GRIF - Griffin Industrial Realty

[Deepdive]

Found this company through Rhizome's Q3 Letter. Griffin looks interesting. They own warehouses in Hartford, Lehigh Valley, and Charlotte. The company also owns 4,000 acres of land that does not generate much in revenue. According to the letter, NAV is 80% higher than their cost and it looks like the NOI is ~$25mm after the company announced some additional leasing. There are structural trends of building warehouses closer to the end consumer. At an EV of $295mm, the company is trading at a mid-8 cap rate.

 

Also, looks like they made the right call selling FRPH when they did. It trades at $46/share now.

Rhizome_Partners_Q3_2018_Investor_Letter_Final.pdf

[mjohn707]

Found this company through Rhizome's Q3 Letter. Griffin looks interesting. They own warehouses in Hartford, Lehigh Valley, and Charlotte. The company also owns 4,000 acres of land that does not generate much in revenue. According to the letter, NAV is 80% higher than their cost and it looks like the NOI is ~$25mm after the company announced some additional leasing. There are structural trends of building warehouses closer to the end consumer. At an EV of $295mm, the company is trading at a mid-8 cap rate.

 

Also, looks like they made the right call selling FRPH when they did. It trades at $46/share now.

 

I looked at these guys recently and I thought it might be a good bet just a little cheaper than it’s trading now.  They had a good write up on VIC a few months back.  Admittedly it’s hard to really get an exact idea of what all the land is worth, the bits not producing income and all, but I couldn’t get there at the current price.  It’s enitirely possible you’re right that it’s decent now though

[glorysk87]

I guess the questions are: what's the market missing? And what is going to cause this to trade up to it's fair valuation?

[cameronfen]

I guess the questions are: what's the market missing? And what is going to cause this to trade up to it's fair valuation?

 

They mention the undeveloped land as a big reason that is worth a lot but not generating anything now but in process of being developed

[Greg]

Run by the son-in-law and the son-in-law of the son-in-law. Where it stops nobody knows.

[Spekulatius]

Reasons why ai thought this trades at a discount:

1) I assumed that cap rates were higher than what they are

2) unclear value of undeveloped land

3) tax inefficient structure (c-Corp)

4) corporate overhead a bit high

5)  unclear outlook for real estate in Windsor, CT (I am sometimes in this area and economic outlook doesn’t look that great)

 

 

Son in law or not, they seem to have done a decent job creating value. Much of it is due to tailwinds, but part of it is that they do seem to know what they are doing.

[BG2008]

Does anyone know of the cannabis growing laws in Connecticut and Florida?  Griffin used to be called Griffin Land and Nursery. They literally have nursery and green houses that they lease to a nursery operation in both CT and FL.  They used to grow Tobacco leaves in CT on those land.  This is a bit of musing and maybe this is what the company needs to do to get the market to pay attention to it. 

[Deepdive]

I guess the questions are: what's the market missing? And what is going to cause this to trade up to it's fair valuation?

 

The market is likely missing the entire thesis

No sellside coverage

They don't go to conferences

No meaningful institutional ownership

People probably think 8% cap rate is appropriate when 5.5-6.5% is the right range

 

 

[Deepdive]

I guess the questions are: what's the market missing? And what is going to cause this to trade up to it's fair valuation?

 

The market is likely missing the entire thesis

No sellside coverage

They don't go to conferences

No meaningful institutional ownership

People probably think 8% cap rate is appropriate when 5.5-6.5% is the right range

 

At the current price, you don't need it to trade up to fair value for you to do well, just small incremental buyers in the market.  Feels like it is really under the radar. 

[Greg]

G&A $7+ million does not seem too good for the non-employee outside stockholders. The members of the Cullman family who control GRIF, but are not employed by it, may be better off if were sold to a good REIT which would (1) take out a lot of the expenses and (2) pay them a dividend.

[Deepdive]

G&A $7+ million does not seem too good for the non-employee outside stockholders. The members of the Cullman family who control GRIF, but are not employed by it, may be better off if were sold to a good REIT which would (1) take out a lot of the expenses and (2) pay them a dividend.

 

How closely have you looked at the company?  People said the same about FRP Holdings which had a similar $7-8mm G&A and that turned out pretty well.  It cost about $2mm a year just to be public.  The company explains some of this in one of their presentations and they are quite conscious about this.  Some of it is the property tax for their large 4,000 acre of land holding.  They expense some leasing expenses that would normally be capitalized under most REIT treatments.  They chose to have the leasing guy in house because they feel his productivity would cost 2-3x if they outsourced it.  A lot of the G&A also goes towards development activities, site acquisition, permitting, obtaining financing, construction management, etc.  G&A would be lower if they just paid 5.5% cap for a leased warehouse.  They have kept the G&A relatively the same despite growing revenue and NOI by quite a bit in the last 3 years.  Despite the $7mm in G&A, they are still creating $4-5 per share of value a year on a $38 stock. 

 

If you want everything nice and perfect with larger scale, normalized G&A ratio, REIT status, high ESG scores, etc, you can pay sub 5% cap rate for Prologis.  GRIF trades at over 10% cap when adjusted for office and land parcels.

 

Sure they can sell to a REIT and we can all cash out at $70 a share

[Greg]

I suspect that the members of the controlling Cullman and Ernst Group, who are mainly individuals, would fare best  in a tax-free exchange with a strong company that is either a good compounder or pays a reasonable dividend. Taking out $7.5 million G&A a year alone can translate to an additional $1.50 dividend. Could be handled with a preferred stock.

[Deepdive]

I suspect that the members of the controlling Cullman and Ernst Group, who are mainly individuals, would fare best  in a tax-free exchange with a strong company that is either a good compounder or pays a reasonable dividend. Taking out $7.5 million G&A a year alone can translate to an additional $1.50 dividend. Could be handled with a preferred stock.

 

I understand and agree with you to a certain extent.  But have you actually looked at what the current management team have done in the last 5-10 years with regards to getting out of the nursery business, diversifying the company into LeHigh Valley and Charlotte, and growing the warehouse business?  They actually did a pretty good job.  Most companies can get a premium by selling to a larger REIT and I would like them to sell to Prologis.  But I think all shareholders will do quite well if they let the current management team continue to execute.  The current format has certain advantages such as having all non-recourse debt at the property level. 

[no_free_lunch]

I am just reading up on this company but at a quick glance their track record is less than impressive.  I see book value of $139M in 2007, vs $92M today.  5.1M shares in 2007 vs 5.05M shares today.  So shares are basically flat and book value is down considerably.  There hasn't been much dividends.  Why would I want to invest with this management team?

 

EDIT: Is the issue that the real estate is recorded at cost? 

[BG2008]

I am just reading up on this company but at a quick glance their track record is less than impressive.  I see book value of $139M in 2007, vs $92M today.  5.1M shares in 2007 vs 5.05M shares today.  So shares are basically flat and book value is down considerably.  There hasn't been much dividends.  Why would I want to invest with this management team?

 

EDIT: Is the issue that the real estate is recorded at cost?

 

 

Interesting question, this wasn't something that I thought about.  But it is interesting to analyze.  I looked through the 10-Ks and found the following:

 

Profits From Leasing (NOI) in 2007 was $7.9mm (pg 24 in 2007 10-K), now it is approaching $25mm run-rate for 2019.  So they tripled their NOI from 07 to 19 while the share counts shrunk by a small amount.  Book value is not a good way to value GRIF.  Assuming the same cap rate of 6.5%, the $25mm of NOI today is worth $384mm and the previous NOI was worth $121mm.  Net debt today is $120mm and long term debt back then was about $15mm.  The increase in the non-book equity value is about $158mm over this time period.  Not necessarily the most impressive, but there was a great recession, their nursery business lost money for a few years during the housing collapse, and they were always sub scale and had to overcome a larger than normal G&A. 

 

The total sqft of buildings also increased from 1.7mm sqft to over 4.0mm sqft in total and they have another 250k in the pipeline. 

 

They paid out $19mm of dividends which lowers the accounting book value by that amount. 

They had a nursery business which lost money during the 2008/2009 period.  Real estate tends to have GAAP depreciation that lowers book value but in reality the warehouses were appreciating.   

 

In general, real estate companies do not grow their book value if they hold the assets over long period of time.  If there is a lot of recycling of assets, book value tend to grow as the sales will reflect market value at the time of the asset sale. 

 

The company is also much more "investable" today.  The nursery has been sold off.  Land parcels are either sold off and 1031 into warehouses or they built warehouses on the land parcels.  Over 90% of the buildings are warehouses making it more of a pure play industrial company. 

 

[BG2008]

The executive Chairman is stepping down and it looks like the company should be saving $350k in salaries 

 

https://www.sec.gov/Archives/edgar/data/1037390/000155837019006031/grif-20190531ex10679570d.htm

[Greg]

$350k out of $7.5 million operating expenses. Compare operating expenses to book value over years and you will see what the problem is.

[BG2008]

Prologis bought Industrial Property Trust for $4bn for a 37.5mm sqft portfolio two days ago.  This values the deal at $108 per square feet.  This deals implies a $70 per share value for GRIF. 

Prologis_buys_IPT_-_IPT_Letter_to_shareholders.pdf

[BG2008]

$350k out of $7.5 million operating expenses. Compare operating expenses to book value over years and you will see what the problem is.

 

$350k out of $7.5mm is a small amount.  But the intention is important.  Unlike certain fella who uses the BH ticker and yet tries to find ways to screw shareholders at every turn, the GRIF guys understand that they run the company for public shareholders.  Bought a little more today given today's pull back. 

[BG2008]

Gregmal and I have been having this convo on the "what are you buying today" thread, I figure that I'll put the convo here as well

 

Quote from: Gregmal on August 26, 2019, 12:03:35 PM

Quote from: BG2008 on August 26, 2019, 11:58:04 AM

Quote from: Gregmal on August 26, 2019, 09:48:06 AM

GRIF @35 and MSGN @14

 

I would be buying more GRIF if it wasn't for the large position size already.

 

Yea while I don't think its got much of a catalyst I still kind of ask myself Who TF is selling at these prices? Its one thing to look at a stock and pass. Its another when you already own it because you have to at least peripherally be aware of what's going on. I mean, even on a super short term, trading based thesis, $35 is still where'd you'd be buying, not selling... got another 1250 today.

 

Gabelli has sold some recently.  I think he manages SMAs and when clients redeem, they tell him to sell out of the stock which he is always very reluctant to do.  That's why you see 40,000 shares sold from Gabelli.  I think Gabelli and the family reducing their stake is better for the long term because it will improve the liquidity and the bid/ask spread of the company.  Yes, there is no catalyst.  But when you have a NAV that's 90-100% higher than the current price, good things happen.  The same thing happened to HHC. 

[cubsfan]

I'm loving this GRIF thesis - just sit back and wait. Thanks for all the commentary.

[Gregmal]

Yea Ive been guilty of that on a few names.

 

Here, I've been lazy in certain aspects relating to diligence. I know a bit about Gabelli and his organizational structure. The SMA structure I find is a gift and a curse.

 

With so much of the stock, are you aware of any sort of strategy here for him? Ive seen him go a bit of an activist route a few times. Ive also seen him many times go on TV and just talk his book. I think either have the ability to be productive with this since exposure for a company like this always helps. Additionally, Ive seen Gabelli do absolutely nothing with higher % ownership positions. Ive also seen his son get kicked out of H&F Club screaming "do you know who I am?" lol.

[BG2008]

One thing that I would suggest people do is maybe buy some Prologis puts at $70 and just roll them.  The Jan 2020 $70 puts are only $1.15 with Prologis trading at $82.  There is no need to hedge GRIF if it's a small position.  But if you want to sleep a little better at night, I think the Prologis $70 puts are a very good CDS type hedge in case we experience a 2008/2009 scenario.  We shorted some Prologis as well as a sector hedge.  But those are costing me way more than just buying the puts. 

[BG2008]

Yea Ive been guilty of that on a few names.

 

Here, I've been lazy in certain aspects relating to diligence. I know a bit about Gabelli and his organizational structure. The SMA structure I find is a gift and a curse.

 

With so much of the stock, are you aware of any sort of strategy here for him? Ive seen him go a bit of an activist route a few times. Ive also seen him many times go on TV and just talk his book. I think either have the ability to be productive with this since exposure for a company like this always helps. Additionally, Ive seen Gabelli do absolutely nothing with higher % ownership positions. Ive also seen his son get kicked out of H&F Club screaming "do you know who I am?" lol.

 

For a really small company, Mario Gabelli surprisingly knew GRIF quite well.  In the past, he has asked the company for more share buybacks mostly.  This is tough to do as the float is 20%.  This is all public.  He also sends his lieutenants to the meeting each year.  There is no full all-out David Winters style battle.  I view that as a big positive as I thought the CTO/Winters Battle Royale to be too distractive.  Despite Gabelli selling due to the forced SMA dynamics, I think they actually want to own more.  Just my understanding of their view on price vs valuation.  One of the better dynamic here is that if someone goes activist, just the sale of the warehouse will likely net the company close to $375-400mm (including the Charlotte, NC newbuild).  This would equates to roughly $49-$55 per share and shareholders will still own the office building, land parcels in CT, and some misc development parcels.  Will they sell if approached?  I think so.  Management team has said multiple times that they run the company for public shareholders.  A sale of the warehouse portfolio will be way simpler than the sale of CTO 2-3 years ago when it was a huge mix of loans, land parcels, a portfolio of single tenant buildings, etc.           

 

 

 

[Gregmal]

Thanks for the background. If there is one thing I think Ive noticed consistently with some of these(especially in hind site) it is that it is important to have at least one easy to value asset making up a big chunk of the value relative to market cap. This definitely checks that box which puts things in play for a catalyst. I wish there was a little less ownership concentration, but as with FRP... if you have guys who are value creators instead of kingdom builders, it doesn't matter.