Value –> growth
Portfolio managers are often classified as value or growth and in some cases a third category that exists in between known as GARP (growth at a reasonable price). This categorization feeds into a broad misunderstanding that value and growth are at odds. It assumes there is some inherent tradeoff between value and growth that means a company can’t be both or neither.
I posit that value creates growth. Among REITs, the two primary measures of value are discount to NAV and P/FFO. Both directly contribute to growth.
NAV –> Growth
The cheaper a stock is relative to its NAV, the more properties an investor can buy with a given investment size. If a stock is trading at 50% of NAV, a $100 investment will buy $200 of properties. With this purchase inflation of 2% will cause those properties to on average appreciate by $4 per year. Thus, through buying at a good value, the investor is getting a 4% return from inflation. If they had instead purchased at 100% of NAV, the $100 would buy $100 of properties which would only appreciate by $2 per year.
Low FFO Multiple –> Growth
Buying at a low FFO multiple generates a higher FFO yield as FFO yield is simply the inverse of FFO multiple. Thus, low multiple stocks throw off more cashflow for each dollar invested. This cashflow goes on 2 pathways, each of which produces growth for the investor.
- The company reinvests the cashflows into properties which then produce cashflow
- The company pays out the cashflows as dividends which the investor then reinvests into companies that generate cashflows.
Most REITs do some combination of the two. Cashflows beget more cashflows through the simple power of compounding.
The stocks in 2CHYP as a group are at a substantial discount to peers on both NAV and FFO multiple. We see this as a passive driver of growth. Time is on our side. The more time goes by, the more the higher level of cashflow accrues.