GRIF - Griffin Industrial Realty

[Gregmal]

All I saw was another writeup basically saying the same thing they all do. JOE's been getting a lotta press and for some reason its still got a huge short interest and small float. Like GRIF, it "may" or "may not" have huge upside, but there really isn't much downside.

[thepupil]

Kuppy / Adventures in Capitalism wrote a very bulled up (I would say over the top promotional) profile of JOE, causing a bunch of buying, which in turn squeezed the illiquid heavily shorted name.

 

 

I don't agree with him on degree/magnitude, but 20% of float is short a net cash name with a unique asset undergoing an inflection.

 

terrible short = punchy long

 

I think, on balance, if you had to pick, you buy a little on a speculative basis.

 

 

[BG2008]

Seems like Joe would be a decent Wallstreetbet idea

[Gregmal]

Pumping stocks and then trading them is definitely more efficient than investing....sarcasm aside, I'm a fan of JOE and what Bruce has done there. But I dont know if these uber bull cases and representations of the land are entirely honestly assessments.

[BG2008]

Pumping stocks and then trading them is definitely more efficient than investing....sarcasm aside, I'm a fan of JOE and what Bruce has done there. But I dont know if these uber bull cases and representations of the land are entirely honestly assessments.

 

One thing that I have learned, the hard way, with investing in land development companies is that they take Fing forever.  So you need to size them properly and trade them from time to time.  Otherwise, you will go crazy.  An 70/30 rule is probably smart.  One of the CFO of a multi-billion developCo literally told me that shareholders who trade a portion of their stock are happier.  So much for durable long term shareholders.  Haha.

[BG2008]

Bid/Ask is now $56.10/$61.28.  This New England Patriot team is just methodically marching down the field.

 

$4 a share higher from last week's "I'm being a cheapskate and waiting for high $40's". Today I say "Ill wait til low 50s to jump back in"....funny how that works. I'm still probably better of just rebuying. Same shit happened with JOE although I at least own a bit there. Some of the RE stuff is beginning to look a little perky.

 

That Gordon Dugan is working some crazy magic.  New high of $59.35.  I'm watching like an overly excited school girl because

 

"Reflexivity Baby"

 

Reminder that the pre-recorded webcast is after market close today and they are supposedly providing supplemental as well

[Gregmal]

Yeahhhh. I cant help but wonder if the end is indeed near when even the doggone real estate stocks are ripping like they have the last week or two.

 

On a more serious note, congrats on the move. I agree with some sentiment that the market may be starting to price in some inflation that will inevitably come with a Biden presidency. Long RE, pot stocks, and EVs lol.

[BG2008]

Yeahhhh. I cant help but wonder if the end is indeed near when even the doggone real estate stocks are ripping like they have the last week or two.

 

On a more serious note, congrats on the move. I agree with some sentiment that the market may be starting to price in some inflation that will inevitably come with a Biden presidency. Long RE, pot stocks, and EVs lol.

 

Pupil will like to have a word.  The office REITs still aren't working.

[BG2008]

Pretty big upgrade on the slide deck

 

http://www.griffinindustrial.com/assets/uploads/files/Q3%20Supplemental%20(10_7_20)%20v54%20(FINAL%20-%20Website)(1).pdf

[thepupil]

Yeahhhh. I cant help but wonder if the end is indeed near when even the doggone real estate stocks are ripping like they have the last week or two.

 

On a more serious note, congrats on the move. I agree with some sentiment that the market may be starting to price in some inflation that will inevitably come with a Biden presidency. Long RE, pot stocks, and EVs lol.

 

Pupil will like to have a word.  The office REITs still aren't working.

 

I don't think holders of office REITs are entitled to have them work at time. they are cheap. they are pricing in lots of value destruction.

 

Some degree of value destruction IS occurring. it will be long and painful. I think they are great risk reward.

 

I've written a ton about them and am associated with them, but am trying to keep an open mind, remain objective.

 

I have a lot in them, but have not been adding.

 

I don't want to pin the state of the whole market on 1 transaction, but I think VNO's 555/1290 transaction will be telling. My guess is they do cash out refi's that imply great valuations. I would become more bearish if they aren't able to extract a lot of cash out of 555. I would become more bullish if a big sovereign or other investor bids for ownership of either building at a 5 cap or less.

 

I think the financing market is very important for well-leased office values. So far we've seen good evidence that's healthy, but I do worry that CMBS is breaking because of hotels/retail.

 

i saw one data point that in some geographies, hotel DQ is approaching 50%.

 

[realassetsvalue]

With the greatly improved info provided in the supplemental, I have updated my valuation. Before starting I think I was assuming that this was now trading at or around NAV after this run-up in the stock price. I was somewhat surprised to find that given my assumptions, I estimate the portfolio of property / land to be worth $560m and NAV of $410m.

 

Today's share price of $59.50 reflects a ~18% discount to my estimate of NAV and implies an unleveraged discount to portfolio value (EV vs. portfolio value) of 14%. Certainly not as cheap as it was but still attractive in the current environment. I had already maxed out my position in my PA (still very illiquid) but not tempted to trim.

 

I get an implied cap rate of about 5.6%, which is certainly higher than peers. Pre-tax FFO yield and my estimate of AFFO yield remains quite low due to the G&A burden given the size of the company and amortization on their mortgage debt - ~3.4% and ~1.0% respectively.

 

Good quality industrial comps (First Industrial, Duke Realty, EastGroup) trade around 4% FFO yield.

 

Groups that have OK portfolios and OK to poor track record of creating value for shareholders (STAG Industrial, Monmouth and Lexington Realty) are in the 5.5% - 6.5% FFO range.

 

The best quality, urban infill groups (Terreno, Rexford) trade around 2.5% FFO yield.

 

I've attached my working so people can make their own assumptions or critique my approach if they want (please do, would love to hear differing views).

 

Positives for me coming out of the release / update call:

• Getting the multi-storey office and vacant flex building under contract is good news (even though the office was sold at a discount to net book value) as they produced very little NOI and the capital can be reinvested into industrial pipeline (after repaying $4m of debt)
  
• Development pipeline has been expanded with additional land purchases in Lehigh Valley and Orlando and well-positioned to add 1m sq ft and ~$6m of NOI in a very hot industrial leasing market. Happy to see they are not chasing growth with the money they raised by buying in this market, where industrial is in high demand.
  
• Their level of disclosure just went from poor to on par with or better than most industrial REITs in my opinion - this makes the business much easier to understand and value. The value of their land will remain the hardest bit to take a view on.
  

 

Risks / Challenges

• Obviously leasing up their new buildings in Charlotte is not easy and taking some time, would like to see progress there before they start the new Charlotte development site... Orlando market still feels like a question mark to me due to COVID impact - I still want to understand why they like it and hope the question gets asked at the Investor Day
  
• Development is risky and hard and this is their primary method of growth. They have a good track record but even once they get REIT status, engage with investors, etc. this should trade at a discount to competitors until the size of their development program reduces compared to their overall portfolio
  
• Once REIT conversion goes through, between need to distribute out 90% of taxable income + the amortization on their mortgages, they will have very little cash to reinvest and they'll become increasingly reliant on monetizing land and capital markets for growth
  

2020-10-08_GRIF_NAV_Analysis.xlsx

[thepupil]

Great work! Thanks

[BG2008]

With the greatly improved info provided in the supplemental, I have updated my valuation. Before starting I think I was assuming that this was now trading at or around NAV after this run-up in the stock price. I was somewhat surprised to find that given my assumptions, I estimate the portfolio of property / land to be worth $560m and NAV of $410m.

 

Today's share price of $59.50 reflects a ~18% discount to my estimate of NAV and implies an unleveraged discount to portfolio value (EV vs. portfolio value) of 14%. Certainly not as cheap as it was but still attractive in the current environment. I had already maxed out my position in my PA (still very illiquid) but not tempted to trim.

 

I get an implied cap rate of about 5.6%, which is certainly higher than peers. Pre-tax FFO yield and my estimate of AFFO yield remains quite low due to the G&A burden given the size of the company and amortization on their mortgage debt - ~3.4% and ~1.0% respectively.

 

Good quality industrial comps (First Industrial, Duke Realty, EastGroup) trade around 4% FFO yield.

 

Groups that have OK portfolios and OK to poor track record of creating value for shareholders (STAG Industrial, Monmouth and Lexington Realty) are in the 5.5% - 6.5% FFO range.

 

The best quality, urban infill groups (Terreno, Rexford) trade around 2.5% FFO yield.

 

I've attached my working so people can make their own assumptions or critique my approach if they want (please do, would love to hear differing views).

 

Positives for me coming out of the release / update call:

• Getting the multi-storey office and vacant flex building under contract is good news (even though the office was sold at a discount to net book value) as they produced very little NOI and the capital can be reinvested into industrial pipeline (after repaying $4m of debt)
  
• Development pipeline has been expanded with additional land purchases in Lehigh Valley and Orlando and well-positioned to add 1m sq ft and ~$6m of NOI in a very hot industrial leasing market. Happy to see they are not chasing growth with the money they raised by buying in this market, where industrial is in high demand.
  
• Their level of disclosure just went from poor to on par with or better than most industrial REITs in my opinion - this makes the business much easier to understand and value. The value of their land will remain the hardest bit to take a view on.
  

 

Risks / Challenges

• Obviously leasing up their new buildings in Charlotte is not easy and taking some time, would like to see progress there before they start the new Charlotte development site... Orlando market still feels like a question mark to me due to COVID impact - I still want to understand why they like it and hope the question gets asked at the Investor Day
  
• Development is risky and hard and this is their primary method of growth. They have a good track record but even once they get REIT status, engage with investors, etc. this should trade at a discount to competitors until the size of their development program reduces compared to their overall portfolio
  
• Once REIT conversion goes through, between need to distribute out 90% of taxable income + the amortization on their mortgages, they will have very little cash to reinvest and they'll become increasingly reliant on monetizing land and capital markets for growth
  

 

The one thing that I disagree with is that Industrials have somehow convinced shareholders that development is a great way to add value.  If you look at all the industrial REITs, they all have a robust development pipeline including really big guys like Prologis.  So Griffins 1mm sqft of projects will be viewed as a plus not a minus.  The use of capital for the equity  + debt will be to make value add acquisitions and developments.  This is one of the rare REIT asset classes where development isn't a dirty word. 

 

Food for thought. 

 

If you disagree, you can look at the supplementals of the all the warehouse comps.  They all provide details on developments and the estimated value creation.  Because investors buy into, it is actually a valid reason why GRIF wants to have low WACC. 

[realassetsvalue]

On the market perception, I think your comments are spot on BG.

 

Thinking regarding the fundamentals, I still think that development carries significant risks that are underappreciated - particularly by desk jockeys like myself who've never helped build a warehouse. So I try to correct for that!

 

That being said, Griffin have been successful in their development track record. I also think its more sensible to be buying value-add deals (like their Orlando acquisitions) and doing development in this environment rather than acquiring stabilized assets. Lastly, warehouse development is definitely simpler than multifamily or office and since it will go up in ~12 months, there's a lower chance of making a mistake and delivering spec product in a market that has gotten weak quickly.

 

On the balance, for me its a risk factor to watch but one that I am comfortable with... And agree that there could be some upside from the market perception, leading to continued NOI growth getting priced into the stock, particularly if they continue to deliver on their development program.

[BG2008]

On the market perception, I think your comments are spot on BG.

 

Thinking regarding the fundamentals, I still think that development carries significant risks that are underappreciated - particularly by desk jockeys like myself who've never helped build a warehouse. So I try to correct for that!

 

That being said, Griffin have been successful in their development track record. I also think its more sensible to be buying value-add deals (like their Orlando acquisitions) and doing development in this environment rather than acquiring stabilized assets. Lastly, warehouse development is definitely simpler than multifamily or office and since it will go up in ~12 months, there's a lower chance of making a mistake and delivering spec product in a market that has gotten weak quickly.

 

On the balance, for me its a risk factor to watch but one that I am comfortable with... And agree that there could be some upside from the market perception, leading to continued NOI growth getting priced into the stock, particularly if they continue to deliver on their development program.

 

Warehouse developments are definitely much faster than MF, hotels, etc.  It carries risk, but not the type of long drawn out litigation "stuck in purgatory risk" of other asset classes.  It is one of the knocks against warehouses as an asset class in that new supply can come onto the market much quicker.  This is why Terreno and Rexford has been so strong.  They are in markets where the highest and best use is a conversion to MF.  So the warehouse supply will likely shrink over time.  The pace of e-commerce growth and the need to rearrange logistics in the last 10 years has meant that demand has outstripped supply. 

 

If you have been to LeHigh Valley, you can see that many of the roads leading to the warehouses are 2 lanes.  There are a ton of farmland.  The choke point is in the residence' willingness to put up with 18 wheelers driving on their 2 lane roads.  You are already seeing quite a bit of push back there.  So LeHigh Valley is starting to be "built out."

 

I do think that the market could potentially over build as development could get ahead of itself which is how warehouses got hurt in the 2008/2009 GFC.  But then everything was built on spec back then.  Big picture, the appetite for e-commerce and as a result warehouses seems to be relentless.  In the last 10 years, you probably could've said that warehouses were expensive and overbuilt many times over.  Seems the new normal is that warehouses now go for 3 digits per square foot. 

 

This WACC/Growth story is really interesting.  I am so use to NAV discount stories that I find myself in a bit of unfamiliar land.  But I would monitor supply/demand dynamics.  We are probably good for 2020 as this Christmas will largely be an e-commerce event. 

 

This CEO and Gordon has earned my trust for at least the next 12 months.  I will be re-evaluating constantly.  For now, I will give them the benefit of the doubt. 

[villainx]

This WACC/Growth story is really interesting.  I am so use to NAV discount stories that I find myself in a bit of unfamiliar land.  But I would monitor supply/demand dynamics.  We are probably good for 2020 as this Christmas will largely be an e-commerce event. 

 

I've been thinking about this for a little bit, as it was a somewhat straightforward thesis about a year ago.  Stock is close to NAV, or at least close enough for the discount story to close enough.  At the same time, cash on hand at least suggest a little bit more space, and the REIT model suggests even more runway. 

 

How are folks thinking about GRIF these days?

[bilo]

GRIF is in the process of changing from a "Discount to NAV" story to a growth REIT play.

 

Signifigant upside from here depends upon if management can successfuly attract a new shareholder base and execute on their strategy. 

 

If they do succeed, the upside will be greater than it was with the original "NAV discount" situatioin.  If they fail, the stock will languish and not do too much, and perhaps they will reconsider selling the portfolio. 

 

Given how hot this asset class is, the quality of management and the skin in the game (alignment of interests) I have decided to sit tight and see if they can get this thing pumping. 

 

IMO, risk/reward still very favorable, just a different type of play vs. the one that attracted the "deep value" shareholder base that mostly exists here. 

 

How are folks thinking about GRIF these days?

[bilo]

Aside from the obvious IR efforts which are often focused on institutions, it must be remembered that REITS are also a very retail/financial advisor oriented asset class. 

 

For example, the top REIT authors on SA have enormous readerships that quite frankly dwarf the influence of most of the sell side in certain names. 

 

Here we have Brad Thomas, one of the top gurus on SA, stating that he reached out to GRIF's CEO to learn more.  https://seekingalpha.com/article/4378711-trick-treat-buying-small-cap-reits#comment-86755992 

 

If they do talk and he likes what he hears, it could be incredibly beneficial to have that support in such a small stock. 

 

Recall that a better stock price (awareness!) is a key fundamental -not- a negative for future returns, as it is with a "Discount to NAV" story. 

[BG2008]

Bilo,

 

Sleuthing award of the year!

[BG2008]

Gabelli has been selling in the mid $50s.  This should help create more float for the market participants.  I view this as a favorable development as Gabelli viewed GRIF as an asset play from pre-financial crisis.  Mario does not see eye-to-eye with the family and probably does not appreciate the WACC/Growth story.  Gabelli had made public statements wanting the company to buy back shares in the past.  Stylistically, it doesn't make sense for Gabelli to get on the growth train.  We are witnessing the shareholder base getting re-structured in real time. 

 

 

          GAMCO ASSET MANAGEMENT INC.

                      10/08/20            1,000-          57.6335

                      10/07/20              500-          55.7768

                      10/02/20              200-          55.5000

                      9/29/20            1,000-          52.0067

                      9/28/20              255            51.9000

                      9/23/20              391            53.0000

                      9/22/20              109            52.9754

                      9/18/20              300-          54.7000

                      9/16/20              300            54.0000

                      9/14/20              900            53.0000

                      9/09/20              400-          53.7719

                      9/04/20              100            53.1700

                      9/02/20              300-          53.9600

                      9/01/20              300-          53.5950

                      8/31/20              700-          54.3021

                      8/28/20              200-          53.4000

                      8/28/20              800            52.9235

                      8/27/20              698-          53.5121

                      8/26/20              600-          54.0000

                      8/25/20              200-          53.8250

                      8/24/20            1,000            51.0000

                      8/21/20              359            53.4200

          TETON ADVISORS, INC.

                      10/14/20              140-          60.2000

                      10/12/20              300-          60.1000

                      10/09/20              200-          61.2920

                      10/07/20              800-          56.1100

                      10/05/20              617-          56.0500

                      8/27/20            2,100-          53.5746

                      8/26/20            1,100-          54.0653

          GABELLI FUNDS, LLC.

            GABELLI VALUE 25 FUND

                      10/08/20              800-          57.2525

            GABELLI SMALL CAP GROWTH FUND

                      10/05/20              800-          55.8875

                      10/02/20              500-          55.8229

            GABELLI GO ANYWHERE TRUST

                      10/13/20              133-          60.2093

[BG2008]

Reminder that virtual investor day is tomorrow at 11AM - Looking forward to this

 

Griffin will hold a Virtual Investor Day on November 11, 2020 at 11:00 A.M. Eastern Time via a live webcast. The link to the webcast may be accessed via the investor relations section of Griffin’s website at griffinindustrial.com/investors or directly through the following link: Griffin Virtual Investor Day. A replay of the Virtual Investor Day webcast will also be available on Griffin’s website through May 11, 2021.

[Gregmal]

Kind of a little granular but was curious if you knew anyway....typically on a REIT conversion/existing structure there are concentration limits and lazily off the top of my head its something like 5 shareholders cant own more than 50%...is this an issue here?

[BG2008]

Kind of a little granular but was curious if you knew anyway....typically on a REIT conversion/existing structure there are concentration limits and lazily off the top of my head its something like 5 shareholders cant own more than 50%...is this an issue here?

 

I don't know about that rule.  But there are definitely 5 investors that owns more than 50% of the shares.  Perhaps, they get a 2 year waiver or something.  Mgt has not bought this up and I assume that they have studied this potential issue before all the announcements.  Could be wrong.

[bizaro86]

Kind of a little granular but was curious if you knew anyway....typically on a REIT conversion/existing structure there are concentration limits and lazily off the top of my head its something like 5 shareholders cant own more than 50%...is this an issue here?

 

The usual workaround there is to just convert some of the big owners to operating partnership interests that are convertible to REIT units to stay under the ownership limits.

[BG2008]

Kind of a little granular but was curious if you knew anyway....typically on a REIT conversion/existing structure there are concentration limits and lazily off the top of my head its something like 5 shareholders cant own more than 50%...is this an issue here?

 

The usual workaround there is to just convert some of the big owners to operating partnership interests that are convertible to REIT units to stay under the ownership limits.

 

Thanks! This is very helpful.  Lawyer?