Volatility is back
REITs went through a quiet period toward the end of 2017 where daily movements were not all that substantial. I am happy to say that volatility is back. 2018 has already had days of movement greater than 1% for the index and 3%-5% for individual REITs.
Such pops and drops will invariably create opportunity for accretive trades. This week, GOV got way too cheap so we took the opportunity to load up on the well covered 9% yield. In the trade alert we discussed the value, but today I want to go into an upcoming catalyst for price realization.
GOV owns 24.918mm shares of Select Income REIT (SIR) or about 28% of outstanding shares. At current market pricing, that is worth ~$600mm as compared to GOV’s market cap of just $1768mm. Therefore, whatever happens to SIR will clearly move the needle for GOV.
SIR has a beautiful portfolio of industrial assets that are currently trapped at its extremely low multiple and these assets are about to be spun off into a new REIT that will trade under the ticker ILPT. As a high quality industrial pure-play, I suspect they will garner a substantially higher multiple while the remaining portion of SIR is likely to remain at approximately its current multiple as it is already trading under 10X 2018 estimates.
The spinoff is fundamentally value neutral, but I think it will help the market realize the value that is already there. Industrial REITs are in high demand right now so it difficult to imagine ILPT trading under a 15X multiple. If I am right, the aggregate market cap of the 2 issues will be more than SIR’s current market cap and GOV would incur a significant capital gain as a result.
Why not just own SIR?
Of the 2, I think GOV is more discounted relative to its intrinsic value and its yield is higher. The general cheapness of REITs at the moment is making it easier to find sustainable high yields and one of our goals for the year is to increase 2CHYP’s dividend stream.
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