Core Civic (CXW)
PDF: Core Civic company profile 2Q18 (CXW)
Core Civic (CXW) owns and operates corrections facilities on behalf of state and federal government agencies. Presently, its occupancy rate is fairly low as it is recovering from a since revoked ruling that the bureau of prisons would reduce its reliance on private prisons. However, its value proposition is sufficiently strong that many states are choosing to contract with CXW for increasing portions of their detainees. We see significant occupancy improvement over the coming years, and with it, restored FFO/share.
CatchMark Timber (CTT)
PDF: CTT company profile 2Q18 (CTT)
CatchMark Timber Trust (CTT) is a tough REIT to value because traditional metrics do not apply. FFO is all over the place and often not tracked for timber REITs which is why the estimates above stop in 2015. EBITDA fluctuates drastically with harvest volume and even harvest vintage. I like to value timber REITs on price per acre net of standing inventory and on this metric, CTT is significantly cheaper than peers. More importantly, CTT is cheap relative to the value of its land as land of such productivity in CTT’s geography would typically go for $1500 to $2000 per acre. We did a full calculation of CTT’s EV/acre in early 2017 and came up with about $780. The stock has risen since then and the new acquisition was at a higher price per acre so I suspect CTT’s EV/acre is now around $1100 which is still well south of the value.
Global Net Lease (GNL)
PDF: GNL company profile 2Q18 (GNL)
We anticipate Global Net Lease (GNL) to generate $2.10 of AFFO in 2018 which puts it at a roughly 10X multiple. Most NNN REITs trade at 13X to 17X so GNL is quite discounted. The market dislikes it because the dividend is $2.13 which means it is not covered by AFFO. I too prefer dividends to be covered, but the stability and trajectory of GNL’s cashflows makes it okay in this case.
Since GNL has exceedingly long lease terms with a weighted average remaining term of nearly 10 years, its AFFO is unlikely to drop. Additionally, GNL has lease escalators of roughly 1% to 2% annually which should take AFFO above the dividend in about a year if GNL simply does nothing.
Government Properties Trust (GOV)
PDF: GOV company profile 2Q18 (GOV)
Government Properties Trust (GOV) is arguably a low quality REIT. It has declining FFO/share as seen above and potentially misaligned management. However, the magnitude of discount is sufficient that both of these problems are more than priced in. Trading at just over 8X forward FFO, GOV is the cheapest office REIT with the average of the sector at 17.6X.
Since most market participants are risk averse and there is no way to put a hard number on how much a company should be discounted for bad management, the market tends to apply an oversized discount. I am willing to accept the discomfort of owning this stock in exchange for a bigger expected return. At such a time that market pricing removes the higher expected return, I would gladly sell GOV.
Iron Mountain (IRM)
PDF: IRM company profile 2Q18 (IRM)
Iron Mountain (IRM) is the global leader in secure storage of physical data and it is now expanding its scope of services to digital data with massive data center acquisitions and developments. Generally, I dislike data center acquisitions as the cap rates are quite low, but IRM has the potential to increase the cap rates through synergies with its legacy business. IRM has a service in which it converts a customer’s physical data to digital for a small fee and once it is stored on the cloud, the customer can have IRM shred the physical documents. As cloud storage is higher margin for IRM, we see this transition doing good things for its bottom line.
We met with IRM’s management at REITWEEK and they seem like a solid team. This, along with IRM’s stellar track record as a public company, gives us confidence that IRM’s transition will be successful.
Jernigan Capital (JCAP)
PDF: JCAP company profile 2Q18 (JCAP)
Take a look at the earnings estimate above. That is not our estimate, but the consensus estimate. A company earning $3.32 over the next 12 months has no business trading at $19.28 unless it is failing or unscrupulous. JCAP is trading cheaply because they are having difficulties communicating their story to investors. It is a unique business model that is not easy to understand. The recent hire of David Corak, a former sell side analyst who covered JCAP, will help JCAP’s communication issue.
We have been working with David since before he worked for JCAP and he knows how to explain the accounting to investors. As he does the rounds at institutions, I believe there will be substantially more buyer interest.
Medical Properties Trust (MPW)
PDF: MPW company profile 2Q18 (MPW)
Two aspects of hospitals make them ideal real estate: essentiality and certificates of need. Hospitals rarely have redundancy due to certificates of need which prevent unnecessary hospitals from being built. As such, if a hospital shuts down, an entire area is left with inadequate healthcare. The government at a national and a local level cannot let this happen as hospitals are of high acuity and are essential to the wellbeing of a community. As such, I view hospitals as the safest form of healthcare real estate in these difficult times for the sector and Medical Properties Trust (MPW) is the only pure play hospital REIT.
Outfront Media (OUT)
PDF: OUT company profile 2Q18 (OUT)
Generally, mispricing originates from uncertainty or discomfort and Outfront Media (OUT) is both confusing and uncomfortable for REIT investors. Short term contracts make future earnings difficult to predict, and advertising as an industry is subject to vicissitudes which are often uncorrelated with the general economy.
Between the ~10X FFO valuation and the strength of OUT’s strategy and management, we believe the outlook is favorable for investors at this price. In particular, I like that OUT is an idiosyncratic risk in that its success will likely be unrelated to REITs broadly. This allows it to act as a ballast for 2CHYP, while also providing lift of its own.
Plymouth Industrial (PLYM)
PDF: PLYM company profile 2Q18 (PLYM)
Plymouth Industrial (PLYM) is arguably the deepest value in the industrial space with stabilized FFO of $1.30 to $1.70 by our calculations. Fundamentals have been quite strong with positive rent rolls and successful re-leasing of previously vacant properties. Its main issue is its insufficient size which makes its FFO margin low and creates an equity overhang. The market knows that the company invariably has to issue equity to get to efficient scale, so many would-be-buyers are waiting to pick up shares on an equity raise. As such, we anticipate substantial price volatility with a potential end reward as PLYM’s multiple expands closer to peers.
Sotherly Hotels (SOHO)
PDF: SOHO company profile 2Q18 (SOHO)
We are anticipating strong YoY comps in Houston and Florida which should propel Sotherly Hotels (SOHO) to a 2Q18 beat. There is also potential for some insurance recoveries related to electrical damage at the Whitehall. Although SOHO has appreciated significantly, it remains cheap on both FFO multiple and discount to NAV.
Over the past couple years, SOHO has started a nice track record of consistent and sizable dividend hikes. As the payout ratio remains quite low at under 50%, the raises should keep coming.
Stag Industrial (STAG)
PDF: STAG company profile 2Q18 (STAG)
Street estimates are calling for steady FFO/share growth at STAG Industiral (STAG) and we are inclined to agree. In recent quarters, rent rolls have come in well above expectations with a high single digit blended average. Based on preliminary 2Q operational reports for the industrial sector, strong fundamentals seem to be continuing.
We are somewhat concerned about supply. It has not hit yet, but a somewhat euphoric market perspective of industrial real estate is likely to have triggered increased development activity. If my hunch is correct, the high growth of the sector has limited life left.
UMH Properties (UMH)
PDF: UMH company profile 2Q18 (UMH)
UMH Properties (UMH) has a strange growth trajectory that makes it hard to track. In my opinion, this is why the market has not yet embraced UMH as a growth stock. Essentially, share issuance through the drip is hurting FFO/share while acquisitions and developments are of the nature where cashflows do not hit immediately. In other words, reported FFO is far below stabilized FFO.
Same store NOI growth has been impressive and fundamentals suggest this will continue. Demand is strong due to high apartment rents and high home prices which make manufactured housing the only affordable housing left.
Uniti Group (UNIT)
PDF: UNIT company profile 2Q18 (UNIT)
Uniti’s fiber business is well positioned to capture increased demand as the US transitions to a 5G network. Existing towers are going to need more backhaul. Small cells will be built throughout the country. With excess capacity built into its network, UNIT can take on additional customers with minimal marginal cost.
There are plenty of exciting tech plays, but few come at such a favorable valuation. UNIT trades at less than 10X AFFO and has a fully covered 11% dividend yield.
Washington Prime (WPG)
PDF: WPG company profile 2Q18 (WPG)
Washington Prime (WPG) is our pick in the mall space due to its combination of strong management and value. Some mall REITs have been taking on whatever tenant will fill their vacancies, but many tenants do not drive traffic to the mall. Such rents are merely temporary bandages that give the appearance of survival. WPG refuses bad tenants, instead opting for those that improve the ecosystems of their malls. Over time, the improved foot traffic will give WPG more power to both attract strong tenants and to raise rents. Such practices are the reason why WPG’s FFO is declining sharply in the near term, but they will also cause WPG to come out of the challenging environment ahead of the competition.