8th inning of earnings season

Farmland Partners (FPI) had a strong report with guidance calling for positive AFFO/share growth in 2018.  NAV of the underlying farmland has held strong in the high $12 range and rents are looking to stabilize in 2018 and roll back up starting in 2019.  Importantly, FPI has one of the most aligned management teams among REITs with the CEO and CFO taking sizable voluntary pay cuts as well as foregoing their bonuses this year.  We continue to like FPI as a long term value play and as a diversifying position for 2CHYP.

Gramercy Property (GPT) had a solid 4th quarter but issued weak guidance for 2018.  The market response was gentle with it performing roughly in line with other REITs, but I was significantly disappointed in this fundamental development.  Essentially, the company is sacrificing near term FFO/share through dispositions exceeding acquisitions in an effort to reduce debt levels.  From an NAV perspective, it is likely accretive, but the reduced FFO/share will likely put pressure on the share price for some time.  While the directional shift lowers our fair value estimate to about $28, that is still well above the current market price so we are holding at this time.

Jernigan Capital (JCAP) seems to be progressing as planned with an increasing number of their funded developments going full cycle and becoming equity holdings.  Earnings growth YoY is quite strong with the midpoint of 2018 guidance coming in at adjusted earnings of $3.05.  That represents a multiple of under 6X. Fundamentally, self-storage is in a good spot with demand remaining strong and supply growth projected to tick down in 2019.

Uniti Group (UNIT) reported a bit more churn for fiber leasing than I was anticipating, but this was balanced out by healthy leasing activity of spare fiber capacity.  Overall, the report was quite strong including guidance calling for significant AFFO/share growth in 2018.  Note that AFFO fully covers the dividend and as far as I can tell there are absolutely no plans to change the current payout rate.  Some have speculated that the company will need retained cashflow to fuel growth, but a majority of upcoming growth can come from lease up of existing owned fiber.  This requires minimal capex relative to the cashflows it can generate.

As fundamentals remain strong we are increasingly believing that this downturn in REITs is a buying opportunity.   Much like any other point in time, there are some problems, but if one were to look at the weighted average fundamental performance of REITs it is quite healthy.  Certain REIT subsectors such as data centers and healthcare are experiencing substantial fundamental difficulties and we have been fortunate to be minimally exposed with just 2 holdings in these areas.  MPW is healthcare and IRM is partially in the data center business, but in both cases, the individual companies seem to have circumvented the headwinds of their respective sectors.  IRM is using synergies with its legacy business to stimulate revenue growth as rate growth for data centers has broadly come in below expectations.  MPW is positioned to let its tenants absorb the entirety of the profitability compression going on in healthcare.  With exceedingly high EBITDAR coverage ratios relative to its REIT peers, MPW is less likely to be forced to lower rents and in many cases is growing its rent.

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

3/1/18 2CHYP Performance since inception

2CHYP Weekly Trade Confirmation Report:  No trades this week.