Fundamentals Overshadowed by Politics

While everyone was focused on the election, REITs continued to report 3rd quarter earnings with the quarters being either forgotten or neglected entirely.  At 2CHYP we trade almost entirely on fundamentals, so to the extent that political focus dislocated market prices from underlying value, we looked for opportunity.

One of the clearest examples of this dislocation is the sustained and even widening arbitrage on American Farmland (AFCO) shares.  Farmland Partners (FPI) strongly indicated a near term close to the acquisition of AFCO in early 1Q17.  While the shareholders still need to vote, Paul Pittman has a very loyal shareholder base and the economics of the transaction make sense, so the chance of fulfillment seems very high.  AFCO holders get 0.7417 shares of FPI upon completion of the merger which translates to $7.95 as of Friday’s pricing.  That is a 12% arbitrage return that has likely fulfillment in roughly 2 months.

Only in the present environment where market participants are overwhelmed with news could such an opportunity exist.  It is hidden in plain sight, and we intend to take full advantage with a very large AFCO position in 2CHYP.

NexPoint Residential (NXRT) had a particularly strong report with double-digit SSNOI growth and returns on capital improvement over 20%.  This was coupled with a healthy dividend increase.

While market prices are volatile and were down through most of the week, much of this is not related to fundamentals.  The only risks we are seeing fundamentally are in skilled nursing facilities, which continue to show falling EBITDAR coverage of rent.  This has implications for Omega Healthcare (OHI), but we believe the risk is fully priced in with it trading at a very low multiple relative to the quality of the company and its track record.

Commentary may contain forward-looking statements which are by definition uncertain.  We retain no obligation to update or correct forward-looking statements should the available information change.  Actual results may differ materially from our forecasts or estimations.

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