1Q2017 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.
Armada Hoffler (AHH)
Armada Hoffler (AHH) has its own development arm which it uses for value creating construction. Presently, the pipeline is rather large with 2 multifamily properties to be delivered in 2017 and 4 more mixed use properties in 2018. The overall size of these deliveries is $435mm which is quite large relative to AHH’s market cap of only $518mm. We anticipate FFO/share to ramp up materially in 2018 as these additions begin to cashflow. Until then, AHH’s existing properties are performing well and supporting a healthy dividend yield. While market pricing has been volatile, the underlying business remains solid.
Medical Properties Trust (MPW)
Medical Properties Trust (MPW) has strong properties and mostly strong tenants, but it has sold down lately on Adeptus’ troubles. Adeptus currently pays about 7% of MPW’s revenues so it is material but not overwhelming. ADPT, Adeptus’ common stock, has sold down dramatically as their failure to collect on accounts receivable became sufficiently large as to threaten the continuation of the business. We believe the market has seen this and priced it in to MPW as a complete loss of revenue on these properties. There are, however, some mitigating factors which I think will preserve MPW’s revenue. ADPT is current on their rent, so 1Q earnings wll come in full. In the event that Adeptus does fail to pay, these are high quality and new properties which MPW should be able to lease in short order. My guess is a default would merely result in a quarter or 2 of lost revenues with minimal impact on long term operations. The dip in MPW’s market price related to this issue seems to be a buying opportunity as the damage will likely not be as great as what the market is predicting.
CBL & Associates (CBL)
CBL & Associates (CBL) epitomizes a deep value play. Trading at just over 3X FFO and about half of its NAV, CBL is priced for failure. Newsflow has been consistently negative with CBL trading down each time a new retailer closes stores or goes under. I believe the market is not grasping CBL’s ability to adapt. Each trouble has a different solution and CBL has been creative in mitigating damage. Bad malls in weak submarkets are being allowed to foreclose such that the property level debt is forgiven. Bad malls in good locations are being redeveloped, and good malls in strong locations can simply find replacement tenants. Overall, the impact to CBL’s FFO/share has been minimal, causing it to get extremely cheap fundamentally. We suspect CBL will come out the other side with a smaller but stronger portfolio of assets which is worth materially more than its current market price.
Stag Industrial (STAG)
Stag Industrial (STAG) has performed quite well both fundamentally and in the market. Ben Butcher, STAG’s CEO, strikes us as a highly capable manager who has been consistently and accretively growing STAG using a fairly sophisticated acquisition model. While we consider this a long term hold, we will consider trimming if the price gets ahead of the fundamentals. Such a trim is more likely if other REITs become more opportunistic. STAG is not anywhere near overvalued as it remains the lowest multiple industrial REIT, but it is arguably close to full value. As such, our price target is just 10% above market price. STAG is one of the best companies in 2CHYP and it brings a bit of stability to the portfolio.
Uniti Group (UNIT)
REITs are far more diversified than most people think, and Uniti Group (UNIT) is an example of direct tech exposure through a REIT vehicle. Uniti owns vast fiberoptic cable networks which it leases to telecom companies as either lit or dark fiber. This is a business which has exposure to secular demand growth while still providing the stability of long term contractual revenues. Telco REITs are generally loved by the market with American Tower and Crown Castle trading at healthy multiples, yet UNIT can be had for just over 11X FFO. This stock brings substantial diversification to 2CHYP while also providing a 9%+ yield and capital appreciation potential.
New Senior Investment (SNR)
New Senior Investment Group (SNR) is the lowest multiple senior housing REIT by quite a margin. It has some problems including high tenant concentration with Holiday accounting for a large portion of SNR’s revenues, but the valuation gap between it and its nearest peers makes the reward worth the risk in our opinion. We like the sector as its fundamentals are similar to that of multifamily, except with more favorable demographic trends due to aging baby boomers. Senior housing is less susceptible to healthcare regulation than other types of healthcare REITs and should do particularly well with the strong stock market growing people’s nest eggs.
Gramercy Property Trust (GPT)
Gramercy (GPT) formed from the residual real estate of its mREIT predecessor, and expanded its portfolio through a merger with Chamers Street. Each of these had properties with a wide range of quality and GPT still trades at a multiple commensurate with a mixed bag of properties. However, it has spent the last year disposing of the junky assets and using proceeds to replace them with better quality industrial assets. It now consists of nearly 70% industrial properties and boasts a long weighted average remaining lease term. Since the dispositions and acquisitions were at a roughly equal cap rate, FFO/share saw minimal impact, but the future growth rate went from flat to strongly positive. Given the tailwinds facing the industrial sector, we see GPT as a cheap way to gain exposure.
CorEnergy Infrastructure (CORR)
CorEnergy (CORR) has been a wild ride with natural gas and oil priced taking such a deep dive in recent years, but this volatility in the underlying commodities demonstrated a key concept of CORR; resilience. Even with a majority of their tenant base declaring bankruptcy, CORR’s revenue stream was largely uninterrupted. Since CORR is careful to select assets that are absolutely critical to the tenant, both bankrupt tenants chose to pay CORR’s lease through their bankruptcies. Quite simply, without CORR’s asset they cannot generate revenue so their best hope of a favorable outcome is to maintain rent payments. With this mess behind them, CORR can go back on offense and start growing FFO/share through accretive acquisitions.
Sotherly Hotels (SOHO)
Sotherly Hotels (SOHO) is a tiny hotel REIT trading at a deep discount to peers at less than 6X forward FFO. With high leverage and low liquidity, the stock is not ideal for those with low risk tolerance, but for those who can handle price swings, it has some potential. Over the past 3 years SOHO has been rennovating its portfolio and it now has some beautiful properties. Specifically, we see room for substantial ADR (average daily rate) growth at the Georgian Terrace and RevPAR growth at the Whitehall. Given the weak performance of Houston last year, it will have easy comps. SOHO has been rapidly growing its dividend and we anticipate the pace to continue as its FFO payout ratio remains conservative.
Washington Prime (WPG)
Washington Prime (WPG) is a beaten down mall REIT currently trading at less than 5X forward FFO. It has taken great strides toward improving its portfolio through rennovations and asset sales. We believe it is now positioned to weather the headwinds facing retail with only moderate damage. While it is never fun to own a REIT facing moderate damage, we need to consider it in context which is that severe damage is already priced in. Washington Prime has thus far been able to maintain rents and occupancy which is well above market expectations. If it can continue to weather the storm it would be worth about $16/share, but our scenario weighted average value is about $10.50. We would not want to overweight retail and we are underweight the sector relative to the index.
W.P. Carey (WPC)
W.P Carey (WPC) has long been a respected NNN REIT and through most of its history it traded at a multiple corresponding to this valuation. Despite its track record and solid fundamental performance, WPC’s P/FFO has fallen well out of line with peers. Some of this was due to the impact of the fiduciary rule on their asset management business, but that is now a small portion of operations. WPC’s NNN business is uninterrupted and should warrant a higher multiple. We own WPC as a quality value play with a high yield. It could return to a roughly 15X multiple for fairly strong capital gains.
Omega Healthcare (OHI)
Omega Healthcare (OHI) is known as a “dividend contender” for its long streak of dividend growth and its FFO/share has grown in similar proportion to support the dividend. Most companies given this label trade at a premium to the market, yet OHI has a P/FFO around 10X making it cheaper than REITs in general and its healthcare peers. There is some fundamental disturbance in the skilled nursing space, but OHI is among the best positioned to navigate the stress. With more diversified and smaller operators, it can be more nimble in dealing with CMS star ratings and bundling. To the extent that an operator fails to be allocated patients from upstream facilities, OHI would have a good chance of replacing them in a timely manner.
Global Net Lease (GNL)
Global Net Lease (GNL) is simply the cheapest and highest yielding NNN REIT. Management is not of exceptional quality, but the in place leases generate enough revenue to pay out nearly 100% of the current market cap in dividends. Therefore, even though there is some risk in the residual value after leases expire, whatever residual value is there represents upside due to the current valuation of the stock. GNL’s tenants are among the highest percent investment grade, so leases have relatively low risk of default. The play is to sit back and collect dividends and perhaps get some capital gains if the market bids it up.
Hersha Hospitality (HT)
Hersha Hospitality (HT) has demonstrated itself to be the best hotel manager in the REIT space. In addition to consistently generating strong property level performance, HT has accretively recycled its assets to upgrade its future growth prospects. It trades at a deep discount presently due to near term headwinds such as the weakness of the Miami market that is projected for the next year or 2. Longer term, Miami should be a strong market once the hurricane damage is repaired and Zika is less of a threat. While HT appears to be trading at a middle of the pack multiple, I think current FFO is somwhat of a trough due to near term weakness in HT’s markets.
CatchMark Timber (CTT)
Catchmark Timber (CTT) has a bunch of catalysts to accelerate its earnings. In addition to the general strength projected for US housing starts, CTT’s primary sales region (southeast US) seems to be at a cyclical low. Thus, its return to mean could stack with the general industry tailwind to create outsized returns. CTT’s peers have been selling into much healthier markets so they will not get the same percentage gain as conditions normalize. With superior growth potential and the deepest discount to NAV, CTT is our pick for the timber sector.
Important Notes and Disclaimer
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