The February US Jobs report came in mixed with a very weak 20K new jobs but strong wage growth over 3%. Ordinarily these do not exist in tandem.
I suspect what happened was that the government shutdown caused some delays in various pipelines that temporarily affected hiring. Construction, for example, had strongly negative net jobs in the month which was likely due to the delay in permitting for projects as a result of the shutdown. I put more faith in the wage growth number because wages are negotiated. Employers would not give over 3% higher wages if the labor market was not tight. Thus, I believe the economy is still quite strong which bodes well for the more cyclical REIT sectors such as hotels and retail.
We are in the home stretch of earnings season and the most recent few reports have come in strong. Our analysis of GMRE’s and UMH’s reports are in the portfolio analytics section, and there is another stock outside the 2CHYP portfolio that I want to discuss.
Plymouth issued guidance that is so high that much of the market is in disbelief. The midpoint of PLYM’s 2019 FFO guidance is $2.55 which not only demonstrates massive year over year growth, but it implies an FFO multiple of 6X. Other industrial REITs trade around 20X. So why are we not buying PLYM hand over fist?
Well, there is a bit of an overhang related to its convertible preferred that has varying outcomes depending on the stock price. If PLYM can get its stock price up significantly in the next few years, it will convert in a rather painless fashion which would preserve the tremendous value proposition the stock offers. However, if the stock price remains low, the preferred will eventually convert into a high number of shares causing some dilution. This presents an interesting factor where the stock price actually influences the fundamental value of the REIT.
Overall, we are bullish on PLYM but will be investing very cautiously due to the overhang of the convertible preferred. Its property fundamentals look great with double digit leasing spreads and growing occupancy. I suspect we will continue to trade it in 2CHYP, so I just want to keep you informed.