Overall, 2CHYP had a reasonably good week with most of its stocks performing well, but I must say that I am disappointed in Plymouth.
As a financial analyst, I attempt to estimate the intrinsic value of stocks and use this information to buy at steep discounts to intrinsic value. Ideally, the discount will close by the stock price coming up to fair value, but occasionally the gap between intrinsic and market price serves a function as a margin of safety for when I am wrong or for when fundamentals change.
One risk that is perpetually present in REITs is that management will do something stupid that reduces intrinsic value. We attempt to safeguard against this risk by meeting with management teams frequently so that we can make an assessment as to their character, capabilities and alignment with shareholders. Plymouth was no exception as we have spoken with its CEO, Jeff Witherell, on numerous occasions. Our assessment was that he was a capable CEO and seemed to be aligned with shareholders.
Based on the share offering that is currently taking place, I fear I may have been wrong in this assessment. Plymouth is too small for a publicly traded REIT so it definitely needs to grow, but issuing more than 100% of outstanding shares at once seems foolish to me. The market price dropped materially upon announcement and the secondary shares have not yet priced. An offering of this magnitude will be hard for the market to absorb which will likely result in a disappointing price of issuance.
As PLYM’s intrinsic value was over $20, the offering pricing somewhere between $15 and $16.50 will almost certainly be dilutive. Paying off the 15% mezzanine loan is a nice use of proceeds, but the capital could have been raised in a much cleaner way. We remain long PLYM as the reduced market price is still far below intrinsic value, but the upside potential is unfortunately not as great as it used to be.
In more pleasant news, we were able to grab some cheap shares of City Office REIT and harvest our gains on RLJ. City Office is deeply discounted to the rest of the office sector and has strong growth potential from recent acquisitions and its well located properties. The roughly 8% dividend yield is a nice kicker while we wait to realize the value.