GRIF - Griffin Industrial Realty

[Spekulatius]

I like Gabelli’s involvement since he is smart like a fox and has a tremendous eye for value. I almost always find a value angle in his holdings, even if it isn’t apparently on first sight.

 

With the low liquidity of this stock, how did he manage to acquire such a large position? FWIW, I have a few hundred shares only, but I am super stingy and bought only when it hit ~$34 recently. I also owned some during the Q4 meltdown but sold for a quick gain. Quite frankly, I was hoping for some deeper selloff into the $30 range  ::).

[BG2008]

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.

 

Totally agreed with what you're saying.  I woulds say that with FRP Holding, it was very difficult to put a finger on the value because you have warehouse, Multi-family, and the rock pits.  Once they develop one of the multi-family, it was very obvious what it was worth because the bank financing provided you with value.  It helped with the sale of the warehouse which was $36 a share, a big chunk of the cost basis in the low $30.  I think these guys are in NYC in September, I should go meet up with them again. 

 

On the value creation, the GRIF guys all come from real estate and PE backgrounds.  Take a look at the director list starting on pg 5 of the proxy.  It's actually not a bad list of credentials.  Management teams told me that since the company is family owned, they tend to underwrite investments on an absolute return basis rather than in comparison to WACC as a big public REIT would.  By looking at some of their investment, they are typically targeting 15-20% levered IRRs.  With the public REITs, they can get a bit overboard with the acquisitions late in the cycle.     

 

https://www.sec.gov/Archives/edgar/data/1037390/000155837019002892/def14a.htm

 

David R. Bechtel (a) ©

 

Principal of Barrow Street Holdings LLC since September 2012; founder and managing member of Outpost Capital Management LLC since 2001; and founder and manager of GP Management LLC since January 2011.

 

Edgar M. Cullman, Jr. (3)

Managing member of Culbro LLC, a private equity investment firm, since 2005; President and Chief Executive Officer of General Cigar Holdings from 1996 through April 2005.

 

Jonathan P. May (a) (b) ©

 

Founder and co-managing partner of Floresta Ventures, LLC since March 2016; Executive Director of Natural Capital Partners (formerly known as The CarbonNeutral Company), a private company that is a leading provider of carbon reduction programs for corporations, since September 2015; Chief Operating Officer and Chief Financial Officer and a Director of The CarbonNeutral Company from 2008 through September 2015; Founder and Managing Director of Catalytic Capital, LLC from 2004 to 2008

 

Amy Rose Silverman

 

President and Chief Executive Officer of Rose Associates, a real estate and property management firm, since December 2017; Co-President of Rose Associates since 2008.

 

 

Ms. Rose is a recognized expert on residential real estate in New York City, is a frequent speaker in premier professional conferences and participates as a guest lecturer at The NYU Schack Institute of Real Estate and Columbia Business School.  Ms. Rose’s significant experience in design, construction, leasing and management of premier high-rise and mixed-use residential buildings provides a unique perspective to the Board.

 

Albert H. Small, Jr. (b) ©

 

Presently active in the development and management of several commercial and office developments in Washington D.C.; President of WCI Communities Mid‑Atlantic Division from March 2005 through March 2008; President of Renaissance Housing Corporation from 1984 through March 2005.

 

[BG2008]

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.

 

Totally agreed with what you're saying.  I woulds say that with FRP Holding, it was very difficult to put a finger on the value because you have warehouse, Multi-family, and the rock pits.  Once they develop one of the multi-family, it was very obvious what it was worth because the bank financing provided you with value.  It helped with the sale of the warehouse which was $36 a share, a big chunk of the cost basis in the low $30.  I think these guys are in NYC in September, I should go meet up with them again. 

 

On the value creation, the GRIF guys all come from real estate and PE backgrounds.  Take a look at the director list starting on pg 5 of the proxy.  It's actually not a bad list of credentials.  Management teams told me that since the company is family owned, they tend to underwrite investments on an absolute return basis rather than in comparison to WACC as a big public REIT would.  By looking at some of their investment, they are typically targeting 15-20% levered IRRs.  With the public REITs, they can get a bit overboard with the acquisitions late in the cycle.     

 

https://www.sec.gov/Archives/edgar/data/1037390/000155837019002892/def14a.htm

 

David R. Bechtel (a) ©

 

Principal of Barrow Street Holdings LLC since September 2012; founder and managing member of Outpost Capital Management LLC since 2001; and founder and manager of GP Management LLC since January 2011.

 

Edgar M. Cullman, Jr. (3)

Managing member of Culbro LLC, a private equity investment firm, since 2005; President and Chief Executive Officer of General Cigar Holdings from 1996 through April 2005.

 

Jonathan P. May (a) (b) ©

 

Founder and co-managing partner of Floresta Ventures, LLC since March 2016; Executive Director of Natural Capital Partners (formerly known as The CarbonNeutral Company), a private company that is a leading provider of carbon reduction programs for corporations, since September 2015; Chief Operating Officer and Chief Financial Officer and a Director of The CarbonNeutral Company from 2008 through September 2015; Founder and Managing Director of Catalytic Capital, LLC from 2004 to 2008

 

Amy Rose Silverman

 

President and Chief Executive Officer of Rose Associates, a real estate and property management firm, since December 2017; Co-President of Rose Associates since 2008.

 

 

Ms. Rose is a recognized expert on residential real estate in New York City, is a frequent speaker in premier professional conferences and participates as a guest lecturer at The NYU Schack Institute of Real Estate and Columbia Business School.  Ms. Rose’s significant experience in design, construction, leasing and management of premier high-rise and mixed-use residential buildings provides a unique perspective to the Board.

 

Albert H. Small, Jr. (b) ©

 

Presently active in the development and management of several commercial and office developments in Washington D.C.; President of WCI Communities Mid‑Atlantic Division from March 2005 through March 2008; President of Renaissance Housing Corporation from 1984 through March 2005.

 

Here's Michael Gamzon's bio.  He's not some entrenched CEO who has an obligation to his family.  He comes from a IB/PE background. 

 

President/CEO

Griffin Industrial Realty Inc

01/2016–PRESENT

President/COO

Griffin Industrial Realty Inc

05/2015–01/2016

President/COO

Griffin Land & Nurseries Inc

05/2012–05/2015

Exec VP/COO

Griffin Land & Nurseries Inc

09/2010–05/2012

Vice President

Griffin Land & Nurseries Inc

01/2008–08/2010

Investment Analyst

Alson Capital Partners LLC

04/2005–01/2008

Investment Analyst

Cobalt Capital Management Inc

03/2002–03/2005

Donaldson Lufkin & Jenrette

FORMER

Analyst:Business

Pepsico Inc

FORMER

Principal

Scp Private Equity Partners LP

FORMER

[BG2008]

I like Gabelli’s involvement since he is smart like a fox and has a tremendous eye for value. I almost always find a value angle in his holdings, even if it isn’t apparently on first sight.

 

With the low liquidity of this stock, how did he manage to acquire such a large position? FWIW, I have a few hundred shares only, but I am super stingy and bought only when it hit ~$34 recently. I also owned some during the Q4 meltdown but sold for a quick gain. Quite frankly, I was hoping for some deeper selloff into the $30 range  ::).

 

Gabelli owns these shares from 1997 when GRIF was a spinoff from Culbro which is general cigars I believe.  I think Gabelli owned 28% of Culbro and winded up with GRIF as a result of the spinoff. 

 

Even in 1998, Gabelli owned a 28.8% stake.  After the recession they increased their stake to the 30%-34% range.   

 

Fun proxy statement from 1997

 

https://www.sec.gov/Archives/edgar/data/1037390/0001047469-98-012018.txt

 

Most of the shares (from 27% to 33%) were purchased around $30 I would think looking at the charts in the 2011 to 2014 time frame.  But the company is worth significantly more today.

 

2014

1,730,812

32.7

 

2013

1,666,541

31.7

 

2012

1,659,430

31.8

 

2011

1,599,456

30.8

 

 

[BG2008]

https://www.wsj.com/articles/the-case-for-giving-money-away-now-11560714097

 

Lewis B. Cullman, brother to Edgar M. Cullman, who was the CEO of Culbro, LLC (parentco of Griffin), gave away $550mm of his wealth.  He passed away at the age of 100 and urged fervently that other wealthy people should give away their wealthy today rather than let it sit in a fund in perpetuity.   

 

This is not the sole merit for investing in Griffin.  But it is good to know that one of the family members you're dealing with gave away half a billion to charity in his lifetime.     

[BG2008]

A lot has been made about the family ownership of Griffin.  I did some further sleuthing and found out a bit more about Culbro the company that spin off Griffin and how GRIF came about

 

The current CEO's grandfather-in-law and his brother were in the cigar and cigarette business.  The grandfather-in-law, Edgar M Cullman, took over the family's cigar business.  Edgar's brother Joseph F Cullman 3rd went to work for Phillip Morris after the family sold Benson and Hedge (maker of Parliament) to Phillip Morris.  Joseph Cullman 3rd eventually rose up the rank and became CEO and chairman.  Benson and Hedge was a pretty good business purchased for $850k in 1941 and sold to Phillip Morris for $22mm for stock in 1957.  Benson and Hedge was a higher end cigarette company and couldn't really grow after a while.  So the family sold it to Phillip Morris despite Edgar and Joseph's father opposing the sale.  This is one of the first instance of the family selling a business when they receive a good price and after they couldn't really grow the business anymore.     

 

https://www.latimes.com/archives/la-xpm-2004-may-03-me-cullman3-story.html

https://www.washingtonpost.com/archive/local/2004/05/03/philip-morris-chief-joseph-cullman-dies/a88cbda5-9e87-476f-8b77-ebc87f3f477e/?noredirect=on

 

While Joseph went on to an incredible career at Phillip Morris, Edgar stayed in the family cigar business and made tuck in acquisitions that would form Culbro.  Over the years, Culbro bought other cigar businesses and they winded up owning mass market cigars and premium cigars such as Macanudo.  When they bought American Sumatra, they acquired thousands of acres of land in the Hartford area that increased their acreage to the family's tobacco growing operation.  They became one of the largest land owners in Connecticut.  They also bought a nursery business which was why the company was previously called Griffin Land and Nursery until they sold the nursery operation a few years ago.  Over the years, the company bought a packaged food business, Ex-Lax (a gentler laxative for children), plastic packaging, etc.  Many of the acquisitions were attempts to supplement the cigar business.  For example the plastic packaging were purchased to make plastic tips for smoking cigars.  Over time, when they couldn't grow the packaged food business, they should it to their competitor because salty food is very regional and the value is really in the distribution which has a separate business.  They sold the Ex Lax when one of the European conglomerates were eager to make an acquisition and they made a pretty good profit on it.  In the 90s, Griffin was spun off from Culbro into a separate company.  Eventually, Culbro sold their mass market cigars to a company called Swedish Match.  Overtime, Culbro also sold the premium cigar business  to Swedish Match and fully exited from the business that was built up over multiple decades. 

 

Anyway, I think the key takeaway from the corporate history of Culbro and studying the family is that there is a pattern of "if the price is right, any asset is for sale."  This went all the way back to Benson and Hedge to the more recent sale to Swedish Match in 2005.  As far as I know, Michael is the only person from the family operating the business.  Danziger is a director.  None of the other children or grand children of Edgar Cullman is involved with Griffin.  I offer this analysis because people keep asking "is this a family and/or management team that will fight tooth and nails to stay entrenched even if they got a bid from a bigger REIT or from Blackstone?"  I am 95% sure that the answer is no.  If they get a good price, they will likely sell.  Another key data point is that the CEO and his wife owns about $27mm of stock (assume a NAV of $70).  Given that this roughly 40x of the CEO's 2018 total compensation, I think he behaves like a true owner rather than a CEO with lots of stock option. 

 

I don't necessarily enjoy putting the family in the spot light.  The stock holdings are public via the proxy statement and if you dig enough you can find the corporate history of Culbro.  But we are dealing with a family that owns almost 50% of the company.  So this analysis is necessary in my opinion. 

 

 

[KJP]

 

I don't necessarily enjoy putting the family in the spot light.  The stock holdings are public via the proxy statement and if you dig enough you can find the corporate history of Culbro.  But we are dealing with a family that owns almost 50% of the company.  So this analysis is necessary in my opinion.

 

Thanks for posting that summary.  It's useful, relevant and based on public information, so I agree there's nothing inappropriate about posting it. 

 

I believe I've seen you post about the Baker family and FRP.  Has the timing of Cullman family asset sales been as good as the timing of the Bakers' sales?

[BG2008]

 

I don't necessarily enjoy putting the family in the spot light.  The stock holdings are public via the proxy statement and if you dig enough you can find the corporate history of Culbro.  But we are dealing with a family that owns almost 50% of the company.  So this analysis is necessary in my opinion.

 

Thanks for posting that summary.  It's useful, relevant and based on public information, so I agree there's nothing inappropriate about posting it. 

 

I believe I've seen you post about the Baker family and FRP.  Has the timing of Cullman family asset sales been as good as the timing of the Bakers' sales?

 

It is hard to tell given that most of the sales are at least 10 years old.  It is probably hard to top selling the aggregate business in 2006.  Regarding the warehouse sale in 2018, apparently the Baker did not top tick it.  But that is still yet to be seen as we are only 1.5 years remove from that.  I know that Ex Lax was sold for $100mm which was much more than what they paid.  Edgar M Cullman has a way of convincing people that he doesn't really want to sell when he really did want to sell.  But that's not relevant to GRIF anymore as Edgar M Cullman has passed away and no longer running the company.   

 

Keep in mind that the Baker weren't seller with the aggregate business or the warehouse.  They woke up one day and had a bid for their business, they looked at the bid and said "this is much more than what we can do on our own."  I think if GRIF wakes up one day and gets a bid, they will sell.  That's the most important part of the analysis.  I guess the moral here is that if someone approach you for a deal and  you sell, that's probably a decent time to sell. 

 

Admittedly, this is sleuthing to the extreme here.  Someone in the family once did an analysis of the Phillip Morris stock that the family owned following the 1954 sale of Benson and hedge to Phillip Morris.  They owned about $22mm of the stock.  One of Edgar M Cullman's uncle was a broadway director.  He made a huge fuss over the fact that the family was overly concentrated in the cigarette business and needed to sell the Phillip Morris stock.  I checked Altria's stock price in going back to 1962 (sale was in 1954).  Altria stock was $0.12 back in 1962 and likely even lower in 54.  So a $22mm position would be worth $8bn.  But there is more.  This does not include the Philip Morris spinoff.  And this does not include the dividend which is $3.36 per share for Altria today.  In that sense, they were terrible sellers back in 1954!!!!  If they held onto to every share, the Cullman family could be one of the wealthiest families in America today. 

 

I'll bet there are many families in America who sold and regretted it.  I'll bet there are sellers to the Berkshire Hathaway business that regretted selling to Buffet, i.e. See's Candy. 

 

 

[TwoCitiesCapital]

 

I don't necessarily enjoy putting the family in the spot light.  The stock holdings are public via the proxy statement and if you dig enough you can find the corporate history of Culbro.  But we are dealing with a family that owns almost 50% of the company.  So this analysis is necessary in my opinion.

 

Thanks for posting that summary.  It's useful, relevant and based on public information, so I agree there's nothing inappropriate about posting it. 

 

I believe I've seen you post about the Baker family and FRP.  Has the timing of Cullman family asset sales been as good as the timing of the Bakers' sales?

 

It is hard to tell given that most of the sales are at least 10 years old.  It is probably hard to top selling the aggregate business in 2006.  Regarding the warehouse sale in 2018, apparently the Baker did not top tick it.  But that is still yet to be seen as we are only 1.5 years remove from that.  I know that Ex Lax was sold for $100mm which was much more than what they paid.  Edgar M Cullman has a way of convincing people that he doesn't really want to sell when he really did want to sell.  But that's not relevant to GRIF anymore as Edgar M Cullman has passed away and no longer running the company.   

 

Keep in mind that the Baker weren't seller with the aggregate business or the warehouse.  They woke up one day and had a bid for their business, they looked at the bid and said "this is much more than what we can do on our own."  I think if GRIF wakes up one day and gets a bid, they will sell.  That's the most important part of the analysis.  I guess the moral here is that if someone approach you for a deal and  you sell, that's probably a decent time to sell. 

 

Admittedly, this is sleuthing to the extreme here.  Someone in the family once did an analysis of the Phillip Morris stock that the family owned following the 1954 sale of Benson and hedge to Phillip Morris.  They owned about $22mm of the stock.  One of Edgar M Cullman's uncle was a broadway director.  He made a huge fuss over the fact that the family was overly concentrated in the cigarette business and needed to sell the Phillip Morris stock.  I checked Altria's stock price in going back to 1962 (sale was in 1954).  Altria stock was $0.12 back in 1962 and likely even lower in 54.  So a $22mm position would be worth $8bn.  But there is more.  This does not include the Philip Morris spinoff.  And this does not include the dividend which is $3.36 per share for Altria today.  In that sense, they were terrible sellers back in 1954!!!!  If they held onto to every share, the Cullman family could be one of the wealthiest families in America today. 

 

I'll bet there are many families in America who sold and regretted it.  I'll bet there are sellers to the Berkshire Hathaway business that regretted selling to Buffet, i.e. See's Candy.

 

For every person who sold a concentrated position and lived to regret it, there were probably many multiples of people who held concentrated positions and regretted it.

 

 

[spartan]

The discount to NAV is enormous, but here's my question: if management and other owners are aware of this discrepancy - and it bothers them so much, according to some who have spoken to them - why don't they do anything about it? Why aren't they buying back their shares? I understand that they are taking a more active approach re: investor relations, but if their stock is such a steal, why don't they just buy more of it back? Would that not be the most efficient use of their capital?

 

As a follow-up, did anyone read the WSJ article from yesterday about Amazon's three story warehouses? There are a lot of interesting points about the warehouse industry that take aim at GRIF's long-term prospects. Will their warehouses be good enough in the long-run? (i.e. is space and location the only thing that's important?) Does this even matter or is the discount still warranted?

 

Link here: https://www.wsj.com/articles/amazons-new-multistory-warehouse-aims-to-cut-delivery-times-11568113201

[thepupil]

spartan, have you  tried to buy this stock? I moved the market pretty big recently with establishing a position. buyback will exacerbate illiquidity.

 

don't have an answe on the "good enough"...7 and change cap rate on in-place assets and going higher  is like a 40-50% discount to market on an asset basis. I'd say there's plenty of downside in other similar assets before this would be impaired.

 

 

[BG2008]

spartan, have you  tried to buy this stock? I moved the market pretty big recently with establishing a position. buyback will exacerbate illiquidity.

 

don't have an answe on the "good enough"...7 and change cap rate on in-place assets and going higher  is like a 40-50% discount to market on an asset basis. I'd say there's plenty of downside in other similar assets before this would be impaired.

 

Pupil,

 

Good to know you own some of this.  It has been bizarre to own GRIF for 2 years and have it trade at essentially the same price.  After a while you start to question yourself, okay maybe just a tiny bit, on whether you're missing some key fundamental.  Was that you with the 3,000 shares bid in the market? 

 

 

[BTShine]

As an outsider that knows very little about this company, yet I did attend the annual meeting one time in the past few years, my thoughts at the time were that much of the GRIF earnings power were spent on corporate expenses (executive pay, etc) and therefore the underlying asset values were not of much use when the earnings are handed to others instead of common shareholders. 

 

A cursory look at the trailing FCF and market cap show me a yield to equity of around 5%.  $10 million in FCF to equity and $200 million market cap.  Clearly this cursory look is not in-depth and my assumptions may be far off, but that's how I view the company and therefore are not surprised it trades where it does.  I'm sure this board has discussed many things that would make my analysis wrong, but that's my donation to the GRIF discussion if you'd like them. 

[BG2008]

As an outsider that knows very little about this company, yet I did attend the annual meeting one time in the past few years, my thoughts at the time were that much of the GRIF earnings power were spent on corporate expenses (executive pay, etc) and therefore the underlying asset values were not of much use when the earnings are handed to others instead of common shareholders. 

 

A cursory look at the trailing FCF and market cap show me a yield to equity of around 5%.  $10 million in FCF to equity and $200 million market cap.  Clearly this cursory look is not in-depth and my assumptions may be far off, but that's how I view the company and therefore are not surprised it trades where it does.  I'm sure this board has discussed many things that would make my analysis wrong, but that's my donation to the GRIF discussion if you'd like them.

 

There has been a lot of cursory look reactions to this thesis on this board, you're not the only one!  It probably tells you a lot about why it trades at the current price. 

[oscarazocar]

As an entity operating on its own, GRIF has a reasonably long history of mediocre returns.  Since the spinoff in 1997, the total shareholder return has been 4% annualized.  The discount to NAV is only really useful insofar as the company is sold and the high G&A burden goes away.  Why would one expect that given the history?

 

Comparing this to the Bakers and FRPH, the Bakers have a long history of very good (low teens) shareholder returns with the companies they have controlled, with multiple examples of selling when the getting was good.

 

One other point, GRIF is very gung-ho on investing in spec industrial properties in what is undoubtedly a hot market.  That doesn't seem like a business where one should expect high returns over a market cycle.  Again, compare this to FRPH who sold industrial when they thought multiples were high and are reinvesting slowly, much of it related to conversion of former industrial real estate to residential (DC developments) where you would expect them to create value due to their historical position.

 

[EricSchleien]

As an entity operating on its own, GRIF has a reasonably long history of mediocre returns.  Since the spinoff in 1997, the total shareholder return has been 4% annualized.  The discount to NAV is only really useful insofar as the company is sold and the high G&A burden goes away.  Why would one expect that given the history?

 

Comparing this to the Bakers and FRPH, the Bakers have a long history of very good (low teens) shareholder returns with the companies they have controlled, with multiple examples of selling when the getting was good.

 

One other point, GRIF is very gung-ho on investing in spec industrial properties in what is undoubtedly a hot market.  That doesn't seem like a business where one should expect high returns over a market cycle.  Again, compare this to FRPH who sold industrial when they thought multiples were high and are reinvesting slowly, much of it related to conversion of former industrial real estate to residential (DC developments) where you would expect them to create value due to their historical position.

 

This was my thinking on why I have stayed away from GRIF. If everything goes in your favor, you can do well. But it also may not. BG2008 - I know you also have a position in LAACZ. I actually do own units in that. GRIF is cheaper if everything goes right but I prefer LAACZ long-term and less stuff has to work out to make money IMO.

[BG2008]

As an entity operating on its own, GRIF has a reasonably long history of mediocre returns.  Since the spinoff in 1997, the total shareholder return has been 4% annualized.  The discount to NAV is only really useful insofar as the company is sold and the high G&A burden goes away.  Why would one expect that given the history?

 

Comparing this to the Bakers and FRPH, the Bakers have a long history of very good (low teens) shareholder returns with the companies they have controlled, with multiple examples of selling when the getting was good.

 

One other point, GRIF is very gung-ho on investing in spec industrial properties in what is undoubtedly a hot market.  That doesn't seem like a business where one should expect high returns over a market cycle.  Again, compare this to FRPH who sold industrial when they thought multiples were high and are reinvesting slowly, much of it related to conversion of former industrial real estate to residential (DC developments) where you would expect them to create value due to their historical position.

 

This was my thinking on why I have stayed away from GRIF. If everything goes in your favor, you can do well. But it also may not. BG2008 - I know you also have a position in LAACZ. I actually do own units in that. GRIF is cheaper if everything goes right but I prefer LAACZ long-term and less stuff has to work out to make money IMO.

 

This is exhausting because people keep on talking about the same cursory items over and over again.  People keep mentioning about the 20 year track, the long term book value growth (news: BV per share doesn't matter in real estate investing!!!), share price appreciation in 20 years.  People keep comparing this to FRP Holdings.  I get it.  FRP Holdings at $30 back in 2016 with a $60 NAV was a much better investment than GRIF at $35 with a $70 per share of NAV.  But you can't buy FRPH at $30 anymore.  You have to pay $50.  You can still buy GRIF at 50 cents on the dollar.  A couple things and I hope people can actually start doing some work themselves, like talk to management and actually do some analysis rather than a simple cursory 20 year look at stock price. 

 

The 20 year track record, I would attribute to a few things.

 

1) At the 1997 spin, GRIF was likely over valued

 

2) GRIF is trading at a huge discount to NAV.  If you use a $70 NAV today versus a $16 price in 1997 and throw in a 1.0-1.5% annual dividend, you wind up with a 20 year CAGR somewhere in the 8.5-9% range.  This is not great, but it is not the 4% cited. 

 

3) Investing is forward looking not backward.  Track record does matter.  But if you pay attention there was a changing of the guard with the new CEO in the last 5-10 years.  Since Michael Gamzon joined the company and rise up in the ranks to become CEO, the following happened.  They sold the nursery business.  They changed the name to Griffin Industrial Realty and focused on warehouses.  They made 4-5x return on their equity investing in the LeHigh Valley warehouses.  They sold a bunch of land parcels and 1031 it into Charlotte and Lehigh Valley.  I don't know the previous CEO, but I suspect that the current CEO is much better.  I think the big bucks in investing is made when you recognize that there has been a change in a companies strategy, focus, and management caliber, and the value of its assets.

 

4) In legacy real estate investing, there is a lot of luck in what assets you start out with.  If you were lucky and winded up with a multi-family building in a crime ridden area in Brooklyn in the late 90s, your track record would look amazing.  I know of a lot of millionaires who don't speak English and all they did is buy 3 family rentals in Queens and collect rent for the last 20 years.  Their track record will trump any of the professionals.  Sometimes, you start out with good assets in a good Geography.  Lets look at the Bakers.  They own an aggregate royalty business in Georgia and Florida, two of the fastest growing states in the last 20 years.  They happened to own an old concrete plant on the river in the DC waterfront.  What used to be a site that needed environmental remediation now has a vibrant Ball Park and huge investments.  They can charge $2,500 for a two bedroom luxury apartment today.  Who would've thought?  Did the Bakers put the ball park there?  Did the Bakers invested billions on the river front?  No, Forest City Enterprise did that.  Now close your eyes and imagine that you are stuck with a crappy nursery business in Hartford and four thousand acres of tobacco land in Hartford Connecticut which in the last 20 years has seen large technology and insurance companies leave the region.  You have to play the cards that you are dealt with and they got dealt with some tough cards.  Let's look at Laacos, they own a valuable portfolio of self storage in LA and San Diego where NIMBYism is rampant.  You can't really build new ones.  I own LAACZ in size as well.  In a way, LAACZ and FRP Holdings had pocket ACEs and GRIF had a 3 and a 4.  Add in the fact that the company was always subscale, it didn't help. 

 

5) I remember a time when people didn't think much of the Bakers.  Look at the FRP Holding's thread in the beginning.  Some of the cursory comments were "they spinoff trucking, but management team is managing both companies, automatic pass."  Many people make assumptions about management team on this thread, but not many have actually talk to the CEO.  He's fairly accessible.  Call the guy and talk to him.  Instead of making the blanket assumptions.   

 

[BG2008]

I think the most important aspect of this thesis and a lot of thesis like Buffet's investment in Railroads and Airlines is that over time industry dynamics shifts.  For a long time railroads were a bad business.  Then they consolidated the railroads.  They made the tunnels taller so that they can double stack the rail cars.  The industry dynamic changed.  10 years ago, people went to the stores and bought stuff from shelves.  Today people get their products in boxes delivered to their doors.  This has fundamentally changed the role of the warehouse in the distribution business.  Warehouses used to be an afterthought.  Now they are front and center.  I would be willing to bet that warehouses will play an even larger role in the future.  Long term fundamental trends are very important in investing.  This is why I avoided the siren songs of Seritage.  I don't want retail exposure.  Yes, there is potentially a lot of value there.  But I don't want to own something that is structurally deteriorating.  Just look at the B and C malls and the suburban office buildings.  Urban multi-families on the other hand had a heck of a 10 year run. 

 

I don't know why people are so put off by something that has almost 100% upside and where the NAV is growing 11-14% a year at today's price.  On any day, you can wake up and Blackstone, Prologis, EastGroup, or any industrial private equity fund could buy this company at a 10% discount to NAV (which would equate to $63 per share or higher over time).  On a portoflio that is worth somewhere in the $450-500mm range, there is only $124mm of net debt.  What is so hard and so tough about this investment?  Why keep anchoring yourself to the 20 year track record when the people running the company today weren't even involved.  Also, the assets today and the strategic focus today has nothing to do with what they owned back in 1997-1998.  I think the 1997-2010 track record matters if you have the same CEO and the same business today.  The business back then was a lot of land, very small warehouse, and a big Nursery business.  The business today is 80% warehouses and 20% land parcels and suburban offices.  Forward looking people, forward looking. 

[Gregmal]

Bill, dont give yourself an aneurism, worrying about defending this shit. I bought it with my eyes closed for one reason... downside is what? $30 per share?!?! LOL. Give yourself a setup and some time. It's good. Especially if you are young or patient. Personally, I see this as the ugly, forgotten cousin of FRP and CTO. Striking characteristics both good and bad, of both. You're fine here brother....

 

The real question... you want to team up and pressure a sale of the warehouses? J/K... maybe...

[thepupil]

Bill, you've already invited enough competition for stock. No need to coherently make the long term case anymore than you already have :). This gap is unlikely to be resolved by incremental buyers of stock, but rather a sale of assets or the company.

 

Yes, I bought a few thousand shares for the family at around $36 and change. I can't speak to whether or not we were some specific block.

 

As a going concern it's not that cheap. But the probability of "asset conversion activities" over the next 0-5 years is high. Y'all need to stop focusing on the primacy of the income statement. Sure the family might take Something Off The Top, but this stock is a wonderful holding for the aggressive conservative investor.

 

 

[oscarazocar]

At the time of the spin, GRIF had net cash and traded under tangible book value, $17 stock price vs $19 per share tangible book value.

 

On this thread, there is frequent reference to a $70 per share NAV and the huge discount compared to the stock price.  What is the source of this number?  As far as I can tell, it is based on the Rhizome presentation.  I consider the assumptions in that presentation to be quite optimistic.

 

My questions boil down to this: Most of the industrial warehouse development in Lehigh Valley and Hartford has been on spec and has taken place recently.  Those are not land constrained markets.  Why are spec industrial warehouses in those locations worth large premiums to recent build costs/replacement costs?  This kind of environment seems likely to end poorly for such builders.

 

[thepupil]

At the time of the spin, GRIF had net cash and traded under tangible book value, $17 stock price vs $19 per share tangible book value.

 

On this thread, there is frequent reference to a $70 per share NAV and the huge discount compared to the stock price.  What is the source of this number?  As far as I can tell, it is based on the Rhizome presentation.  I consider the assumptions in that presentation to be quite optimistic.

 

My questions boil down to this: Most of the industrial warehouse development in Lehigh Valley and Hartford has been on spec and has taken place recently.  Those are not land constrained markets.  Why are spec industrial warehouses in those locations worth large premiums to recent build costs/replacement costs?  This kind of environment seems likely to end poorly for such builders.

 

it all comes down to what you think the right cap rate is. If you assume the office and undeveloped land is worthless and assume they get to $25mm or $28mm of NOI, then you're creating the company at an 8% cap rate. There is a wall of institutional and REIT money buying assets at a 4-6 cap. the company is cash flow positive and achieving some degree of scale. the market for industrial is hot. If you think that that is going to unwind massively, there's plenty of shorts for ya. If you think that these assets are much much much worse than what is being bought by institutions, then I'm open to hearing that case. It's not clear to me  that they are. there seems to be a large margin of error. the debt is low cost, well-termed, and non-recourse. the odds appear to be in ones favor.

 

I'm not one to necessarily say "just beleive management" but the presentation does indeed outline plenty of market evidence (cites CBRE cap rate surveys, price per foot etc) for their assets being worht a lower cap rate than 8%...to a signficant degree. http://www.griffinindustrial.com/assets/uploads/files/GRIFFIN%20INDUSTRIAL%20REALTY%20Investor%20Presentation%20May%202019%20Final.pdf...

 

In real estate land, I am more inclined to beleive management as they point out comps/transactions/etc. private real estates is the worlds 2nd or third (maybe 1st) largest asset class, with lots of markers of value. there's room to mislead of course, but this isn't some phony IRR on an obscure drug. as for your question, how can this company be creating assets at such juicy yields and will those juicy yields attract competition and ultimately kill the theses, perhaps it will or perhaps the supply response won't be as dramatic (relative to growing demand). Honesly haven't done any work on it; it could happen and that's why I don't own prologis at 28x EBITDA or whatever.

 

the gap between apparent implied cap rate and the private market transactions and public comps is enough for me to warrant an initial position. I have spent the better part of 4 years listening to how public market real estate valuations are leading the private market lower or that the discount to NAV isn't real because asset quality isn't as high as you think etc. But there's about $300 billion of real estate PE equity on the sidelines and that money seems to always find its way to these stocks, whether that be EQC selling its development sites in seatlle for more than expected, VNO trading its scary retail at a 4.5 cap, Forestar trading to $20-$25 from $10 over 3 years, HHC going up 40% on a tweet they may sell, or FRPH selling some Baltimore warehouses for a low cap rate.

 

As long as the music is playing, I will continue to dance in non-recourse low leverage form for a portion of my portfolio.

 

BG2008 will provide a more substantive answer, but for me it comes down to this. People (rightly or wrongly) are buying something for X. If you can buy that for 0.5x -0.7x you have room to be a little wrong. If you are wrong, non-recourse low cost leverage may make you less than extremely wrong.

 

NYC office may be grossly overvalued by the private market, but that doesn't mean that creating VNO's portfolio at a 7-8 cap is a mistake. it gives you room to be wrong.

 

 

 

 

 

 

[BG2008]

At the time of the spin, GRIF had net cash and traded under tangible book value, $17 stock price vs $19 per share tangible book value.

 

On this thread, there is frequent reference to a $70 per share NAV and the huge discount compared to the stock price.  What is the source of this number?  As far as I can tell, it is based on the Rhizome presentation.  I consider the assumptions in that presentation to be quite optimistic.

 

My questions boil down to this: Most of the industrial warehouse development in Lehigh Valley and Hartford has been on spec and has taken place recently.  Those are not land constrained markets.  Why are spec industrial warehouses in those locations worth large premiums to recent build costs/replacement costs?  This kind of environment seems likely to end poorly for such builders.

 

it all comes down to what you think the right cap rate is. If you assume the office and undeveloped land is worthless and assume they get to $25mm or $28mm of NOI, then you're creating the company at an 8% cap rate. There is a wall of institutional and REIT money buying assets at a 4-6 cap. the company is cash flow positive and achieving some degree of scale. the market for industrial is hot. If you think that that is going to unwind massively, there's plenty of shorts for ya. If you think that these assets are much much much worse than what is being bought by institutions, then I'm open to hearing that case. It's not clear to me  that they are. there seems to be a large margin of error. the debt is low cost, well-termed, and non-recourse. the odds appear to be in ones favor.

 

I'm not one to necessarily say "just beleive management" but the presentation does indeed outline plenty of market evidence (cites CBRE cap rate surveys, price per foot etc) for their assets being worht a lower cap rate than 8%...to a signficant degree. http://www.griffinindustrial.com/assets/uploads/files/GRIFFIN%20INDUSTRIAL%20REALTY%20Investor%20Presentation%20May%202019%20Final.pdf...

 

In real estate land, I am more inclined to beleive management as they point out comps/transactions/etc. private real estates is the worlds 2nd or third (maybe 1st) largest asset class, with lots of markers of value. there's room to mislead of course, but this isn't some phony IRR on an obscure drug. as for your question, how can this company be creating assets at such juicy yields and will those juicy yields attract competition and ultimately kill the theses, perhaps it will or perhaps the supply response won't be as dramatic (relative to growing demand). Honesly haven't done any work on it; it could happen and that's why I don't own prologis at 28x EBITDA or whatever.

 

the gap between apparent implied cap rate and the private market transactions and public comps is enough for me to warrant an initial position. I have spent the better part of 4 years listening to how public market real estate valuations are leading the private market lower or that the discount to NAV isn't real because asset quality isn't as high as you think etc. But there's about $300 billion of real estate PE equity on the sidelines and that money seems to always find its way to these stocks, whether that be EQC selling its development sites in seatlle for more than expected, VNO trading its scary retail at a 4.5 cap, Forestar trading to $20-$25 from $10 over 3 years, HHC going up 40% on a tweet they may sell, or FRPH selling some Baltimore warehouses for a low cap rate.

 

As long as the music is playing, I will continue to dance in non-recourse low leverage form for a portion of my portfolio.

 

BG2008 will provide a more substantive answer, but for me it comes down to this. People (rightly or wrongly) are buying something for X. If you can buy that for 0.5x -0.7x you have room to be a little wrong. If you are wrong, non-recourse low cost leverage may make you less than extremely wrong.

 

NYC office may be grossly overvalued by the private market, but that doesn't mean that creating VNO's portfolio at a 7-8 cap is a mistake. it gives you room to be wrong.

 

Well said and not much to add aside from maybe just google CBRE, JLL, etc Industrial Reports.  It's clear that the cap rates are in the 4.5-6.5% range for Griffin's submarket. Since they built most of these warehouses in the last decade, they would be considered Class A in their submarkets.   

[Gregmal]

One thing I'll add, is that the ATM is inexcusable, and downright tone deaf if your goal is to improve your current situation and attract new investors. I can't find anything that indicates they've used it, but having it there is a real dumb thing if you hope to attract new investors and claim to trade at a fraction of NAV. Look what the asinine and self serving convertible note deal did to CTO. When you trade at a discount, even a whiff of a tiny mouse fart sized inkling that management is thinking of issuing shares is frightening. Its just a big black eye optically and does in a way take away some credibility. Its not stopping me from buying this all day in the mid $30's, but to others it might, and it definitely dampens the enthusiasm in regards to upside knowing you'll likely be competing with management to dump your stock should this thing appreciate.

[Deepdive]

GRIF announced Q3 new and extended leasing for office and industrial. Leased out some of the Lehigh Valley warehouse and CT warehouse tenant expanded their footprint. Warehouse occupancy up from 94% in Q2 to 97% in Q3.