Fundamentals might be returning to focus

In the first half of this earnings season, we saw quite a few strong reports, but the market seemed to not care, opting instead to trade the reporting companies on macro factors.  This week, however, earnings reports have received the proper response.

Core Civic beat on FFO and revenues, but more importantly, it demonstrated a renewed growth trajectory with indications that its Contract with the state of Kansas was just the tip of the iceberg when it comes to development partnerships with states.  The stock moved up nicely on the week.

Stag Industrial had yet another quarter of rent rollups and accretive acquisitions.  They seem to be properly tempering the volume of acquisitions going forward with respect to availability of capital.  Ben Butcher is hesitant to issue equity when the stock is this low, so most of the acquisition activity in early 2018 is likely to be funded with cash and the credit facility.  This bodes well for FFO/share growth and the stock responded positively.

Following up on the previously strong 4Q results, Medical Properties Trust announced a dividend raise to $1.00 per share annually.  We like increasing dividends, particularly from companies with low FFO payout ratios.  The market seems to agree, evinced by big gains from MPW on the week.

It is not all happy news in REITs with data centers suffering a bit this week.  Digital Realty’s report demonstrated supply concerns and a lack of scale advantage as DLR, who is one of the biggest in the space, struggled with maintaining market share.  DLR is not in the 2CHYP portfolio, but I suspect its report is what pulled down Iron Mountain as IRM put up strong numbers including guidance for a healthy compound growth rate through 2020.

After the deal with Credit Suisse, IRM has significant exposure to data centers, so any bad news for that sector seems to negatively impact IRM’s price.  We think IRM is the best in the space as it has synergies with its legacy business that help to supplement the otherwise somewhat low IRR of data centers as a property type.

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

2/15/18 2CHYP Performance since inception

2CHYP Weekly Trade Confirmation Report: No trades this week