REITWEEK results

Each year REITWEEK seems to have a substantial impact on the market.  My theory on this is that it is, for many firms, the final stage of due diligence on REITs before making their purchase or sell decisions.  It can therefore mark the emergence of new demand for REIT shares.

At the 2017 REITWEEK we had 15 private meetings with management teams including those from 9 of 2CHYP’s holdings.  Below are our takeaways:

STAG:  Ben Butcher and team continue to execute on the plan they announced many years ago.  We continue to view them as the best industrial REIT with medium growth potential and the lowest multiple of the true industrial REITs.  Our greatest concern with STAG is that their stability relies on their assets being uncorrelated which has so far been the case.  However, a sharp recession could cause many of their properties to fail simultaneously.  We do not see a recession coming, but recessions are often hard to see coming.  We like the position but may look to trim if prices rise further.

GPT:  Gordon DuGan is an impressive guy and seems to understand what makes the market tick.  He has successfully repositioned GPT in a way that it is about to be considered a pure-play industrial REIT.  This has and should continue to result in a higher trading multiple.

CORR:  Our meeting with CORR was mixed.  We find management to be both honest and capable, but the energy market has entered into a phase which will make their business strategy more difficult to execute, particularly on the acquisition front.

CBL:  Steven Lebovitz had instant recall about specific details of each property in CBL’s portfolio.  This suggests to us that he works directly with the portfolio each day as more of a hands-on manager.  Given the difficulties of the retail environment, this sort of TLC is essential for a mall REIT.  We also learned that CBL’s dividend is essentially mandated by their level of income so they could not cut it even if they wanted to.  This is a well-covered and safe ~13% dividend.

SOHO:  Drew Sims had a newfound confidence as many parts of his portfolio are reaching a point of performance.  Specifically, the Hyde properties should prove to be highly accretive to shareholder value, both individually and through the synergistic impact on the Hollywood Florida hotel.

AHH:  Some of AHH’s grocery anchored retail properties could be under a bit of stress, but the core development business is still chugging along as anticipated.  Given the magnitude of the developments relative to AHH’s market cap, we believe it will be the driving force going forward.

WPC:  W.P. Carey’s business is changing in that the non-traded REIT arm of growth will be less available going forward.  Thus, it will not have the explosive performance that it has put up in the past, but is instead a triple net value play with strong metrics across the board.  This is one of those where we can just collect dividends and perhaps trim opportunistically if the price gets too high.

GNL:  Admittedly, I was not expecting to be pleased with the GNL meeting as the combination of former non-traded REIT and external management is often a recipe for misalignment.  However, I am far more confident in the position after meeting management.  They have taken steps to improve alignment including FFO/share based compensation which does not reward growth for the sake of growth and a largely independent board.

KRG:  Kite is still projecting growth despite the difficult environment in which it operates.  Due to the high household income in the trade radius of its properties, its sales remain strong and afford healthy rent bumps upon lease renewal.  If there is consolidation in the grocery store space we may look to sell, but otherwise it strikes us as undervalued relative to its growth potential.

FPI:  Farmland Partners is not yet in 2CHYP, but we are watching it closely with intent to add during trough pricing.  Corn and soybeans have had 3 record yield years in a row which tanked prices and made farmer profitability drop materially.  We are attempting to time our purchase with the point of maximal stress.  Basically, farmland is an excellent long term asset class that generally outperforms the market and Paul Pittman is, in my opinion, a strong consolidator in the space.

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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6/8/17 2CHYP Performance since inception

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