08/10/2016 Update

Our approach involves careful selection of individual stocks which we believe have increased potential to outperform due to market mispricing or fundamental superiority. As a portfolio, these stocks have a dividend yield of roughly 7.2% and a price to 2017 estimated funds from operations (FFO) of 11X. That makes it yield 1.85X as much as the benchmark (the SNL US REIT index) and our portfolio is only 65% as expensive.

Armada Hoffler (AHH) AHH 9.19 -0.29 -3.06%

Louis Haddad (the CEO) has been managing the company for decades with a consistent execution and discipline that is extremely rare in the REIT world. AHH is utilizing its market presence in the Virginia Beach submarket to develop at cap rates that are quite accretive to the bottom line. Time and time again, developments are delivered on schedule and lease up efficiently. While AHH has performed well in the market, we believe there is still room to run as the quality is not fully priced in.

Ashford Hospitality (AHT) AHT 0.62 -0.02 -3.77%

AHT is a simple case of extreme value. It is trading at just over 4 times FFO despite properties that are performing quite well. While there is risk related to Monty Bennett and the external management structure, we believe this risk is overly baked into the stock. A mere tepid fundamental performance would result in large gains for shareholders due to the extreme cheapness of the stock.

CBL and Associates (CBL) CBL 0.25 -0.01 -3.35%

CBL is the mall REIT version of Ashford Trust. This value is extreme. CBL is trading at just over 1/4th the valuation of another mall REIT, Simon Properties (SPG). However, CBL lacks the management risk as Steve Lebowitz has actually been quite reliable as a steward of shareholder capital. CBL has grown slowly, but consistently as it successfully replaces troubled tenants like J. C. Penney or Sears with more Amazon-resistant tenants like Ulta Beauty.

Communications Sales and Leasing (CSAL) Unfortunately, we could not get stock quote CSAL this time.

This tech REIT owns the fiber-optic cables that fuel cellular towers which make it an essential piece of real estate for the proper function of communication infrastructure. It is trading cheaply due to a high tenant concentration in Windstream, but this discount should disappear as it continues to grow. Leases on cables tend to be long duration which provides investors with steady cashflows and an oversized dividend.

Farmland Partners (FPI)FPI 6.74 -0.01 -0.15%

Farmland has historically been one of the highest return assets due to its tendency to appreciate over time combined with the current income it produces. Paul Pittman, the CEO of FPI, is arguably the most capable operator in this space and is quickly developing a platform that will create additional value to farmers through pooled purchasing programs and tenant friendly financing options. As this hits critical mass, FPI will have the opportunity to be the chief consolidator in the space and can do so at highly accretive rates.

Global Net Lease (GNL)GNL 16.43 -0.40 -2.38%

GNL is a triple net lease REIT which gives it highly diversified contractual cashflow. GNL touts among the highest credit rating among its tenants and a very long weighted average lease duration such that the cashflows are secure for the foreseeable future. These cashflows are then given out to shareholders through its oversized dividend. We do not find this company to be anything special, but the cashflows are available at a substantial discount to where they should be trading.

Gladstone Commercial (GOOD)GOOD 17.55 -0.73 -3.99%

Externally managed REITs such as Gladstone Commercial are disliked by the market and tend to be available for far cheaper multiples than internally managed peers. In the case of Gladstone Commercial, we believe the discount in not warranted. David Gladstone runs his companies with a legitimate sense of fiduciary responsibility and the corporate culture seems highly ethical. This is the only management team that I have ever seen voluntarily waive a portion of their fees. Such shareholder-friendly behavior will eventually be recognized by the market and until it is we can benefit from the large dividend and secure cashflows generated by its NNN business.

Gramercy Properties Trust (GPT)GPT 0.00 -27.48 -100.00%

GPT is currently classified as a diversified REIT and trades at a multiple of about 13X forward FFO. It is quickly transitioning to a predominantly industrial REIT and industrial REIT peers trade closer to 20X.
The management team seems responsible and its property quality is quite high so we think it could trade up closer to peers as the transition completes.

Hersha Hospitality (HT)HT 5.06 -0.21 -3.98%

Hotels are a challenging industry as the extreme cyclicality can make valuing assets rather difficult. Hersha, however, has repeatedly sold assets at full value and bought them at discounts which have created substantial value for shareholders. Its assets are strategically located to catch the spillover from conferences held in tier 1 cities. As its assets are select service, as opposed to full service, operating margins are materially higher which affords greater pass through to shareholders.

Investors Real Estate Trust (IRET)IRET 69.73 -0.74 -1.05%

IRET has a unique niche as one of few REITs with a focus on Midwestern properties. Its portfolio consists of extremely well located medical office buildings near the Mayo Clinic in Minnesota and a fairly high-quality group of apartments. Its current lack of property focus results in a discounted multiple, but as management refocuses on becoming a multifamily pure play we anticipate multiple expansion.

Independence Realty Trust (IRT) IRT 10.83 -0.12 -1.10%

Low-end apartments do not get enough respect in the REIT market. They produce substantially more cashflow than their high-end counterparts (per dollar of asset) and can even boast higher NOI growth rates. Beyond the assets outpunching pound for pound, IRT trades at a massive discount to peers which compounds the value. Cheap and efficient assets held by a REIT trading at a discount to NAV is an excellent entry point for investors.

Lexington Properties (LXP)LXP 10.39 -0.04 -0.38%

Lexington is a turn-around story as it has just gone through a period of heavy re-leasing that is always costly to an NNN REIT. It successfully sold or released a majority of its assets such that it could raise guidance and now has a long remaining lease term. The trouble is settled yet the cheap shares of LXP remain. This is a simple case of high yield at a low multiple with safe fundamentals.

Medical Properties Trust (MPW)MPW 18.01 -0.37 -2.01%

You may have noticed that MPW is the largest position size in this portfolio. That is because it has virtually all of the factors we like to see in a REIT: Strong management, strong properties and accretive prospects for growth both externally and organically. Hospitals have materially higher EBITDAR coverage ratios than other kinds of healthcare assets which afford greater stability of income to the REIT as we go through a period of regulatory reform. Whatever reimbursement changes are incurred by the operators will likely by absorbed by the coverage ratio such that tenants can still pay the contractually obligated rent to MPW. It has had a good year so far, yet MPW remains a cheap stock.

Omega Healthcare (OHI)OHI 30.30 +0.62 +2.09%

OHI represents a play on dividend growth. It has grown its dividend consistently for over a decade, including through the great recession. Nearly every other stock that has such a track record is trading at extreme valuation, yet OHI remains discounted on fears for the skilled nursing facility or SNF industry. Reimbursement changes such as bundling for joint replacement and cardiac patients in a post-acute-care setting will certainly shake up the industry. In my opinion, what the market is missing is that these changes are not a net negative, merely a source of substantial volatility. Overall profitability of the SNF industry should remain roughly the same and OHI has diversified operators as well as the financial flexibility to adapt to the new situation.

Stag Industrial (STAG)STAG 28.84 -0.38 -1.30%

Stag is simply smarter than other industrial REITs. While others are stuck in conventions of buying class A properties in tier 1 industry cities regardless of the cost, STAG has recognized that such properties are overpriced. Instead, STAG has a quantitative acquisition model which facilitates acquisition of whatever industrial property is likely to have the best cashflow over its entire useful life. This grants higher cap rates, steadier cashflow and more growth to the bottom line. The total addressable market in the class B industrial property landscape remains substantial, so we think STAG has room to run.

WP Glimcher (WPG)WPG 0.71 -0.04 -5.50%

WPG is similar to CBL in that it is a deeply undervalued mall REIT, but it has a different avenue of potential returns. After an overturning of management, we think WPG is positioning itself for sale. A new management team has come in and announced intent to maximize operating cashflows which would be the ideal move to increase sale price as most REIT sales are on a multiple of NOI. As WPG still trades at a material discount, a sale of the company could be quite a payday for investors.

Rait Preferred B (RAS-B)Unfortunately, we could not get stock quote RAS-B this time.

Rait Financial is not a particularly good company. It is a mortgage REIT with a management team that seems to prefer raising its AUM to raising earnings per share. As a result, these managers are serial equity issuers which dilutes the value of common shares. Oddly enough, preferred stockholders are beneficiaries of management’s self-serving behavior. This preferred gives over a 9% yield and gets safer each time equity is issued due to its superiority in the capital stack.

Wheeler Preferred (WHLRP)WHLRP 8.05 +0.25 +3.21%

Wheeler is similar to RAIT in that its management has a penchant for dilutively issuing equity. This capital is then deployed into grocery anchored shopping centers that generally produce steady income. As the portfolio grows, preferred shareholders have a greater asset base protecting their liquidation value which makes this over 10% yielding preferred quite safe relative to its payoff.


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