Market Commentary | June 15, 2023
We Bought the Farm
Over the last year and a half of this hyper-inflationary environment, we’ve joined the legions of other investors in ritualistically awaiting the monthly release of fresh Consumer Price Index (CPI) and Producer Price Index (PPI) reports. Most of the time these reports are followed by the minutes of the Federal Open Market Committee (FOMC) and their decision on the direction of interest rates. This routine has become a bit stupefying in that investors tend to react with both elation and fear and the real economic and market details are lost in the noise. Coming into this week we knew we faced the CPI, PPI, and FOMC triplet, but we had to remain sharp because we were also awaiting something else, something we’ve seen before.
At the end of May, Gladstone Land Corporation (LAND) announced that they would list shares of Gladstone Land 6.00% Series C Cumulative Redeemable Preferred Stock (LANDP) for trading on the Nasdaq. LAND is an agricultural REIT that owns row crop and specialty farms throughout the United States; we know the company and its management very well. These are obscure REIT equities that won’t be noticed by the broader markets, but we found opportunity in the 4Q 2020 listing of Gladstone Land 6.00% Series B Cumulative Redeemable Preferred Stock (LANDO), and we hoped to repeat the gains.
LANDO and LANDP were each capitalized as non-traded preferred stock. They both pay a 6% coupon and have a $25/share liquidation preference. When LANDO shares were listed in late 2020, they struggled initially and traded down to just below $24 before gaining a following and traded above $27.50/share. When an obscure, untraded equity eventually lists, the pent-up desire for liquidity can temporarily outstrip demand and the prices dip; we bought discounted LANDO shares shortly after listing, collected some dividends, and sold shares for a small profit. We hoped to do something similar with the listing of LANDP, but markets are a little bit crazier now.
With little fanfare, LANDP began trading on June 8th. Shares opened at $21.50 and that made sense because that mirrored the pricing of the basically identical LANDO. Then things got weirder. By the time CPI figures were released on Tuesday, June 13th, LANDP’s trading volume had quintupled, and share prices had fallen to as low as $19.03; simultaneously, LANDO’s shares were still changing hands for $21.10 – $21.35. When the same asset trades at 8-10% disparate pricing it is called dislocation (read Dane’s take here). We became active LANDP acquirers.
We effectively bought LANDO’s twin at a 9% price discount that produces a 70 basis point higher dividend yield. In today’s trading, the discount narrowed with LANDP shares trading as high as $20.75 on lower volume.
When markets get dislocated, you can decide to be the supply or the demand. Here we saw opportunity in stepping up as the first wave of demand.