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  Risking it on real estate

BENJ GALLANDER and BEN STADELMANN

Friday, July 9, 2004

Towards the end of June, about 900 new homes were to be released in Hawthorne Village in Milton, a small community west of Toronto. Competition for the residences was fierce, as a couple of dozen tents were pitched by anxious buyers. A mania? In our minds, absolutely.

Our collective memory casts back to the late 1980s, when this type of event was relatively common. Buyers were crazed by a market in which prices appeared to have only one direction, up, and multitudes felt that if a home was not purchased now, the dream of ownership would never become a reality as prices only moved further and further from their grasp.

How wrong they were!

A few years later, housing prices across the land had declined, in many places dramatically, and those who could be patient reaped ample rewards for their pocketbooks.

We constantly avoid making short-term predictions, acknowledging that the smaller the time frame, the greater the likelihood of conjectures being proven wrong.

This time, however, our faith in our conviction is strikingly strong, so we'll shift our weight to the end of the limb: we predict that, in one year, housing prices will be either comparable to now, or less.

(Readers should note that our predictions in the past have not proven bulletproof.)

How might one profit from this mania? Both of us purchased the commercial real estate outfit Grubb and Ellis on the over-the-counter market earlier this year at around $1.10 (U.S.).

This Illinois-based outfit, with revenues slightly north of $425 million, was particularly hard to buy, as volumes at the time were less than 10,000 a day, thin by most standards. Sometimes, days would pass without a transaction.

People had good reason to avoid this firm, which had lately endured a couple of brutal years, losing money in 2002 and 2003. Cash flow was negative at times, the drain being severe enough to result in a negative book value.

Things were so bad that the corporation was banished from trading on the big board, and was forced to shift to the humbling environs of the OTC.

Despite these discouraging signs, the time seemed ripe for us to jump. It helped that Grubb was a company well known to us — we purchased it in 1993 and 1995 at an average price of $2.55. The firm's future seemed uncertain back then, and until 1997, the stock did bupkus.

But then the enterprise caught fire, and we exited our position in three tranches ranging from $14.38 to $16. Content to mock us, the stock price skyrocketed above $20, becoming a top performer on the NYSE. But heck, it was derision that did no harm to our egos.

One of us is concerned enough about a crash in real estate prices due to high prices and rising interest rates that he recently took a fast profit, pulling 25&nbps;percent of his position off the table at $1.94.

However, that still leaves plenty of shares to ride on in this boom-and-bust arena, where our tea leaves read both havoc and profit simultaneously.

It would not surprise us to see this stock push back into double digits as share volume heats up, as is starting to happen.


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