J.C. Penney announced strong earnings and traded up substantially on the report.  Within the report, they announced some store closures which has sent the retail REITs into a fit.  The REITs seem to be dropping in unison without regard to reason.  WPG is down 7% today despite putting out a release stating that none of the J.C Penney closures are in WPG locations.   As is often the case, the market is focusing on the closures and ignoring the store openings.  Amazon announced that it will be opening a chain of grocery stores priced significantly cheaper than Whole Foods.  We see this as additional demand for many of the shopping center REITs and it seems to be getting overlooked.

Uniti is essentially in purgatory right now, awaiting judgement.  Windstream has announced intent to keep operating and in so doing it intends to pay all vendors and servicers.  This, in my opinion, means that WIN intends to affirm the master lease with UNIT.  Thus, there is a very real possibility that UNIT’s cashflows will be entirely uninterrupted by the Windstream saga.  While UNIT’s share price may continue to languish until there is more clarity, no real harm has happened yet.  There may be harm or UNIT may even benefit if WIN comes out the other side of bankruptcy as a much higher credit tenant.  With such a wide range of possibilities, many are uncomfortable owning it and most investors sell uncertainty.  I take a more expected value approach, weighing the potential scenarios and I firmly believe the EV is well above current market price.  There are scenarios in which UNIT is worth less than market, but these are more than balanced by the scenarios where UNIT can demonstrate the stability of its cashflows and moves to full value.

I am particularly liking the triple net REIT sector right now as macro conditions are steady.  Grow continues in the U.S. at a moderate pace which will keep occupancy close to 100% and interest rates have stabilized due to a more dovish Fed which will keep spreads in place.  GOOD and GNL seem positioned to just churn out cash at a steady and predictable pace.

Earnings season continues with more of the REITs in 2CHYP reporting earnings.  This week, it was RLJ and GNL.  Please check out our earnings updates in the portfolio analytics section of the website.

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2/28/19 2CHYP Performance since inception

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