Any REIT experts here?

[writser]

Yes, FFO and AFFO are the key metric, not earnings because of the reason stated above. 

 

There is a book called Investing in Reits by Block which everyone who likes reits has read.  It's a good place to get a foundation in what types of reits are out there, how they are valued and what to look out for.  It's what I read to get started learning about them.

 

Thanks for the book tip. Decent overview.

[CorpRaider]

SLG heading back toward the 52 week low.  I see an analyst downgrade of "manhattan real estate."

[muscleman]

One way to invest here that for me has worked well so far is to buy solid NNN firms.  These firms are a combination of real estate and long-term secured lending to tenants which have contractual rent increases in the leases.  You can get a combination of yield & built in increasing recurring revenue for over 10 years.  The tenants pay for most of the maintenance so this is not as capital maintenance intensive as other REIT-types.  Sort of like mature software without the software price tag.  Some of the most interesting include STOR and Broadstone Net Lease.

 

Packer

 

Thank you Packer. Do you know anything about mortgage REITs? It seems like ABR is a mortage REIT paying over 9%. These REITs don't have real properties right?

 

[Spekulatius]

One way to invest here that for me has worked well so far is to buy solid NNN firms.  These firms are a combination of real estate and long-term secured lending to tenants which have contractual rent increases in the leases.  You can get a combination of yield & built in increasing recurring revenue for over 10 years.  The tenants pay for most of the maintenance so this is not as capital maintenance intensive as other REIT-types.  Sort of like mature software without the software price tag.  Some of the most interesting include STOR and Broadstone Net Lease.

 

Packer

 

Thank you Packer. Do you know anything about mortgage REITs? It seems like ABR is a mortage REIT paying over 9%. These REITs don't have real properties right?

 

No, these mortgage Reits typically hold paper (commercial and residential mortgages), lever them up and live off spreads. Get something wrong like duration (easy to mess up with callable residential mortgages) or credit risk and you have a zero.

[muscleman]

One way to invest here that for me has worked well so far is to buy solid NNN firms.  These firms are a combination of real estate and long-term secured lending to tenants which have contractual rent increases in the leases.  You can get a combination of yield & built in increasing recurring revenue for over 10 years.  The tenants pay for most of the maintenance so this is not as capital maintenance intensive as other REIT-types.  Sort of like mature software without the software price tag.  Some of the most interesting include STOR and Broadstone Net Lease.

 

Packer

 

Thank you Packer. Do you know anything about mortgage REITs? It seems like ABR is a mortage REIT paying over 9%. These REITs don't have real properties right?

 

No, these mortgage Reits typically hold paper (commercial and residential mortgages), lever them up and live off spreads. Get something wrong like duration (easy to mess up with callable residential mortgages) or credit risk and you have a zero.

 

So essentially these mortgage REITs have the same nature of lending business like the banks, but with a higher funding cost?

The concerns you outlined seem to be the exact same concerns banks have. But WFC and BAC still seem to be investible by a lot of members here. When I look at mortgage REITs, what particular concerns should I have and look out for?

[Spekulatius]

One way to invest here that for me has worked well so far is to buy solid NNN firms.  These firms are a combination of real estate and long-term secured lending to tenants which have contractual rent increases in the leases.  You can get a combination of yield & built in increasing recurring revenue for over 10 years.  The tenants pay for most of the maintenance so this is not as capital maintenance intensive as other REIT-types.  Sort of like mature software without the software price tag.  Some of the most interesting include STOR and Broadstone Net Lease.

 

Packer

 

Thank you Packer. Do you know anything about mortgage REITs? It seems like ABR is a mortage REIT paying over 9%. These REITs don't have real properties right?

 

No, these mortgage Reits typically hold paper (commercial and residential mortgages), lever them up and live off spreads. Get something wrong like duration (easy to mess up with callable residential mortgages) or credit risk and you have a zero.

 

So essentially these mortgage REITs have the same nature of lending business like the banks, but with a higher funding cost?

The concerns you outlined seem to be the exact same concerns banks have. But WFC and BAC still seem to be investible by a lot of members here. When I look at mortgage REITs, what particular concerns should I have and look out for?

Banks are diversified and regulated business. Mortgage Reits are one trick ponies and not regulated and cater to yield hungry investors. That makes the risk profile entirely different. It doesn’t mane that they are bad business, but I think most business that are designed as yieldcos aren’t great business to begin with.

[Packer16]

One way to invest here that for me has worked well so far is to buy solid NNN firms.  These firms are a combination of real estate and long-term secured lending to tenants which have contractual rent increases in the leases.  You can get a combination of yield & built in increasing recurring revenue for over 10 years.  The tenants pay for most of the maintenance so this is not as capital maintenance intensive as other REIT-types.  Sort of like mature software without the software price tag.  Some of the most interesting include STOR and Broadstone Net Lease.

 

Packer

 

Thank you Packer. Do you know anything about mortgage REITs? It seems like ABR is a mortage REIT paying over 9%. These REITs don't have real properties right?

 

Mortgage REITs are capped like bonds/loans & thus the yield you get is all the upside you get.  You may actually have a loss due to loan losses.  Mortgage REITs like you say are debt funds so the value is in the underwriting or lack thereof the manager.

 

Packer

[Gregmal]

Just my 2c, but if you're interested in the triple net stuff, check out CTO. They're not currently a REIT but I would bet my last dollar that either this year, or next, they do a REIT conversion. They are basically built to resemble NNN and O. Still have some land and a few spec projects which I think give you additional upside, but on the income property side they're basically single tenant retail with a bunch of high quality single tenant office(WFC, Fidelity) properties as well. By my estimates NAV is mid 90's, which against a mid $60's share price is a reasonable margin of safety considering peers(just going by who they consider their peers) trade at a 20-30% premium to NAV. This is one of my top positions.

 

 

[Packer16]

Taking a quick look at CTO, I am not impressed at least by the disclosure.  They imply a net cap rate for NNN based upon land values?  This is misleading at best.  You are comparing apples to oranges.  If you look at the leases, it looks like many of them have no escalation clauses and many of the largest leases will be gone in 5 to 6 years.  The metrics they report is not even the industry standard, AFFO (which adjusted for long-term lease payments) so how can you compare to other NNN companies.  They also do not disclose the WA escalation rates. 

 

Do these guys have a credit analysis background?  NNN investing is as much credit analysis of tenants as real estate investing IMO.  My question would be are they going to distribute the cash flows or use them to develop the land & buy more properties.  If it is the later, your investment is more dependant upon how good the investment in the land/properties will be vs. the income the properties provide.  Just some observations.

 

Packer

[Spekulatius]

Just my 2c, but if you're interested in the triple net stuff, check out CTO. They're not currently a REIT but I would bet my last dollar that either this year, or next, they do a REIT conversion. They are basically built to resemble NNN and O. Still have some land and a few spec projects which I think give you additional upside, but on the income property side they're basically single tenant retail with a bunch of high quality single tenant office(WFC, Fidelity) properties as well. By my estimates NAV is mid 90's, which against a mid $60's share price is a reasonable margin of safety considering peers(just going by who they consider their peers) trade at a 20-30% premium to NAV. This is one of my top positions.

 

The issue with a REIT conversion is that it comes with a huge tax bill usually, as assets need to be valued to fair market value. I could be wrong with this and don’t know about CTO specifically, but that’s what I heard in other cases where a change in incorporation was discussed.

[BG2008]

Just my 2c, but if you're interested in the triple net stuff, check out CTO. They're not currently a REIT but I would bet my last dollar that either this year, or next, they do a REIT conversion. They are basically built to resemble NNN and O. Still have some land and a few spec projects which I think give you additional upside, but on the income property side they're basically single tenant retail with a bunch of high quality single tenant office(WFC, Fidelity) properties as well. By my estimates NAV is mid 90's, which against a mid $60's share price is a reasonable margin of safety considering peers(just going by who they consider their peers) trade at a 20-30% premium to NAV. This is one of my top positions.

 

The issue with a REIT conversion is that it comes with a huge tax bill usually, as assets need to be valued to fair market value. I could be wrong with this and don’t know about CTO specifically, but that’s what I heard in other cases where a change in incorporation was discussed.

 

May not be as big as you think.  Not to rain on Greg's parade, but I just don't like the guys calling the shots at CTO. 

[Gregmal]

Taking a quick look at CTO, I am not impressed at least by the disclosure.  They imply a net cap rate for NNN based upon land values?  This is misleading at best.  You are comparing apples to oranges.  If you look at the leases, it looks like many of them have no escalation clauses and many of the largest leases will be gone in 5 to 6 years.  The metrics they report is not even the industry standard, AFFO (which adjusted for long-term lease payments) so how can you compare to other NNN companies.  They also do not disclose the WA escalation rates. 

 

Do these guys have a credit analysis background?  NNN investing is as much credit analysis of tenants as real estate investing IMO.  My question would be are they going to distribute the cash flows or use them to develop the land & buy more properties.  If it is the later, your investment is more dependant upon how good the investment in the land/properties will be vs. the income the properties provide.  Just some observations.

 

Packer

 

Appreciate the thoughts and(at least I assume) first impressions(unless you're previously familiar with this). Its good hearing outside observations. I've been with this prior to the "basically dark" days, which iirc probably changed sometime in 2015. Prior, there were no calls, no confirmed earnings dates, nothing. You'd just randomly see a brief release dropped at like 1:30 in the afternoon. So to me, disclosure has improved greatly, although it is inconsistent at times. In 2016 it seems to have peaked, with everything down to the 3rd digit of a cap rate often disclosed. Since then it's been a little less so. The cynic in me always rushes to find a link to something that's being hidden or indicative of something devious, however it really just appears to be random.

 

I do not think the cap rate used in the presentation if that is what you are referring to is including land values. Those are broken out separately on the NAV sheet.

 

A few points. Pre-2014 this was basically just 10,000 acres of land with a few income properties in Florida. So almost all of the portfolio has been acquired in the past 5 years, meaning if you like it or dislike it, or whatever, you at least have a general idea of a recent market value. The income properties are acquired more or less to skirt taxes on the land sales, which have a basis in many cases dating back to the early 1900's. The tax implications of a REIT conversion have been communication to be around $45M, so figure ~$9 per share needs to be shat out for the conversion. Not awful and better than original thought which many believed included all the 1031 deferred taxes which apparently dont need to be purged.

 

They do not develop...at all. So there is no risk there. Every so often they'll take on something in their back yard, such as the Winter Park project or the beach front parcel, but these are generally sub $10M developments. To date those have been some of the better investments made. Daytona IMO is very much a good ole boys club and if you are on the "in" you can do well where others cant. They are very much on the inside there. I can't tell you how many times I've grown frustrated seeing them sell a parcel to a developer for say, $3M. Then seeing the developer put in $10-$15M, lease it up and flip it for like $30M. I call it lazy, they call it conservative, but thats the deal. Sell the raw Daytona acreage and 1031 to an income property. The CEO has a background there and is reasonable competent. I have not always agreed with the capital allocation(among other things), and while I think they've been boneheads sometimes, cant say they've ever destroyed value. They(management) own a lot of stock relative to their net worths.

 

That they don't use traditional REIT metrics(AFFO, etc) I think is just a result of the fact that they still report the same way they always have as a land company. The transition is still occurring but agree that moving to those metrics with REIT conversion on the horizon makes sense.

 

I do agree with what you allude to about the bigger properties. I hate gargantuan single tenant office space. Fidelity is not a concern but the two Wells Fargo's have always bothered me. Those to me are value traps. But generally speaking I think one is fairly compensated at these prices. I think they've got a lot to prove and they kind of made fools out of themselves blaming everything on Wintergreen(a whole separate story not really worth getting into) and claimed a Wintergreen Discount was the reason the stock trades at such a discount to NAV, at $65 share price/ ~$365M market cap and now 6 months after Wintergreen is gone have a $64 share price and ~$320M market cap. The incentives to me are there for this to do well and at least narrow that gap over the few quarters; but I also could be wrong and maybe they just keep telling stories and milking the heck out of this...but we should have an answer soon and its a heads it doesn't really go anywhere and tails it goes up a lot situation, which I like.

 

And had I listened to BG several years ago I'd have spared myself a huge opportunity cost here...but I think at this point the cards are on the table and we get to see if these guys are respectable dudes(my first impression of them) or just another bunch of schemers(my next impression of them).

[Gregmal]

 

Start at 1:05:00; and deduce what you will...

[maverick]

One way to invest here that for me has worked well so far is to buy solid NNN firms.  These firms are a combination of real estate and long-term secured lending to tenants which have contractual rent increases in the leases.  You can get a combination of yield & built in increasing recurring revenue for over 10 years.  The tenants pay for most of the maintenance so this is not as capital maintenance intensive as other REIT-types.  Sort of like mature software without the software price tag.  Some of the most interesting include STOR and Broadstone Net Lease.

 

Packer

 

Thank you Packer. Do you know anything about mortgage REITs? It seems like ABR is a mortage REIT paying over 9%. These REITs don't have real properties right?

 

Mortgage REITs are capped like bonds/loans & thus the yield you get is all the upside you get.  You may actually have a loss due to loan losses.  Mortgage REITs like you say are debt funds so the value is in the underwriting or lack thereof the manager.

 

Packer

 

On mortgage REITs - the trick is to buy them when they are trading at a substantial discount to book value if you have confidence that the discount could narrow over time and even turn to a premium. Otherwise, Packer is right that what one earns is the dividend yield. Also, growth comes from issuing equity when the stock is trading above the book value.

[Cardboard]

Hey Gregmal, if you had a gun to your head: GRIF or CTO and why?

[Gregmal]

Hey Gregmal, if you had a gun to your head: GRIF or CTO and why?

 

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

 

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

 

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

[Cardboard]

Thanks man!

 

What got you interested into these real estate companies?

 

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

 

Probably one more reason why these are cheap.

 

[Packer16]

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

 

Packer

[Gregmal]

Re Packer:

 

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

 

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

 

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

 

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

 

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

 

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

 

 

Re Cardboard:

 

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

 

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

[Packer16]

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

 

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

 

Packer

[Gregmal]

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

 

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

 

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

 

[Spekulatius]

re GRIF vs CTO, I like GRIF much better. They do one thing (smaller warehouses) in a few markets reasonably well and trade to a significant discount to NAV. It’s easier to get this sold than CTO.

 

I don’t own it (sold it for a quick swingtrade) but would buy this any time if it falls back a little.

[Read the Footnotes]

I am also concerned that the portfolio is so dispersed & how can CTO have re-development expertise in so many markets?

 

Packer

 

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

 

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

 

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

[Gregmal]

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

 

Read the Footnotes you make good points as well.

[muscleman]

Thanks man!

 

What got you interested into these real estate companies?

 

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

 

Probably one more reason why these are cheap.

 

 

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