The waiting game

Presently, the 2CHYP portfolio is in a period of waiting.  We firmly believe that each of the holdings is trading well below intrinsic value.  If we do not believe this about a particular holding it would be swiftly replaced with a different stock that we do think is undervalued.  Since we are not relying on momentum or any other sort of market timing, time is on our side.  Additionally, given the strong fundamental backdrop of most of our holdings, the intrinsic value of the portfolio is increasing over time (of course this is subject to errors in our analysis).

As we wait, 2 things are consistently occurring.

  • Dividends come in at a healthy pace with a high portfolio yield.
  • FFO generated by the portfolio should increase since the FFO payout ratio is fairly low, the companies will be able to reinvest cashflows that exceed the dividends which leads to growth.

These are the benefits that will generally occur through waiting, but there are also more specific events that we are anticipating.

CatchMark Timber is likely to be added to the Vanguard REIT index in the first or second quarter of 2018 which should generate substantial buying interest and help the stock price trade up to the intrinsic value.

A particularly acute focus on the ugly side of prisons has sent market sentiment on Core Civic to very low levels.  Sentiment on private prisons has ebbed and flowed many times in the past and we see no reason this time will be any different.

Most of the mall REITs have participating rent which causes the 4th quarter to be the strongest of the year due to both Black Friday and Christmas shopping occurring in this quarter.  Since this is the case every year, it should already be priced in, but the optics of quarter over quarter growth could help retail sentiment recover from rock bottom levels.

Windstream’s court situation is likely to progress in December as the rulings for the “event of default” are scheduled in that month.  This should give increased clarity to UNIT’s future rent payments and remove the uncertainty overhang.  It is worth pointing out that WIN is up 30% in the past month and this pricing surge has yet to be reflected in UNIT.

Monmouth Real Estate Investment Corp (MNR) returned 33% on the year and UMH owns a ton of this stock.  As of 9/30/17, UMH owned 2,313,424 shares of MNR which equates to a current market value of $40.97mm (11/24/17) which compares quite favorably to UMH’s cost basis of $20.315mm.  The just over $20mm of unrealized gains equates to about $0.59 per share; A significant gain on a ~$15 stock.  This should bolster UMH’s full year 17 results which are likely strong already due to fundamental performance.

Gramercy’s 3rd quarter acquisitions significantly outpaced its dispositions which suggests the 3rd quarter will have been the trough FFO and growth can return in 4Q17.  The perception of a company that is growing can be far better than that of one currently in a trough.  For this reason, along with fundamental justification of GPT being among the cheapest in the industrial sector, we see room for significant multiple expansion.

Global Net Lease (GNL) has materially underperformed the other triple net REITs which have done well in recent months.  This has widened the dividend yield gap making GNL relatively more opportunistic.

To be honest, I hate waiting.  I would much rather be trading at a rapid pace, but presently I do not feel that is the right thing to do.  2CHYP is positioned precisely how I think it should be, so I must wait for the right time to make a move.

We are constantly re-evaluating each of the holdings to make sure they are still worth owning and looking at new opportunities to see if they are superior to current holdings.  As long as the fundamentals remain strong, we are quite comfortable waiting, even if it is less exciting.

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.

2CHYP Portfolio Snap Shot

11/23/17 2CHYP Performance since inception

2CHYP Weekly Trade Confirmation Report:  No Trades This Week