Welcome to the 2CHYP quarterly analytics. Each quarter we analyze our holdings both at a portfolio level and at a company level along with additional commentary about how 2CHYP works.
PDF link: Portfolio analytics 2Q17
For information and analysis on each company within the portfolio, click the links below to open 2 page profiles. Each profile contains our price target, company information and an elevator thesis. These should be uploaded in the coming days.
CBL & Associates (CBL)
PDF: CBL Company Profile 2Q17 (CBL) CBL 0.25 -0.01 -3.35%
CBL & Associates (CBL) is a company we have been bullish on for a while in comparing its long term value to its current market price. However, we are now bullish on its short to medium term prospects as well. It has taken a hit to FFO/share as it sold off weaker assets at fairly high cap rates in an effort to improve quality. Its FFO has bottomed and can now start to recover as its remaining assets likely have positve NOI growth. At such an absurdly low multiple, I believe the market will be a bit shocked by growing FFO and it could rebound rather swiftly. Retail in general has been fairing better in recent weeks.
City Office REIT (CIO)
PDF: CIO Company Profile 2Q17 (CIO) CIO 9.21 -0.43 -4.46%
City Office REIT (CIO) is primarily a yield and value play. We are not particularly bullish on office fundamentals as supply keeps coming in at a pace around absorption and may surpass it if the economy comes in weak. However, at its low multiple, discount to NAV, and high yield we do see some upside in CIO. Its properties are well located so it has potential for SSNOI growth and we like their higher going-in cap rates on acquisitions. We will pay close attention to lease rolls and tenant concessions as these could be early signs of either success or failure. We will likely continue to trade it around the fundamentals as they relate to the market price.
PDF: CORR Company Profile 2Q17 (CORR) CORR 7.54 -0.33 -4.19%
CorEnergy Infrastructure (CORR) is clearly a high yield and strong value, but its upside rests in its ability to acquire new properties. It has just over $100mm of liquidity which is large relative to CORR's market cap, so the difference between an active pipeline and failure to find a property to buy will be significant. In the event it fails to find an acquisition, it is appropriately priced. The current properties will continue to cashflow and the dividend is fully covered. Since the yield is so large, it will support the market price, but we see minimal upside without an acquisition. If CORR can buy a property with underwriting standards and a going in yield similar to those of former acquisitions, it would be wildly accretive. Given the novelty of CORR's business model, it is hard to determine if a pipeline exists, but with the fully covered dividend we do not mind waiting around to find out.
CatchMark Timber (CTT)
PDF: CTT Company Profile 2Q17 (CTT) CTT 8.32 -0.38 -4.37%
CatchMark Timber (CTT) is a deep value play on commodity production and raw land. Accounting for the standing trees on CTT's land at current sawtimber and pulpwood pricing adjusted for CTT's mix, the raw land in CTT's portfolio is trading at around $800-900 per acre. Recent transactions of similar Georgia land place the value per acre much higher as fellow timber REITs have made acquisition in the area above $2,000 per acre. The value inherent in the superior growth rate of this area is currently masked by reduced commodity prices, but as more mills and biofuel plants come online, we expect a normalization of southeastern timber pricing. This should unlock CTT's value and provide shareholders with significant upside.
Core Civic (CXW)
PDF: CXW Company Profile 2Q17 (CXW) CXW 8.80 -0.45 -4.86%
CoreCivic (CXW) is a controversial stock as its business is primarily prisons which it leases to Federal and local government agencies on a per diem rate in exchange for securing detainees. Jeff Sessions has undone the prior administration's orders to phase out private prisons, which I believe will open the doors for increased occupancy and profitability. Government owned prisons have occupancy above 100% so an increased use of private sector prisons could alleviate overcrowding, making it more cost effective and potentially superior from a humanitarian standpoint. We see potential for material FFO/share growth as the new contracts would incur minimal additional costs.
Global Net Lease (GNL)
PDF: GNL Company Profile 2Q17 (GNL) GNL 16.43 -0.40 -2.38%
Global Net Lease (GNL) represents a healthy mix between value and stability. It has among the most visible cashflows as its weighted average remaining lease term is over 10 years with minimal expiries in the next 4. To top it off, GNL has a higher percentage of investment grade tenants than nearly all of its peers, including the blue chip peers. Such stability should not normally mix with a 9.5% dividend yield, so I suspect the market could bid it up closer to an 8% yield. We see this as high reward relative to the risk and it could be a long term holding.
Gramercy Property Trust (GPT)
PDF: GPT Company Profile 2Q17 (GPT) GPT 0.00 -27.48 -100.00%
Gramercy Property Trust (GPT) is a hybrid office/industrial net lease REIT that is becoming a pure play industrial REIT. Since industrial trades at higher multiples, this transition should result in material P/FFO inflation. Through skillful management GPT has been able to sell office at roughly the same cap rate at which it is buying industrial. This has improved the quality of the portfolio while preserving FFO/share. GPT is conservatively levered, large, and well managed so we see it being a future blue chip REIT. It has already appreciated materially, but there should be some upside remaining.
Jernigan Capital (JCAP)
PDF: JCAP Company Profile 2Q17 (JCAP) JCAP 12.92 -0.37 -2.78%
Jernigan Capital (JCAP) is the David of the self-storage industry with a market cap of just over $300mm, yet it represents the threat to Goliaths like Public Storage. Essentially, there is an abnormally large development spread with JCAP able to build at a 9% cap rate and existing properties selling for 4%-6%. New supply will benefit at the expense of existing properties. Rents will flatten or even drop slightly, but since construction costs are so low, there is still significant value capture for developers. As a financier of self-storage development, we think JCAP is leveraged toward the best part of that vertical.
Kite Realty Group (KRG)
PDF: KRG Company Profile 2Q17 (KRG) KRG 10.22 -0.51 -4.75%
Kite Realty (KRG) has fallen first on retail and again with grocers as Amazon bought Whole Foods. I think the threat is overblown. KRG's numbers have been quite strong, putting up positive lease spreads that aggregate to 2%-3% SSNOI growth year over year. There is so much talk about retail hardship, but it has yet to have any fundamental impact on KRG. Sure it has a few tenants that have gone under, but its overall numers have been strong anyway. The market seems to be missing the forest and only seeing a few rotting trees. At this multiple, much of the downside risk is priced in, leaving potential for a nice recovery.
Medical Properties Trust (MPW)
PDF: MPW Company Profile 2Q17 (MPW) MPW 18.01 -0.37 -2.01%
It can be difficult to discern the quality of a company until they go through a tough situation. Medical Properties Trust (MPW) just had a major tenant go under and it escaped the situation without any interruption to cashflows or long term value. This demonstrates a certain level of underwriting which will bode well for MPW going forward. They have put together a track record of consistent growth of FFO/share and dividends. As recent acquisitions kick in, we see continued growth. There is no reason MPW should be trading at a sub 10X multiple. They are the highest quality hospital owner in the US.
Omega Healthcare (OHI)
PDF: OHI Company Profile 2Q17 (OHI) OHI 30.30 +0.62 +2.09%
We own Omega Healthcare with a bit of trepidation due to the volatility in the SNF space. So far, OHI has navigated the rough waters without any difficulty, growing consistently. However, this is one to watch closely as changes to the industry could be systemic and cause a rapid decline. Specifically, we will be watching for changes to patient routing from hospitals to SNFs that could cause certain SNFs with low CMS star ratings to lose occupancy. Additionally, dropping tenant EBITDAR coverage ratios will be an early warning sign. If it can succeed through the difficult environment, OHI has tremendous upside as significant turmoil is already priced into the stock.
Sotherly Hotels (SOHO)
PDF: SOHO Company Profile 2Q17 (SOHO) SOHO 2.27 -0.10 -4.22%
Sotherly Hotels (SOHO) has an unusual opportunity in its condominium lobby operations in Hollywood Beach, Florida. If successful the small investment could lead to significant cashflows as well as synergy for their hotel in the area. At such a small market cap, everything moves the needle and it can capitalize on little opportunities like its recent condo plays which would be too small for most hotel REITs to dedicate any attention to. With just over 10 properties, each one receives a higher level of personalized TLC that should afford property level outperformance over time. Rather than applying cookie cutter renovations to portfolios, each hotel is getting a custom designed renovation for the specific layout and the specific submarket. SOHO is priced well below asset value and has healthy cashflows.
Spirit Realty (SRC)
PDF: SRC Company Profile 2Q17 (SRC) SRC 31.68 -1.57 -4.72%
Spirit Realty has good real estate and weak tenants. The basic idea is that tenants can be replaced so long as the location is desirable to other potential tenants. Thus, SRC focuses on property level metrics such as rent coverage rather than tenant level metrics like credit ratings. Due to this strategy we think it is likely SRC will suffer more tenant defaults than peers, but with its real estate focus, it should have a better time replacing them. This is one of the more high-risk high-reward positions as a weak retail environment could stifle re-tenanting efforts. That being said, at its current market price, enough damage is priced in that we believe the upside outweighs the risk.
Stag Industrial (STAG)
PDF: STAG Company Profile 2Q17 (STAG) STAG 28.84 -0.38 -1.30%
STAG Industrial is, in our opinion, the best value in the industrial space which is characterized by high FFO multiples. It is likely discounted to peers due to its class B properties while most peers have primarily class A. We do not view this as a negative, but rather as a positive since B properties can be acquired at far higher cap rates with better cashflows over the life of the property. STAG's acquisition system accounts for capex and re-leasing costs, yet it comes out ahead in the long run if projections come true. So far, performance is at or above expectations at an aggregate portfolio level.
Whitestone REIT (WSR)
PDF: WSR Company Profile 2Q17 (WSR) WSR 6.43 -0.24 -3.60%
Whitestone REIT has the 2nd highest quality shopping center locations of any REIT with only FRT edging it out. One would not suspect this looking at WSR's barebones multiple or its sizable discount to NAV. WSR has always traded somewhat cheap to its property value, but a recent offering blew this discount out of proportion. Even in this challenging retail environment, WSR is growing same store NOI at a good clip. Given the quality of its assets and skill of its management, we see significant upside as the dip from the offering is undone. While we wait, WSR's sizable dividend yield can pay the bills.
Washington Prime (WPG)
PDF: WPG Company Profile 2Q17 (WPG) WPG 0.71 -0.04 -5.50%
Washington Prime is priced for struggles ahead which we do not see as being all that damaging. Some tenants will leave voluntarily and others may go bankrupt, but WPG should have minimal difficulty in replacing them due to the sheer number of options available and management's willingness to form creative solutions. Empty big box stores can be broken into a number of smaller shops which pay more rent and are faring better in this environment. WPG has even used some of its space for Amazon delivery lockers. The greatest threat to malls is now a mall tenant, and one that brings in a significant amount of foot traffic. People will come in to pick up their package and may grab a bite to eat at the food court or workout at the gym embedded in the mall. I suspect that increased tenant diversity will improve synergy as compared to defaulting apparel stores which tended to cannibalize the sales of their neighbors.