4Q2017 Portfolio Analytics
Each quarter we prepare profile sheets on major portfolio holdings. Click the links below to open 2-page profiles. Each profile contains our price target, company information, and elevator thesis.
Each quarter we prepare profile sheets on major portfolio holdings. Click below to open our 2-page profiles. Each profile contains our price target, company information, and elevator thesis.
CatchMark Timber (CTT)
CatchMark Timber (CTT) has performed quite well in the market which has taken it somewhat close to our fair value estimate. We still like its business and the fundamentals are continuing to improve as the southeast gets more demand drivers for timber as home-building picks up. The Canadian lumber tariff, however, is not likely to help CTT much due to geographic distance. Quite frankly, Canada's supply to the southeast is minimal. I think the market has been responding positively to the tariff which may have been what helped CTT's price appreciate. While still a decent stock to hold at current pricing, CTT is on the chopping block if we need to free up capital for another position.
Core Civic (CXW)
Core Civic (CXW) has had a rough time in the market, falling from over $30 per share to around $22. Oddly, the duration of the fall corresponded to a period of positive fundamental news in which CXW had a strong 3rd quarter report and obtained new contracts. Residuals of the former ruling against private prisons are still hitting the bottom line causing earnings to trough in 2017 and 2018. This may be giving the impression of fundamental troubles and could be the cause of the price dip. However, the ruling has since been overturned by Jeff Sessions and over time the occupancies should tick back up. While the lost earnings are real, the market is pricing the dip as permanent. We see it as a temporary speedbump with a bright future ahead for the market leader. At just over $22, CXW is deeply below intrinsic value.
Farmland Partners (FPI)
Farmland Partners (FPI) represents a tradable way to invest in farmland which has historically been one of the most stable and profitable asset classes. One would anticipate that the liquidity would cause it to trade at a premium to direct farmland ownership, but FPI is actually trading about 25% below the value of the farms it owns. I believe this discount is a temporary phenomenon related to public perceptions that farm values drop with commodity prices. According to the USDA, this is not the case with farm values mixed over the past 2 years and averaging out to about flat since the drop in commodity prices. The durability of farmland suggests a fair yield of closer to 4%, but FPI is trading at a 5.7% yield.
Global Net Lease (GNL)
Global Net Lease (GNL) has been a long term holding for us and fundamentally it has done everything we have asked which is nothing at all. Quite simply, GNL's contractual rents are worth far more than its market price as long as it just sits back and collects rent. Thus far, that is precisely what GNL has been doing, and with a weighted average remaining lease term of about 10 years, that is all they need to do for quite some time. We will continue to monitor for dilutive acquisitions which could be a sign to exit the position, but in the absence of activity, we are quite content to just sit on the position and collect the oversized dividend. At a yield over 10%, this represents significantly outsized reward for a low risk company with embedded cashflows.
Gramercy Property Trust (GPT)
Gramercy (GPT) has been transitioning to being an industrial pure play and at about 80% industrial on forward NOI, the transition is nearly complete. Relative to other industrial REITs, GPT trades at a low multiple and a high yield. We like management and have been impressed by their ability to transition the portfolio to higher quality properties at a roughly equal cap rate. Selling a medium quality office property at a 6% cap rate and buying better quality industrial properties at 6% is not immediately FFO accretive, but it is in the long run. The market often forgets that office properties come with tremendous capex in the form of leasing commissions and tenant improvement costs which can be as high as 20% of rent. If we account for the true cashflow after capex, the transition was significantly accretive and should lead to increased growth going forward due to the favorable industrial environment.
Iron Mountain (IRM)
Iron Mountain (IRM) is an important diversifier as it provides both international and tech exposure. I have often spoken ill of data center REITs as the property type has minimal barriers to entry. IRM is proof of this point as a couple years ago they were not a data center company and are now one of the largest providers of data centers. The business model is slightly better in the hands of IRM because they get synergies on top of the decent cashflows generated by data centers. This portion of the business allows the legacy physical data business to remain vibrant as it converts what would otherwise be churn into higher margin digital storage. As IRM offers conversion services it is simply easier for the customer to keep their data with IRM than it is to recover the physical copies and give them to a different data service. With sensitive data, which is a large portion of that guarded by IRM, customers will not want additional parties having access. It is logistically safer to keep the sensitive information with the reputable company that already has it under lock and key. This, in my opinion, is why IRM's supposedly outdated legacy business continues to see net inflows.
Independence Realty (IRT)
Independence Realty (IRT) benefits from a variety of factors that should cause it to outperform multifamily peers on a fundamental level. Specifically, its submarkets have higher job and population growth which combined with its presently lower rent as a percentage of household income could fuel rent bumps. the SALT changes to the tax bill will amplify the population growth as most of IRT's properties are in lower taxed states where I imagine a portion of those fleeing the high tax states will end up. When the superior NOI growth outlook is combined with IRT's lower FFO multiple, it could drastically outperform peers. The only reason our fair value for IRT is $11.00 instead of much higher is because management is a big risk.
Jernigan Capital (JCAP)
Jernigan Capital (JCAP) is admittedly one of our riskier positions as the mREIT style of asset allows for fuzzier accounting. A sizable portion of JCAP's earnings come from positive amortization of their developments from their cost basis to an estimate of value at completion. Since the gains are recognized throughout the process much of the reported earnings are not yet earned. This creates 2 problems of which investors should be aware. 1) When the property is completed and sold at expected value, JCAP will not recognize a large gain because the gain has already been accounted for. 2) If something goes wrong such as cap rates increasing or the property failing to lease up, JCAP will have to take a sizable impairment charge. We own the position with eyes wide open to these risks because it also has a huge opportunity. If developments perform to underwriting, return on invested capital is in the high teens. Dean Jernigan is one of the most experienced and respected operators in the self-storage space and so far, underwriting appears to be slightly on the conservative side.
Kite Realty (KRG)
Kite Realty (KRG) has been the same story since we owned it. Fundamentals remain strong and the market price does not reflect the growth. Shopping centers are generally doing better than malls and grocery anchored centers are doing better still. People like to see their food and verify its freshness before they buy so I do not see online grocery ever killing the brick and mortar stores. With people already at its centers for their weekly grocery shopping, the other shops benefit from increased foot traffic. Grocery stores are also good about not cannibalizing sales in the way that some other anchors do. We like the model and KRG is right up there with Brixmor as the best value in the space. Depending on pricing, we could do some flipping between the two, but at this time, I would like to maintain exposure to at least one of them.
Medical Properties Trust (MPW)
Medical Properties Trust (MPW) is outperforming its peers fundamentally. Hospitals are less susceptible to supply due to certificates of need in the permitting process and MPW has demonstrated itself to be a strong underwriter. Rising labor costs are a problem for every part of the healthcare space and will impact MPW's tenants along with the rest. However, MPW's tenancy has among the highest EBITDAR coverage of leases so the strain felt from rising labor costs is unlikely to trickle through to MPW. At a multiple less than 10X, MPW's quality is not priced in and we see material room for upside.
Plymouth Industrial REIT (PLYM)
Plymouth Industrial REIT (PLYM) is an effective way to capture fundamental strength in the industrial space. Its leverage amplifies same store NOI growth, allowing it to have profound effects on the bottom line. Management seems to be acquiring properties intelligently, and at high cap rates. This is a risky position as it absolutely requires industrial fundamentals to remain strong, but given its steep discount to peers, we believe the reward outweighs the risk. The discount is largely due to property quality and location which the market views as a negative, but we actually prefer class B to class A due to new supply competing primarily with existing class A properties.
Sotherly Hotels (SOHO)
In the past, we have liked Sotherly Hotels despite disliking the broader hotel REIT space. We thought its sheer value was enough to make it worth investment despite the challenges facing hotels. Presently, however, hotel fundamentals are looking better. 2017 ended stronger than it began and 2018 is off to a good start. In particular, Houston and southern Florida have outperformed and these markets make up a large portion of SOHO's portfolio. With improved RevPAR, SOHO should be able to continue increasing its dividend and we suspect the gap between market price and NAV will begin to close. The 4Q17 report is likely to be average as timing issues are pushing certain revenues into 1Q18.
Simon Property Group (SPG)
The problems facing Simon Properties Group (SPG) are entirely speculative while the factual performance has been superb. Growth has continued at a rapid pace, and this includes same store performance despite the struggles facing retailers. I think the market is not giving credit to the fungibility of high quality space. If a struggling Macy's vacates, SPG is not necessarily harmed as the quality of its malls drives other retailers to want to occupy that space. So far, tenant replacements have actually increased SPG's rent. The media's fascination with "the death of retail" has created a rare opportunity to buy one of the best REITs at a deeply discounted price. In my opinion, this is one of those obvious winners, but as always, I could be wrong.
Stag Industrial (STAG)
The market has cooled a bit on STAG Industrial (STAG) with a significant price dip in recent weeks. We have seen nothing fundamental to cause such a dip so we suspect it is related to the general REIT selloff. STAG is now large enough to be in indices and therefore ETFs like the VNQ. As investors sold such ETFs in response to rising interest rates, STAG sold down with it. Prologis just reported 4Q17 earnings and revealed particularly strong US industrial fundamentals which should benefit STAG and we are anticipating a strong 4Q. Our hope is that REIT earnings season will bring renewed focus to company specific performance and perhaps break this correlated price movement that is muting fundamentals.
UMH Properties (UMH)
UMH Properties (UMH) is one of our top holdings as it provides a healthy combination of value and growth. manufactured Housing fundamentals are strong with both apartments and houses reaching price levels that exclude a large portion of the workforce. With rust belt locations UMH services precisely the population that is being harmed by out of control living expenses and provides an affordable housing solution. The cost to build and permit manufactured housing communities is rather prohibitive, but UMH already has communities with spare space for lease-up. Additionally, it has a land bank in varying stages of permitting. The barriers to entry serve as UMH's moat and its existing vacancies portend outsized growth for the foreseeable future. Despite its growth potential, UMH trades at a steep discount to its peers.
Uniti Group (UNIT)
Go ahead and cancel your Netflix subscription because Uniti Group (UNIT) is bringing all the drama one can need. Between the Windstream/Aurelius courtroom battle and the FCC's elimination of net neutrality, it would seem the rural telecom sector is in a precarious position. Fortunately for Uniti investors, this is little more than drama as UNIT's rental revenues have gone up consistently through all the supposed turmoil. There are many distractions obfuscating the simple truth that end customers need access to phone and internet and UNIT's infrastructure is essential to providing these services. There is some risk here as WIN Is actually troubled financially, but I think the chance of UNIT losing revenues is far lower than implied by the market price.
Washington Prime (WPG)
Washington Prime Group (WPG) has a mix of strong properties and struggling properties that will require skillful navigation from management. So far, it appears they are salvaging and creating value wherever possible and we think WPG will come out the other side of the retail downturn with a stronger portfolio occupied by internet resistant tenants. I expect some deterioration in FFO/share as the transition will require substantial capex along with some rent concessions. Presently, WPG is priced for about 50% FFO deterioration which we view as highly pessimistic. Our analysis suggests somewhere in the 10% to 20% range is more likely in the short term with growth after the transition. NAV of $12.90 suggests WPG is opportunistically priced and we think these low prices cannot last unless fundamentals get substantially worse.