know, we like both of those.”at 22:02

Cousins Properties

• Tim Melvin · Community Bank InvestorBullish

  Cousins Properties trades at a discount to NAV despite trophy Sunbelt office buildings that are full.

  Cousins is a Sunbelt office REIT with buildings in cities people are moving to, such as Charlotte, Tampa, Orlando, and Atlanta. These are trophy buildings with the best amenities that command a premium to Class A rents and are full. The stock should trade at a premium to NAV but trades at a discount, with very solid financing and about a 4.5% dividend, so Melvin sees it as undervalued that will eventually be recognized.

  “This thing should be trading at a massive premium to net asset value. It is not. It is trading at a discount to net asset value.”at 22:12

Agree Realty

Across the shows: 1 speaker in other episodes, 1 bullish and 0 bearish calls, past 30 days

• Tim Melvin · Community Bank InvestorBullish

  Agree Realty's standalone triple-net properties yield about 4.8% and trade below NAV with heavy insider buying.

  Agree's standalone retail properties are leased to businesses like Starbucks, Home Depot, and gas stations. Triple-net leases mean tenants pay maintenance, insurance and taxes, so the REIT collects the rent. Most tenants are essential businesses that did not close during COVID. The company is well financed, yields about 4.79%, and has seen insider buying nearly continuously since late last year. Melvin says they are comfortable owning it at a discount to NAV.

  “especially the standalone retail space like ADC, which has seen very heavy insider buying”at 23:47

CTO Realty Growth

• Tim Melvin · Community Bank InvestorBullish

  CTO Realty Growth yields 7.7% at about 80% of NAV, with covered and growing dividends.

  CTO converted from a land and real estate company to a REIT and now owns open-air shopping centers in high-density areas with high average incomes. It trades at around 80% of Melvin's internal NAV estimate with about a 7.7% yield. It has very low price-to-FFO multiples, so its dividends are covered and growing. It also owns a big chunk of Alpine Income Property Trust.

  “And you've got about a 7.7% yield trading at around 80% of our internal estimate of net asset value.”at 25:31

Alpine Income Property Trust

• Tim Melvin · Community Bank InvestorBullish

  Alpine Income Property Trust, trading near 80% of NAV, needs a takeover by a bigger REIT.

  Alpine is a smaller triple-net REIT that CTO owns a big chunk of. It trades at about 80% of Melvin's NAV estimate and throws off a lot of cash. He thinks it needs to be sold to a bigger REIT, and believes that will happen at some point, which he sees as the path to closing the discount.

  “It desperately needs to be sold to one of the bigger ones, and I think at some point, it'll happen.”at 26:31

FS Lending ETF

• Tim Melvin · Community Bank InvestorBullish

  FSSL's discount to NAV will keep narrowing; its roughly 15% yield on direct loans is attractive.

  This fund holds direct loans to small and midsized companies generating EBITDA. Its discount has narrowed a couple of points to about 34%, but the yield is about 15%. Melvin calls it a carbon copy of FCCO, a fund he says made him a lot of money after a similar listing and discount. FS Investments is one of the bigger private credit lenders with a long track record. Internal loss and pick ratios are survivable, institutions are selling, and activists are starting to tiptoe in, so he expects the discount to close as private credit recovers its reputation. He warns of volatility because private credit is headline-driven.

  “Discount's actually narrowed a couple points. It's at 34% now, but the yield on this is currently 15.”at 41:58

Ares Capital

• Tim Melvin · Community Bank InvestorBullish

  Ares Capital is the safest private credit manager; he would own its BDC and Apollo's loans.

  Apollo sold its real estate lending portfolio to Ares Capital, creating a $31 billion BDC that is now the largest by far. Melvin calls it a really good portfolio of direct lending loans. He says he is completely comfortable owning anything Ares does in the space because Ares almost invented private direct lending. He also notes Ares's relationship with Apollo, which puts Ares in line for a piece of Apollo's large financings. He contrasts this with smaller, less experienced lenders.

  “This is a really good portfolio of direct lending loans. And this now creates a $31,000,000,000 BDC, the biggest one by far. I'll own that all day.”at 43:18

Fulton Financial

• Tim Melvin · Community Bank InvestorBullish

  Fulton's 5.25% preferred at $16.24 should rerate toward $20+ as rates fall.

  The preferred trades at $16.24 with a 7.89% yield, and its original coupon is 5.25% on a $25 par. It is noncumulative and perpetual, and callable at par, but Melvin doubts the bank would call such cheap capital unless a larger bank acquires Fulton, which he says cannot be ruled out. If rates fall further, he expects the preferred to price closer to its coupon and move back toward par, above $20.

  “Now when rates begin to come down, this thing's gonna trade back up over $20.”at 46:19

First Citizens BancShares

• Tim Melvin · Community Bank InvestorBullish

  First Citizens' adjustable preferred offers a ~7.5% yield-to-worse that rises with rates and recovers with cuts.

  The newly issued preferred has a 6.875% coupon and trades around $22 to yield about 7.5%. From 2031 it resets to the five-year Treasury rate plus 2.83%. Higher sustained rates would raise its payout, and lower rates would price it back toward the coupon and par. The yield to worst is quite a bit higher than the current yield, so Melvin says it is a favorite.

  “So if we were to get higher sustained rates, this would go higher. However, if we get lower rates, this thing will price back towards the coupon and take it back towards par.”at 48:14

Merchants Bancorp

• Tim Melvin · Community Bank InvestorBullish

  Merchants Bank of Indiana preferred at 8.31% yield is a favorite, though it will likely be called if rates fall.

  The preferred has a 7.625% coupon issued a few years ago and trades at $22.95 to yield 8.31%. It is callable at par in 2030. Melvin says that if rates go down, the bank will likely call and refinance it at the first opportunity, so the preferred's upside is capped near par. He still calls the group a big favorite for its yield.

  “We're also big fans of this one.”at 48:37

Flagstar Financial

• Tim Melvin · Community Bank InvestorBullish

  Flagstar's preferred is a buy above a 7% yield despite a rocky couple of years ahead.

  The former New York Community Bank still holds rent-controlled apartment loans and second- and third-tier New York City office notes. Melvin expects a rocky couple of years, with common-stock earnings that could be volatile and that eventually show up in the preferred. A large recapitalization has supplied excess capital, so he thinks the bank can withstand the stress and will survive. For the preferred that is enough to stay money good, so he would buy it on a pullback that takes its yield above 7%.

  “That bank's gonna have a rocky couple years, but it's gonna survive.”at 49:32

Virtus InfraCap U.S. Preferred Stock ETF

• Tim Melvin · Community Bank InvestorBullish

  Hatfield's PFFA preferred ETF is a good way to own preferreds at a 10.9% yield after rate-driven selloff.

  PFFA is down 12% year to date, yields 10.9%, and just raised its dividend. Jay Hatfield buys preferreds at discounts to par and sells as they return toward par, the same way Melvin has traded them. Holdings such as Energy Transfer, Boeing, Flagstar, Alphabet, KKR and Telephone and Data Systems are not expected to default soon. The fund uses about 25% leverage, which Melvin likes since he expects rates to at least stabilize. It pays a monthly dividend.

  “Jay trades preferreds exactly the way I've traded preferreds my whole life. He doesn't buy new coupons.”at 50:44

Angel Oak Capital Advisors

• Tim Melvin · Community Bank InvestorBullish

  Angel Oak's bank subordinated debt fund at a discount yields 10%+ with minimal credit risk; he's buying.

  The closed-end fund holds bank subordinated debt, which banks can count as tier one capital. Most of it is rated investment grade or ranked that way by the manager's internal models, and the average credit is about triple B. Melvin trusts the manager's models. The fund is trading at about an 8.75% discount to NAV, unusually wide for it, and offers a 10%+ dividend yield, so he sees credit risk as extremely minimal at this price. He notes the market is institutional and individuals rarely get in, and that small community banks with high capital and good credit will not go out of business.

  “I'm buying it a little bit discount to NAV and a 10% plus dividend yield in here. I will own this all day.”at 52:51

Banks

• Tim Melvin · Community Bank Investor

  Community bank credit is far better than the headlines suggest, with high capital and good loan quality.

  Melvin says bank headlines have been awful since 2023, but earnings keep showing credit is much better than people give banks credit for. Community banks don't do subprime or near-prime lending, so capital levels are high and loan quality is pretty good. He sees a couple of small cracks, confined to older commercial real estate, but nothing he would lose sleep over.

  “Credit's way better than anybody's giving these guys credit for.”at 1:53

• Tim Melvin · Community Bank Investor

  US community banks will consolidate from about 4,400 down to a thousand or fewer.

  There are about 4,400 community banks left, down from 18,000 when consolidation started. Melvin expects the count to fall to a thousand or under and says it is going to happen, which is why he focuses on the smaller banks and ignores the giants.

  “There's about 4,400 of them left, down from 18,000 when consolidation started, and we're going to a thousand or under, Toby.”at 4:07

• Tim Melvin · Community Bank Investor

  Community bank stocks have risen sharply, making cheap banks hard to find at his price targets.

  Melvin's nano-cap bank list is up about 30% on the year. He wants to buy banks at about 80% of tangible book value with negligible loan losses and lots of capital, but he cannot get that price widely because banks have moved up so much over the past couple of years. He is waiting for an industry or administration mistake to push prices down again and has learned to be patient.

  “When we look at the industry as a whole, my only complaint is it's getting tougher to find cheap banks.”at 4:32

• Tim Melvin · Community Bank Investor

  Small banks can hedge an inverted yield curve by parking deposits in securities, which big banks cannot.

  When deposits cost more than the loans a bank is making, a bank has a problem. Melvin says most banks hedge this by stopping new loans and parking money in securities. Smaller banks can do that easily, a big advantage over giants such as JPMorgan, which has nowhere near enough securities to absorb its deposits.

  “A lot of them will just stop making the loans and park the money in securities as well. And that's one of the big advantages of being a smaller bank, and you can do that.”at 6:31

• Tim Melvin · Community Bank Investor

  The 2023 bank failures were four isolated mismanagement cases, not a credit crisis; he'd buy the dip again.

  SVB and similar banks took huge uninsured deposits from venture-backed companies, around 90% of deposits, and bought long-duration, low-yielding mortgage securities and treasuries after the Fed signalled rates would stay low. When rates rose they could not sell without huge losses, and the run came fast. Melvin argues it was not a broad credit event: loans were not going bad across the country as in 2008-09, and calls to community bankers found no panic. He wishes it would happen again because it was a tremendous buying opportunity.

  “until you looked at what was actually happening, it wasn't a credit deal. It wasn't that, you know, loans were going bad all over the country like we saw in 2008, 2009. It was four isolated incidents tied to a specific corner of the industry”at 10:12

Commercial real estate

• Tim Melvin · Community Bank Investor

  CRE credit problems sit in older Class B and C properties in major cities; trophy offices remain full.

  CMBS delinquency rates show problems in older vintages of commercial real estate, especially Class B and C properties in major cities. Class A and trophy properties are not a problem. Melvin's community banks avoid syndicated loans and second- and third-tier office, lending mostly on local business parks and doctors' offices, with no meaningful delinquencies. He also cites Jay Hatfield's visit to New York REIT office buildings, where the bigger, newer, nicer buildings are full at normal occupancy.

  “the areas of credit where there is a problem, large commercial real estate. Especially class b and class c properties in major cities.”at 2:32

• Tim Melvin · Community Bank Investor

  Multifamily demand is strong and supply is easing, so the widespread negativity is misplaced.

  Banks aren't making new loans, so the apartment supply wave is easing. Most people can't afford houses, and a generation is stuck behind the one graduating now, so people can't move out of rentals as they used to. That creates tons of demand for multifamily apartments, which Melvin says is not reflected in how negative investors are on the sector.

  “everybody is very negative on multifamily housing, and I don't understand how you can be right now. Because banks aren't doing any new loans. So supply is starting to ease up.”at 17:02

• Tim Melvin · Community Bank Investor

  Public REITs trade below the value of the real estate they own because public money runs scared.

  Melvin says REITs are now cheaper than the actual real estate they hold, a disconnect in valuation. He attributes it to public investors who are scared after COVID hit office, even though the best buildings are full. He sees the gap as an opportunity in public real estate stocks.

  “REITs are now cheaper than the actual real estate, so you've got a disconnect in valuation because public money runs scared.”at 17:42

Private credit

• Tim Melvin · Community Bank Investor

  Gated redemptions in private credit and real estate funds were justified to protect remaining investors from fire sales.

  When investors demand their money at once from funds holding illiquid assets, honoring every request would force fire sales that hurt everyone left in the fund. Melvin sees the refusal to pay out in private credit and real estate funds as managers protecting the other investors, even though investors who signed the agreements are unhappy.

  “They were really protecting the interest of the other investors in the fund because if you start giving everybody their money back, you're gonna just hammer these markets for illiquid assets.”at 34:32

• Tim Melvin · Community Bank Investor

  Smaller post-crisis private lenders lack credit-cycle experience and will pay a price; avoid them.

  Banks largely left middle-market and leveraged lending after the financial crisis at regulators' request, and a wave of newer lenders filled the gap. Melvin argues many of them are less experienced and have never been through a bad credit cycle. He expects outcomes to depend on experience, capital levels and survivability, and says lenders that have not been in the space and make stupid loans will pay a price. He would avoid those players and own Ares instead.

  “I would not own those, but I would own [Ares] all day.”at 44:19

US consumer

• Tim Melvin · Community Bank Investor

  The K-shaped economy's lower leg is growing as inflation, energy and housing costs squeeze the bottom half.

  Melvin says the economy is bifurcated, with the bottom leg of the K getting larger. The bottom 50% of Americans are feeling inflation, energy prices and housing affordability. Grocery prices keep rising consistently, and energy has been running much higher. That takes a bite out of discretionary spending, including Las Vegas travel.

  “we have a bifurcated economy. Everybody knows the k shaped economy. Right? Well, the bottom leg of the [K] getting a little larger.”at 20:28

Asset managers, brokers & exchanges

• Tim Melvin · Community Bank Investor

  Closed-end fund discounts widen to create buying chances, and activists push managers to narrow them.

  Closed-end funds have no marketing-driven buyer base, so their prices follow market psychology. They trade at a premium when popular, a small discount most of the time, and occasionally at a large discount, which is when Melvin buys. His three return sources are asset recovery, discount narrowing, and dividend yield. Activists like Bulldog's Philip Goldstein buy big stakes and push for liquidation or tender offers. Because closed-end funds are permanent capital, managers resist liquidating, so they buy back stock or tender instead. Boaz Weinstein's Saba is the biggest player, and although he has lost some court cases, Melvin expects him to succeed eventually as institutional blocks grow.

  “Most of the time, you'll trade at a small discount. Occasionally, you'll trade in an above average discount. That's when it starts to get interesting”at 29:23

International equities

• Tim Melvin · Community Bank Investor

  UK closed-end fund discounts are huge; he'll get more interested once activists enforce deals.

  Activists such as Boaz Weinstein are increasingly active in the UK closed-end fund market. Melvin says UK discounts have always been huge, and large hedge funds like Pershing Square trade on London exchanges. He is tracking the space and will get much more interested once activists show more success enforcing deals.

  “We are interested in The UK market because those discounts are huge. They've always been huge.”at 32:56

US Treasuries & yields

• Tim Melvin · Community Bank Investor

  Rates must come down because interest costs are unsustainable, which would lift discounted bank preferreds.

  Interest costs are about $1 trillion this year, roughly 16 to 17% of the budget and a little over 20% of revenue collected, with a deficit near $2 trillion. Melvin says the government is effectively financing its interest, so rates have to come down somehow. He suggests that if the war and oil prices persist, the government could manufacture an economic slowdown that justifies lower rates. When rates fall, heavily discounted preferreds should be quite profitable. Rising rates have pressured preferreds, especially bank preferreds.

  “Rates have got to come down. When they do, these heavily discounted preferreds are gonna be pretty profitable.”at 45:51

US stock market outlook

• Tim Melvin · Community Bank Investor

  US stock valuations are ridiculous and the market is bifurcated, so he'd be nervous owning indexes.

  He says valuations are ridiculous and have only grown more extreme over about three years. Even with S&P 500 earnings growth expected near 27%, about two-thirds of that growth comes from just 10 companies, and 36% from Micron and Nvidia alone. The market is bifurcated and further down the stack is less exciting. Credit spreads were very tight, supporting prices, and he expects eventual correction as cracks show. He says that if he were owning the indexes he would be a little nervous right now, and that most of his own holdings are outside the mainstream US market.

  “When you look at the market, the valuations are ridiculous.”at 53:40

Credit markets

• Tim Melvin · Community Bank Investor

  Credit spreads are rising off tight lows; CCC stress signals a coming reset in stretched valuations.

  Melvin says credit spreads were very tight, which supported markets, but they have recently widened back above the low end of the normal range. He is not yet calling caution. Overall spreads are about 340 basis points, double B about 260, B about 346, and CCC and below about 1,375 basis points with current-coupon CCC yields near 18%, versus roughly 8.5% to 9% five years ago. He says the lower end is suffering and that defaults will hit laid-off workers and communities. If spreads keep widening, he expects them to force valuations down to reality. He cites Verdad's research that credit spreads are among the best market indicators.

  “It's not gone. It's now back over the low end of the normal range. It's not to the area where I would officially say it's time to be cautious, but ain't close.”at 54:42

AI bubble & tech valuations

• Tim Melvin · Community Bank Investor

  Hyperscaler AI spending returns may revert to utility-like returns, especially for data centers; valuations will correct.

  Melvin compares the AI build-out to the 1999 Internet bubble, when every promised outcome happened but investors still lost badly. Microsoft took 17 years to break even, and Cisco investors are still waiting. When he looks at the implied rates of return on hyperscaler spending, he thinks those returns could fall back to utility-like rates, especially for data center projects. He says AI is a big deal, but that does not justify the valuations of second- and third-tier players, so the market will eventually correct.

  “I mean, when I look at the implied rates of return in the hyperscaler spend, that's gonna be tough because these returns could very well go back to utility like rate of return.”at 57:57

AI: overall outlook

• Tim Melvin · Community Bank Investor

  AI's economic impact will be as big as electricity, though many AI companies are overvalued.

  Melvin says AI will change life and make the world better and make everyone more productive, things he compares to the Internet's effects. In his view the impact can be as big as electricity. He separates that from valuations: doesn't mean these companies are worth what the market pays, especially second- and third-tier players.

  “Artificial intelligence, in my mind, is as big as electricity.”at 58:22