Earnings and Pessimism
2CHYP held up fairly well overall, but some of our holdings took substantial hits individually as earnings rolled in. One of the harder aspects of fundamental value investing is that bad news can be priced in multiple times. The entire world has known for multiple quarters that retail has substantial headwinds, and Washington Prime’s (WPG) quarter came in showing that sure enough they were affected by headwinds. The stock price dropped to a valuation that we found too juicy to pass on so we added to our position. I actually liked the quarter quite a bit as management seems to be taking all the right steps to pivot into a position of greater stability while preserving most of the cashflow generation potential.
Hotels in certain regions of the country faced some obvious problems in the 4th quarter with Zika decimating travel to southern Florida and the relatively strong hurricane causing cancellations in much of the southeast. Sotherly Hotels (SOHO) and Hersha Hospitality (HT) reported, confirming what should have already been known. Each of these REITs has a high concentration in Southern Florida and the southeast so their numbers reflected the aforementioned events.
Each of these REITs is exceedingly cheap, trading at multiples less than half that of the broader REIT index. Their reports were not pretty, but they do not need to be pretty. The fundamental performance, while not perfect, remains very strong relative to the market price. Price dips and volatility are always going to be part of value investing, but in the long run, fundamentals and cashflows tend to dominate. We will continue to be patient and hold on until the market price property reflects intrinsic value.
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.