GRIF - Griffin Industrial Realty

[Gregmal]

I think if nothing else, you just have to simplify the heck out of the general ballpark we may or may not be in. Ask yourself, as a value investor, you look to buy things that are 1) undervalued, and 2) out of favor. You would naturally look to sell when they become in favor. I am not advocating buying or selling this, but where on the spectrum of "out of favor to in favor" has this gone?

[bizaro86]

I need a break from this thread and this forum in general.  Clearly, I am not knowledgeable when it comes to real estate investing.

 

You did ask for pushback, and I thought everyone who did so was polite about it. For my part, I hope you won't step back, as I've always enjoyed and learned from your posts. I apologize if anything I said wasn't appropriate - I think there's more than one way to look at this, which is healthy, imo.

[writser]

You made a great call, there was a lot of valuable discussion in this thread, shares are up 40% YTD, everybody in this thread has always been very polite and on-topic. I wish all threads were like this (and that I was smart enough to have bought myself). You are getting your requested pushback from a few very good posters and I think what they are saying is exactly the sort of stuff you should be happy with when you are thinking about updating your thesis because the initial thesis worked out. And it is also the pushback you could have expected on a value investing board, FWIW. No need for drama.

[BG2008]

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.

 

Bump, with relevant portion bolded. What BG2008 is speculating, I believe is that it's possible that GRIF is shifting from trading at a management/G&A/subscale/low stock liquidity related discount to a accretion story/management/secular tailwind/compounder premium.

 

the assets have not drastically changed, the market has gone down, and yet the stock is up 40-50%. what's changed is an acceleration of the e-commerce tailwinds to industrial real estate, the change in chairman, and liquidity in the stock has improved.

 

if you think real estate stocks should ALWAYS trade at a G&A discount or that they can't trade at premiums, I'd point to the net lease REITs which have in the past sustained big NAV premiums and used them to grow IVPS at a greater rate than they otherwise would, I'd point to American Tower and the data center REITs, also prolific issuers at good prices, I'd point to office REITs in 2014/5. Sentiment is fickle and can change, but the inflection in sentiment potentially increases the intrinsic value of GRIF because of the ability to accretively issue. the small starting base makes accretion more powerful.

 

the market may be looking forward to GRIF scaling up to become a real stock via accretion and growth, rather than looking at the existing estate of assets and slapping on a G&A discount.

 

I am a tepid trimmer here. I hope BG2008's speculation is correct and expect further upside. nevertheless the discount has narrowed significantly, and the stock is potentially less "safe" than it was in the $30s. I find it easiest to buy on the way down and hardest to hold on the way up; I think complete exit is a potential mistake because of BG2008's scenario.

 

the choice between "will they sell" or "will this be a going concern" is not binary. What if they scale up for the next 5 years, then sell to a bigger REIT/PE? I think that's the bull case. The answer is not either/or but YES/BOTH. Bear case is they don't scale and it's a going concern at small illiquid g&A burdened scale.

 

REITs w/ savvy managements (or really any company, but more relevant to pass through entities dependent on capital markets instead of earnings retention) are long the volatility in their NAV premiums. Big discount = repurchase accretion (PGRE is buying back 5% / quarter). Big premium = issuance accretion. Fair value = nothing to do.

 

GRIF is potentially making the uncomfortable transition of discount to premium. It has to pass through the least sexy part (fair value) to get there though.

 

Pupil is the GOAT of articulating his viewpoint

[BG2008]

Sooooo, I have been thinking lately about GRIF and this is something that was not a possible scenario even 6 months ago for me.  The march from the $30 to $56 is just incredible.  I have held this name for 2-3 years and gotten all sorts of push back from people, son-in-law, family control, etc.  Anyway, now that the shares are starting to trade at close to my NAV of roughly $70 (give or take $10 in either direction), I have been thinking about why the stock is here today and what to do with the position.  I think the combination of the company fundamentally performing well, 98% rent collection and 8.1% cash rent increases on 400k sqft were very positive developments.  The question here is what if this trades into the $60s and onto $70 and GRIF actually uses the ATM so that they can buy some assets?  Since they can get financing in the 3s now, they can probably get WACC in the 4s.  If they can develop or acquire at  6% cap rate, it will actually be quite accretive.  As a value investor, this is a scenario that I would not have thought of.  But every channel check on Gordon Dugan basically comes back "Dugan is involved?  Oh, yeah, let me look at it?  Or he made me a lot of money at Gramercy"  Does GRIF winds up benefiting from reflectivity?  If GRIF trades above $70, I would probably be willing to hold onto the shares as a way to see how they arbitrage the private to public delta.  That was a key aspect of Gramercy's thesis.  Yes, you can no longer buy warehouses at a 9% cap rate anymore like they did 7-8 years ago.  But if the WACC is 4% and you can buy at 6%, that's an incredible amount of value creation.  I hope I am not setting myself up for disappointment, but a REIT's ability to issue cheap equity is the reason why many REITs go pubic to begin with.  The advantage of having a cheap cost of capital is very.  The difference between GRIF and a Prologis is that small bolt on really move the needle for GRIF. 

 

Thoughts?  Pushbacks?  If  your thought is "BG, lay off the pipe!", let me know.

 

PS. The public comps trade at a 4% cap rate.  So I don't think it's a stretch to imagine a WACC in the 4s.  They may have to issue some shares at a slight discount to build the shareholder base.  More trading begets more volume which begets a larger shareholder base.  It is very counter intuitive for value investors, but I have seen it happen before.

 

Edit - I would really appreciate pushback/feedback that isn't related to the G&A as that has been thoroughly examined.   

[Packer16]

You may want to capitalize the G&A expenses of $8m per year into your calcs @ either 5 or 10% as the leasing NOI adds back G&A.  This would reduce value by $80m to $160m.

 

Packer

 

Just to illustrate how flawed this argument is a $80 to $160mm valuation is $16 to $32 per share roughly.  If the private market NAV is $60-70/share, then this implies fair value of $28 to $54.  The current price is 0-92% above the fair value.  Is the market really that inefficient?  Or do you use a private market value that is backed by a deep pool of potential buyers that are willing to pay for this asset?  Isn't that the very definition of intrinsic value?  Multiple buyers who are willing to pay $60-70/share in arms-length-transaction?  I buy that the value creation going forward will be impeded by $1/share per year.  But I don't think it is appropriate to penalize a real estate company for expense that has not incur yet. 

 

Bizarro,

 

What would be your suggestion for what is the appropriate year to discount?  Is it 3, 5, 10, 15, or 20 years?  In a weird way, you can actually change the NAV of a real estate company simply by arbitrarily picking your own sale date?  I suggest that it is much more "real world" if you reduce your forward NAV appreciation because the G&A acts as a bigger anchor.  But the G&A should not reduce what you can sell by running a quick auction for the portfolio.

 

My 2 cents

 

With regards to the timeline for growing into 4% WACC.  My observation is that investors are now excited about GRIF because of Gordon Dugan.  Previously they had no reason to own GRIF like many mentioned on the board.  I speculate that GRIF may trade to a sub 6% cap rate, they issue some equity which increases float, which allows bigger funds to buy, and the whole going to 5% WACC and then 4% WACC could literally happen in the next few months.

 

The $80m to $160m is off the asset value, which if you use 4.2% cap of comps for industrial properties on $21.9m of NOI ($521m) plus the BV for other properties ($50m) less debt ($150m) less G&A caped of $80m to $160m you get NAV of $262m to $342m ($51.6 - $67) assuming steady state operations close to the current price.  You will get a bump if the REIT expenses are $5m G&A vs. $8m for total firm G&A last year.  The 4.2% cap rate for a REIT (or an AFFO multiple of 24x) sounds about right, higher the NNN REITs but lower than Data Center/Tower REITs but you are probably a better judge than me on this multiple.  Clearly value is moving number and if management can reinvest into new projects, as it has in the past there is some value there also.

 

Packer

[thepupil]

Pupil is the GOAT of articulating his viewpoint

 

I will be sure to let those  who followed me into NYC office REITs know that the view was articulately expressed so the losses are okay  :D

 

I will have to start reporting my articulation adjusted returns. “We recognize that our absolute return hasn’t been great but we’re more of an AAR shop”

[BG2008]

Pupil is the GOAT of articulating his viewpoint

 

I will be sure to let those  who followed me into NYC office REITs know that the view was articulately expressed so the losses are okay  :D

 

I will have to start reporting my articulation adjusted returns. “We recognize that our absolute return hasn’t been great but we’re more of an AAR shop”

 

Isn't "Articulation Adjusted Returns" literally the game of professional money management?   

[thepupil]

Indeed it is!

 

BG2008 et al. At what price would you all be comfortable with GRIF selling into the market via the ATM?

 

I would be okay with it around here to $60+ to continue to increase stock liquidity / diversify the ownership base; though a secondary offering (or blocks) of GAMCO held shares would be much preferred until we get into NAV premium territory.

[BG2008]

Indeed it is!

 

BG2008 et al. At what price would you all be comfortable with GRIF selling into the market via the ATM?

 

I would be okay with it around here to $60+ to continue to increase stock liquidity / diversify the ownership base; though a secondary offering (or blocks) of GAMCO held shares would be much preferred until we get into NAV premium territory.

 

I imagine Munger would say something like "You articulate well, but I am right"

 

I agree that prices here and $60+ in small amounts does make sense.  Yes, it's a slight discount to NAV of $70. But increasing liquidity would be better for GRIF in the long run.  I used to believe you should always be buying back if you are at a discount to NAV.  The truth is that if you are illiquid, there is a "price to pay" to get liquidity.  The early institutional investors gets a better deal by being the first to invest in what would be an illiquid security.  The next investors then will own something that is more illiquid.  In my previous life, I used to get information from the IBs on how they would "build a book" where the key is to have 80% "buy and hold" investors in a large sized secondary offering and 20% that are flippers.  The flippers helps with liquidity. 

 

This maybe my famous last words but I think value investors are terrible at understanding reflexivity.  Everything happened so quickly recently with Griffin.  I have trimmed. But I stopped to think for a bit and started to think there is a possibility that this may trade over NAV and then it becomes a bit of a machine where issuing equity to fund developments for acquisitions will actually work really well.  I have been trying to put myself in Gordon Dugan's shoes.  Why did he spend $47 per share on $2.5mm of his own money?  Is he really just looking out for a meager 20% gain? Or does he have bigger and more lucrative plans? 

 

One of the misses that I had in my career is CareTrust.  They had a lot of concentration with Ensign.  After the spinoff, the company had too much concentration and was a bit more levered than what a traditional REIT look like.  They did an equity offering at a discount to NAV.  I was pissed.  Sold and got out.  It promptly doubled after I got out.  Gabelli has been badgering this company to buy back shares for the last 10 years.  But if they did, they would not have the portfolio today.  They would be overly concentrated in Hartford.  Let's get Gabelli out of this investments and bring in some Fidelity and others.  Apparently Gordon Dugan is the kind of guy who loves going to conferences and talking with institutional investors.  He would stay past the event and go to the bars with the guys.  I am 90% sure that is going on in the background which is likely why the share prices are up and the share volume are up.  I can't think of any other reason.  So when you have a CEO who asked his father-in-law to give $350k in board compensation and strategically recruited Gordon Dugan, you have to ask yourself "maybe Michael Gamzon is a better CEO than we all thought."  I think stories are powerful.  Look at Nikola and Virgina Galactic.  Here, the story is potentially Gramercy 2.0.  That's a powerful story.     

 

I guess I am a "drama queen" about the SG&A because that topic has been beaten to death.  That kind of feedback/pushback doesn't add much value if we keep harping on it.  The value of the forum is when people give you good feedback that introduces new way of thinking about risk and reward.  If we go back this thread, we can see a ton of discussion about SG&A and family ownership, related party etc.  I am working hard to expressing my evolving thoughts in writing.  I don't mind if people challenge me on this discount/premium to NAV and reflexivity concept.  If people keep harping on the SG&A, you maybe missing out on a potentially really exciting part of the story which is the transition from discount to premium.  For those thinks all companies should trade at a discount, I would implore you to look at some of the suggestions that Pupil had. 

 

Regarding the SG&A, maybe Munger will say "You are right in theory, but I am right"  The 55% price appreciation is probably saying something since the beginning of the thread.  So, please, let's just leave the SG&A debate alone and just agree to disagree.  I believe that I have added value over 20 some pages.  I am just a bit mentally drained from the SG&A conversation. 

 

Isn't a big part of being listed having access to low cost of capital, both equity and debt?  Isn't this the very purpose of having a capital markets?  I think sometimes we forget that.  I do think that position sizing should be smaller (I'm still thinking this one through).  It is a different risk profile to buy this at $35 with a NAV of $70.  There is a position size for that.  It's a different position size at $55 thinking it flips from NAV discount to NAV premium and holding onto what potentially could be a cool compounder story.  What if GRIF becomes the next Store Capital story?  Again, this recent price movement has been so rapid, it's taken me sometime to think about this.  It was not a part of what's in the playbook even 4 weeks ago. 

 

 

[BG2008]

Some mental math here on accretion

 

Let's assume that GRIF does $300mm of development/acquisition at a 6% cap rate.  Let's assume that was paid for with $150mm of equity and $150mm of debt at 3.5%.  At $65/share, this increases share count by 2.3mm.  Add onto the fully diluted count of 5.26mm shares today.  That's a total count of 7.56mm shares O/S.  $300mm at 6% cap rate implies $18mm incremental NOI.  Less 5.25mm of interest expense on $150mm of debt.  Current run rate FFO is about $12mm.  This adds another $12.75mm which brings us close to $25mm.  The current P/FFO multiple of comps is in the 20x.  Assuming a 25X multiple, this would imply a $625mm of market cap which divided by $82/share.  It's pretty crazy that by issuing shares at $65, GRIF could potentially trade to $82.  Then the MC would be $625mm with $310mm of debt.  This is now a reasonably levered company with $40mm of NOI, $12mm of interest expense, $8mm of G&A (maybe it goes up).  The coverage ratios and everything starts looking good.  More importantly, it looks like a real institutional company with a $1bn EV and trading at roughly 4.2% cap rate which is what the comps are currently trading at.  If they issue more shares at $82 and buys more assets at a 6% cap rate, then it further increases per share value.  If Griffin gets to $2bn of EV, the stock could be over a $100 and it will be a real institutional quality company. 

 

How much do I want to own at NAV or above NAV, I don't know.  I'm still thinking about it.  Short answer is that without Gordon Dugan, I won't own any at above NAV.  With Gordon Dugan and this as a accretion/compounder story, I probably want to keep some.  These are the potential multi-year multi-bagger opportunities that others see. 

[BG2008]

New high of $56.88 on 14,102 shares traded.  I definitely did not imagine the shares to get here this quick after March.  Momo begets more momo.  The stock chart in the last month is pretty incredible. 

[thepupil]

BG, perhaps rather than SG&A, the more relevant pushback is that it may be difficult to source good assets at a 6 cap, or even a 5.5 cap given how hot things are.

[EricSchleien]

"How much do I want to own at NAV or above NAV, I don't know.  I'm still thinking about it.  Short answer is that without Gordon Dugan, I won't own any at above NAV.  With Gordon Dugan and this as a accretion/compounder story, I probably want to keep some.  These are the potential multi-year multi-bagger opportunities that others see."

 

^^^ this basically sums it up.

 

You find 10 of these over your life. 1-2 are flops. 6-8 do okay to good. 1 or 2 really hit it out of the park. Even if just 1 really hits it out of the park that compensates for the other 9. In cases like this, I just close my eyes and hold. I give you credit for finding this idea. However, I'll just be holding on and not selling a share.

 

[BG2008]

BG, perhaps rather than SG&A, the more relevant pushback is that it may be difficult to source good assets at a 6 cap, or even a 5.5 cap given how hot things are.

 

I agree.  It is hard to find 6.0% cap rate in this market.  They may have to do value added projects or develop. 

[bilo]

At least so far industrial assets are proving to be a relative safe haven.  Given movement in interest rates and a need to put cash to work, quite frankly, this could go much higher assuming that safe haven status of industrial holds up. 

 

If this highly favorable dynamic does indeed progress, I personally would like to see a total sale vs. attempting to become a growth REIT - the risk/reward of a clean sale would dominate the attempt to "bulk up" via acquisition/development in an already hot market, IMO.   

[villainx]

BG, perhaps rather than SG&A, the more relevant pushback is that it may be difficult to source good assets at a 6 cap, or even a 5.5 cap given how hot things are.

 

I agree.  It is hard to find 6.0% cap rate in this market.  They may have to do value added projects or develop.

 

Maybe one advantage in being smaller (by market cap) player, can source deals that others might ignore or find to small to move needle. 

 

At the same time, sourcing one or two attractive deals is huge for GRIF.

[BG2008]

BG, perhaps rather than SG&A, the more relevant pushback is that it may be difficult to source good assets at a 6 cap, or even a 5.5 cap given how hot things are.

 

I agree.  It is hard to find 6.0% cap rate in this market.  They may have to do value added projects or develop.

 

Maybe one advantage in being smaller (by market cap) player, can source deals that others might ignore or find to small to move needle. 

 

At the same time, sourcing one or two attractive deals is huge for GRIF.

 

I agree.  Also keep in mind that the company still has 500k sqft of developable land in Charlotte, NC and probably about 500k-750k sqft of shovel ready land in Hartford, CT and 130k sqft or so in LeHigh Valley.  So, the total sqft could easily be another 1.0 to 1.4mm higher than today with internal development.  Small tuck ins during this time will likely be very accretive. 

 

 

[BG2008]

At least so far industrial assets are proving to be a relative safe haven.  Given movement in interest rates and a need to put cash to work, quite frankly, this could go much higher assuming that safe haven status of industrial holds up. 

 

If this highly favorable dynamic does indeed progress, I personally would like to see a total sale vs. attempting to become a growth REIT - the risk/reward of a clean sale would dominate the attempt to "bulk up" via acquisition/development in an already hot market, IMO. 

 

I think you are potentially missing the point of the potential accretion from low WACC from growing this REIT assuming this trades at a decent premium to the NAV.  From a capital allocation perspective, I think it is best to take some chips off the table as it trades closer to NAV and leave a portion to see if the  WACC story plays out.  This assumes that you have a decent size position to begin with.  If you have a small position, there is probably no harm in leaving it intact and see if Michael and Gordon can double, triple, or quadruple this one.  One thing about RE investing is that long term trends are very powerful.  If the future is warehouses and e-commerce, that's likely a 10-20 year tailwind.  I under appreciated this dynamic when I was younger.  Look at how obvious shorting retail is in hindsight.  Yes, it's hindsight.  But I was suspicious even back in 2012,2013.  I think if Blackstone sells, that would probably be a moment for us as well. 

 

[BG2008]

Is anyone else seeing the 174,131 shares traded today? I hope this is Gabelli selling out of their position.  Something like 15% of the float traded today.  There was a time when they showed a lot of volume, but it was actually mistaken.

[Gregmal]

You are wrong. I have 182k lol

[BG2008]

Today was an interesting day. All time high before the selloff.  Normal volume and then a spike at end of day.  The Russel rebalance was only suppose to increase weighting by 1%.  It is a strange indeed. 

[BG2008]

I think GRIF is currently experiencing the Brisket Stall phenomenon.  It is in an area where it is a little below NAV.  Hopefully, this is a small stall and maybe we can use a Texas Crutch technique to get it over the stall. 

 

https://goshindig.com/brisket-stall/

https://goshindig.com/wp-content/uploads/2019/07/the-brisket-stall-graph.jpg

 

It has been a fun month, y'all!

[BG2008]

Discussion reminds me a little bit of Grammercy Property Trust.  GPT held a hodgepodge of assets after the GFC, and I seem to recall on the verge of bankruptcy also.  Gordon Dugan took over, and repositioned their portfolio over about five years.  Extended leases, purchased high-quality properties with below-market leases, and transitioned to almost 100% industrial properties.  Sold it at the end to Blackstone in what I thought was a pretty good deal for shareholders. 

 

Certainly seems like this could be happening here. However, I don’t think they have someone of the caliber of Gordon Dugan.  And I also wonder if they can reposition these assets and then sell the collection while we are still at this...bubbalicious time...for industrial assets.

 

I went back and re-read this thread and saw this comment and it gave me a chuckle.  How ironic that Dugan winded up joining the board.  Webcast this Friday.  They are upping their IR game.

http://www.griffinindustrial.com/about/news-events/griffin-schedules-webcast-to-report-fiscal-2020-second-quarter-results

[villainx]

Discussion reminds me a little bit of Grammercy Property Trust.  GPT held a hodgepodge of assets after the GFC, and I seem to recall on the verge of bankruptcy also.  Gordon Dugan took over, and repositioned their portfolio over about five years.  Extended leases, purchased high-quality properties with below-market leases, and transitioned to almost 100% industrial properties.  Sold it at the end to Blackstone in what I thought was a pretty good deal for shareholders. 

 

Certainly seems like this could be happening here.  However, I don’t think they have someone of the caliber of Gordon Dugan.  And I also wonder if they can reposition these assets and then sell the collection while we are still at this...bubbalicious time...for industrial assets.

 

I went back and re-read this thread and saw this comment and it gave me a chuckle.  Webcast this Friday.  They are upping their IR game.

http://www.griffinindustrial.com/about/news-events/griffin-schedules-webcast-to-report-fiscal-2020-second-quarter-results

 

Exciting!