Trading and Process
With each trade I try to give a synopsis of the rationale to keep subscribers in the loop as to why we do or do not own certain stocks. For this week’s trades, the rationale is a bit more complicated than fits in a trade alert e-mail so I will provide more color here.
There are far more stocks that I want to own than fit in the portfolio and since we do not use margin in 2CHYP, purchase of an additional stock necessarily means another stock has to go or multiple other stocks need to be trimmed. In both of this week’s stock sales, the desire to purchase a different security was the driving force of the sale.
Essentially there exists a basket of securities with which we are familiar and our analysis suggests are positioned to outperform. Some of these are better than others with higher reward potential, less risk, or some combination of the two. In some instances, the spread between the Nth best security and the N+1 best security can be rather small which means the stock we find to be better positioned can change on relatively small news or price fluctuations.
This is the case with Gramercy. When we sold it on 10/27, we liked the stock. It is a well-run company and likely a future blue-chip. However, its valuation was such that there were other stocks that were slightly more opportunistic. Since the sale, GPT moved up our list for 2 reasons;
- The 3rd quarter report was significantly better than we anticipated.
- The price came down
This week we got the opportunity to buy stronger GPT shares for a cheaper price than where we sold it.
The Outfront Media (OUT) purchase was similarly motivated. We have been following the company for a while and like its prospects as the leader in the digital/physical advertising combo. The NYC Metro Transit Authority contract award solidified their fundamentals, but it also took the share price up double digits. With the fundamentals moving in tandem with the price, the opportunity did not occur until more recently when the share price dipped back down. We were happy to be able to grab some shares at $23.37.
In order to free up capital for these purchases, we sold CBL and PLYM respectively. I still believe both CBL and PLYM are positioned to outperform on a scenario weighted average basis. However, the risk adjusted magnitude of this outperformance potential is slightly less, in my opinion, than that of OUT and GPT.
Since CBL or PLYM could re-enter the portfolio at some point in the near future, I want to provide some updated thoughts on the stocks.
At the 2017 REITWEEK I had a private meeting with Stephen Lebovitz (CBL’s CEO) to discuss the future prospects of CBL. We try to meet with REIT management as often as possible as part of our due diligence. In the meeting, Lebovitz demonstrated an uncanny knowledge of his portfolio with the ability to describe specific properties in detail. The strategy he outlined for transitioning the properties to entertainment destinations made sense to me and still does today. Lebovitz is a competent manager and an expert in the mall space. However, what I failed to pick up on in the meeting was his alignment.
CBL is a family run company and in 20/20 hindsight it is fairly obvious that such a company would make every attempt to self-sustain. I believe this loyalty to his family over shareholders was the basis of the decision to cut the dividend. Retaining more capital in the company clearly improves its longevity, but at the expense of shareholders.
Fundamentally, there was no reason for CBL to cut its dividend. Even with the slight distress malls are feeling, FFO covered the dividend with plenty to spare for capex and redevelopment. CBL had a much lower payout ratio than the average REIT.
Going forward, we must now treat CBL as a shareholder unfriendly REIT which warrants a certain amount of discount to intrinsic value. CBL is sufficiently discounted to still be an opportunity, but WPG is just about as discounted with a manager at the helm who seems far more focused on improving shareholder value. As 2CHYP’s capital is pulled in so many directions, there is no room in the portfolio for both.
Plymouth had an interesting conference call in that it demonstrated a higher level of quality than most were expecting with highly favorable leasing activity of the existing portfolio. At the same time, growth was a bit disappointing with no additional acquisitions announced as of yet. The pipeline for acquisitions remains large at over $400mm and we have little doubt that many of those will be consummated. However, the delay in new acquisitions delays the growth. Coming out of the quarter exemplifying higher quality and lower growth bodes quite nicely for the preferred A shares as preferreds care far more about stability of the underlying company than about growth. At prices below par, we may be looking to pick up some PLYM-A as a 7.5% yield is quite attractive given its place in the capital structure.
This update was a bit long-winded, but I just want to keep everyone informed as to why we do what we do.
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.