Author Topic: Any REIT experts here?  (Read 4996 times)

Gregmal

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Re: Any REIT experts here?
« Reply #40 on: October 12, 2019, 12:36:55 PM »
Hey Gregmal, if you had a gun to your head: GRIF or CTO and why?

Next 12 months, CTO without a question. The plan all along was to monetize the company by taking 11,000 illiquid acres and selling them then 1031 the proceeds into income properties, go REIT, and then if necessary sell to a larger NNN reit. Theyíve got 5,000 acres left with a big chunk scheduled to close this quarter. Whatís left is mainly 1600 commercial/residential lot and some scattered parcels along I-95. But the main thing is you have catalysts, and in March the convertible note due, which IMO has been a poison pill of sorts. Further, as I alluded to before, you have reputations at stake. These guys are not crazy rich. Sure I was utterly disgusted by some of the behavior during the proxy fights with Winters, but in the context of the corporate world, they were in a fight to the death and while unfair to shareholders, you can at least see where they were coming from. Going forward I believe they want to redeem themselves and deliver for things that, by their own admission, maybe werenít ideal. Either way, I think we see fairly soon how this plays out. With a $95+ NAV, it shouldnít be hard to get some upside. I havenít always liked or agreed with everything, but it would take a really special type of piece of shit, like a Sardar Biglari type, to do what they did with Winters and then just screw everyone else and do nothing. Itís always possible, but I donít think they are those types of bad people.

GRIF I like, the same as JOE, but it needs either a catalyst or a clear plan. You could say value there will explode once shareholders and outside investors get comfortable with management and determine them to be adequately aligned with all shareholders, but the same is true at CTO and CTO happens to be further along with the transformation.

That said Iím a buyer of GRIF anytime it hits $35, the same way Iíd be a buyer of CTO below $60 or JOE under $16. If nothing else those prices get you a good pop back to normal levels once whatever hysteria currently occurring subsides.


Cardboard

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Re: Any REIT experts here?
« Reply #41 on: October 12, 2019, 12:47:01 PM »
Thanks man!

What got you interested into these real estate companies?

Personally I have rarely if ever found a REIT that I liked: not cheap enough, growth too low, ponzi scheme like, too much debt, etc. A few exceptions but, really rare due in large part to people reaching for yield. Kind of turned me off on real estate. However, these shouldn't be lumped into the same category.

Probably one more reason why these are cheap.

Packer16

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Re: Any REIT experts here?
« Reply #42 on: October 12, 2019, 01:30:01 PM »
IMO, the big risk of CTO's NNN lease portfolio is 25% of its NOI is going to expire in the next about 5 years.  In these cases the value of NNN lease is closer to the value of the RE vs a premium due to the leases.  Comparing this to other NNN lease portfolios is like comparing apples to oranges.  Given the short duration, the market will not give these lease any value (which is assumed in the NAV) until the leases are renewed.  Also, the top 5 leases are like 38% of NOI vs. 12-15% for other NNN lease firms.  Also, the non-standard metrics makes me feel like these guys tried to put something together that "looked like" NNN lease firms that when you drill down is much more risky than NNN lease firms.  What also makes me feel uneasy is that many of the properties are not in in their core markets (26% in Florida).  The top tenants slide also is misleading as CTO has both location & tenant risk vs. the other NNN lease firms who typically have limited location risk because they have multiple locations around the country vs. CTO which has few or one location for each tenant.  Also, the reported average lease term excludes multiple lease firms, although not big by itself, in combination with other "non-standard" disclosures makes me uneasy the estimated NAV will ever be reached.

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« Last Edit: October 12, 2019, 01:56:35 PM by Packer16 »

Gregmal

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Re: Any REIT experts here?
« Reply #43 on: October 12, 2019, 04:40:03 PM »
Re Packer:

Yes I agree, and that's a valid concern. As a shareholder however, the question was, would you rather have 11,000 illiquid acres of raw land in Daytona Beach, a mixture of that land and some income properties, or a full blown portfolio of NNN properties and little to no land? I fall somewhere in the middle; management clearly wants the last option. As a potential shareholder, the question is, would you rather pay 20-30% premiums to NAV owning NNN, O, STOR, etc, or pay 65% of NAV for something like this? I dont think it's totally an apples to oranges comp; maybe a tangerine or a clementine, or maybe a marzipan orange to oranges comp. Given CTO's size, I dont think they'll ever really compete with the bigger guys, rather the company has been built IMO to eventually be sold to one of them. The CEO is a mercenary and came to Florida from Texas, with the intention to eventually move back there. Despite the already massive discount to NAV, an acquirer has plenty of juice to squeeze as they'd more likely have a lower cost of capital and would likely immediately chop the $8M in G&A.

The geographic diversification has been intentional, which is cool provided they stay in areas of decent demand, but my concern would be the ability to get things done should there be a need for major Capex or repositioning.

The lower duration leases are not entirely by accident. A number of properties fall into the "covered land play" category. The best example is probably the BofA in Monterey with I believe about a year and change left on the lease. You have a tenant option to extend for(iirc) 10 years which would more than double the NOI from the property(as you mentioned, there was no escalator in the original lease they bought, just the options to extend), OR have them leave, which would be my preferred option as the location has greatly changed from when the building was originally established, in which you've got an entire block in Monterey, not to far from the beach, with approved uses also including residential and the ability to built up another 2 stories.

https://www.google.com/search?client=safari&source=hp&ei=xlqiXeiFMrK0ggfOp4fwDQ&q=200+e+franklin+st+monterey+ca+aerial+view&oq=200+e+franklin+st+monterey+ca+aerial+&gs_l=psy-ab.3.1.33i299l2.176.10573..11820...0.0..0.223.3169.32j4j2......0....1..gws-wiz.......0j0i131j0i22i30j38j33i160.qeffXpWXJSE

The Century Theatre in Reno was also bought specifically to repurpose once the lease expired, although Century chose to renew a couple quarters ago. The 24 Hour Fitness is Virginia is another example, right next to a big Brookfield project and square in the middle of the area Amazon will be building their second headquarters, or the CVS in Dallas right next to the American Airlines Center which is approved for like 40 stories of residential.  Thats at least how these are pitched. Personally I don't think they have much interest in developing, at best, they'll JV it, or more likely just flip it to a developer once the old tenant is out.

The locations I'm concerned about are the two Wells Fargos, and maybe stuff like the Cliffside Shopping Center or the 99 year lease on the boutique hotel in Austin. Wells is like 20% or so of NOI, and those massive compounds should the tenant leave, basically become shitbox multi tenant office space requiring a lot of time, Capex, and despite all that, often having massive tenant churn. But all in all they seem to buy pretty good dirt, which is my preference. which leads me to Cardboard's statement...


Re Cardboard:

I really dont like REITs at all. The have a lot of fat and fees are everywhere with real estate, and specific to REITs you also seem to have this extra layer of yield chasing shareholders which imbeds a premium into most of the valuations but also a further level of idiot in the base that allows nefarious managers to get away with things they shouldn't be allowed to. It boggles my mind the implied cap rates people are paying for stuff like O and NNN. Ive flirted with shorting them because it just seems insane to me to be giving this much value to what are largely retail operations. I'd much rather have a shitty tenant on a well located piece of dirt than vice versa.

I only own one REIT and its a tiny micro cap that has very little characteristics with the big ones. Whereas many of these types of companies, are kind of riddled with the inverse of what I dislike about REITs. CTO, JOE, GRIF, FRPH, etc(want to get real whacky check out CKX Lands), illiquid, no real or natural shareholder base, the all screen poorly, and have inefficient corporate structures and more often then not, questionable management arrangements or shareholder bases. So they trade at big discounts but what is nice there is that you dont really need a whole lot to go right for that discount to narrow slightly. Usually they're just dead money but if you get increased transparency, or a few favorable deals, or god forbid, management wakes up and decides they want to let Wall Street know they care about shareholders, you see some nice upside. So if you get confortable with what they own, and find ones that dont really make a lot of money but also dont burn through money or destroy value, its an interesting place to hang out. If you can observe how they trade, its real easy to keep tabs and then take advantage of the lack of liquidity during market sell offs, and then load up and be the beneficiary of the predictable V shaped recoveries once things normalize.

Packer16

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Re: Any REIT experts here?
« Reply #44 on: October 12, 2019, 05:07:43 PM »
I disagree with your comparison.  You are comparing cash flows with bond-like characteristics that grow over time (the cash flow from the leases) to a real estate developer.  From your description CTO is developer not an investor.  No one is going to buy there NNN portfolio anywhere near the estimated NAV given the risk.  The derisking would include getting lease renewals and being less dependent upon a few tenants and geographies.  If you want to invest in a developer that is fine & they can be good businesses but assuming that what CTO can be sold to an investor assuming 6.5% cap rate is dreaming given that it sounds like a good portion of the portfolio has the development risk versus tenant risk.  CTO sounds closer to Seritage than the NNN comps management throws around. 

I do not like your average REIT either but NNN REITs if they are underwritten properly are inflation adjusted bonds selling for high single digit yields with mid single digit growth in coupons.  The key IMO is tenant underwriting.  CTO clearly has a redevelopment aspect to their underwriting which makes it a different animal than the other NNN leasors.  I am also concerned that the portfolio is so dispersed & how can CTO have re-development expertise in so many markets?

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Gregmal

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Re: Any REIT experts here?
« Reply #45 on: October 12, 2019, 06:05:42 PM »
You're not wrong. I definitely would not call them a developer. I can count maybe on a few fingers the number of properties they've ever been involved in any developmental aspect of. All of them have been in Volusia/Orange Counties. I've even been somewhat outspoken to encourage them to do a little bit more of this as simply buying and holding 5% cap rate properties isn't totally my preferred capital allocation strategy. But the response is always that by doing the 1031 they save lets say 25-30% of the proceeds(again, very low basis land), and that 5 years after a REIT conversion the 1031 deferred taxes are forgiven so that is your margin of safety.

So maybe I am portraying it wrong in terms of them developing. That said, they do consider development options quite often when making acquisitions. So maybe not developer, but NNN preference with a risk/speculation appetite is a better description. A failed deal would be Westcliffe Shopping Center. They bought it 2 years away from some major tenant expirations, looking to then flip to a developer interested in doing a senior center and the deal fell through. Now they're holding it with 1/3 of the potential NOI absent and can either look to find a new developer(the area seems ripe for student housing) or try to lease it back up. They've already said they're not touching any development there themselves. We'll see what the overall return profile on that situation looks like probably next year, but that's most likely where the downside sits. You are buying at a reasonable discount acquiring something with big renewal risk less than 3-5 years out...so I get your point from the perspective of an outside investor or an acquirer. My pushback would be that the same is true for CTO who is also quite often buying these properties with that lingering on the horizon.

My thesis at this point is that if they convert the remaining acreage anywhere near the market values, you're looking at another $150-$200M in proceeds. If those get thrown into more properties at the same targeted cap of 6-8%, tack that on to the existing portfolio and two years out, even with discounts and whatever, the figure is much higher than $64. I haven't seen any reason not to expect 6-8% annualized NAV growth as well.  Maybe I'm more comfortable because I've spent the past while watching and studying these acquisitions one by one as they happen, but provided things they've been buying for market rates between 5-8% cap rates don't massively blow up, you'd think one should do fine. The threats again are that this occurs with a few of the bigger ones. Thanks for the different view and pushback though.(and yes, some of the metrics are bs, such as book value and EPS growth when you're flipping 100 year old land...)

Spekulatius

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Re: Any REIT experts here?
« Reply #46 on: October 12, 2019, 06:17:14 PM »
re GRIF vs CTO, I like GRIF much better. They do one thing (smaller warehouses) in a few markets reasonably well and trade to a significant discount to NAV. It’s easier to get this sold than CTO.

I don’t own it (sold it for a quick swingtrade) but would buy this any time if it falls back a little.
« Last Edit: October 12, 2019, 06:21:41 PM by Spekulatius »
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Read the Footnotes

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Re: Any REIT experts here?
« Reply #47 on: October 12, 2019, 06:18:05 PM »
I am also concerned that the portfolio is so dispersed & how can CTO have re-development expertise in so many markets?

Packer

CTO has 5 different segments. Several of those segments have significant geographic dispersion as Packer mentions. In addition it is hard to see common themes in the assets within each segment. That would not be an unusual situation to find in REITs. To me the portfolio looks like a "jack of all trades, master of none" sort of situation or at least that is a risk to consider. When I see a portfolio like that in a REIT, I immediately start questioning the history of the company and the quality of the management and culture that produced the portfolio.

Personally, I believe portfolios like that can be the outgrowth of issues specific to REITs with respect to management and manager compensation, perverse incentives, and other agency issues. I believe these agency issues specific to REITs result in many of the issues with REITs mentioned previously by other commenters in this thread.

Regarding the potential for an acquisition, if I have accurately described the portfolio, another issue that would be whether it will prove harder than anticipated to find (or even imagine) a single natural acquirer. If acquired, any premium might be lower than you might hope if the acquirer is taking on some properties they see little value or alignment in. The longer it takes for management to work through the portfolio and position for sale, the lower your IRR and the longer you're an investor with what may be questionable management. The more complicated the M&A, the longer it will likely take and the higher the drag. That doesn't mean it won't work out, but the longer it takes the longer you might be on a ride that is becoming increasingly frustrating.

Gregmal

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Re: Any REIT experts here?
« Reply #48 on: October 12, 2019, 06:30:42 PM »
I should clarify, CTO vs GRIF. Short term for me its definitely CTO(as my position sizing expresses), however I think GRIF has higher absolute upside longer term from $36. The million dollar question, which changes everything, is would GRIF management sell? If they will, or give any indication, IE an FRP type transaction, then the potential for a high IRR is huge. If not, I think it runs the risk of lagging around and just being a turd, kind of like CTO has for the past few years, maybe squeaking out a 5-10% IRR which aint bad, but isn't worthy of a large concentration IMO.

Read the Footnotes you make good points as well.

muscleman

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Re: Any REIT experts here?
« Reply #49 on: October 12, 2019, 08:05:44 PM »
Thanks man!

What got you interested into these real estate companies?

Personally I have rarely if ever found a REIT that I liked: not cheap enough, growth too low, ponzi scheme like, too much debt, etc. A few exceptions but, really rare due in large part to people reaching for yield. Kind of turned me off on real estate. However, these shouldn't be lumped into the same category.

Probably one more reason why these are cheap.


You may want to read Soros' Alchemy of finance. There was a chapter about REITs. When the stock price is above the intrinsic value, they can issue shares to increase per share value, and use that cash to buy more properties, and push up the stock price. It goes on and goes.
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