Their stock prices have crashed over the past 2 years as has their money flows continued to increase. As a result, there are many REITs that are now priced at huge discounts to their net asset values:
The best evidence of this is the many REITs that are now buying back shares and insiders that are loading up their shares to take advantage of low valuations.
Here are two such possibilities:
Farmland Partners Inc. (FP)
Farmland Partners is a farmland REIT.
In short, we are very good to the company because:
- We think farmland is a great investment that will likely continue to gain value over this period long-term due to supply/demand imbalances caused by population growth, growing middle class, changing diets, global warming, and declining supply due to better-use conversions.
- Farmland Partners is a play backed by this long-term valuation.
- The stock is trading at $12 today, but we estimate its NAV per share to be around $18, which means it’s priced at 67 cents on the dollar.
- Management is taking advantage of this discount today by selling properties and buying shares – all while paying down debt.
- They are also building an asset management business that we expect to earn significant fee income over the long term as they grow their external assets under management.
- Finally, farmland provides good diversification benefits for our portfolio.
And the interesting thing is that farmland has continued to gain value in 2023:
But despite this, FPI’s share price has fallen to lower levels:
As a result, the discount to NAV has actually widened in recent months, and management is now redoubling its efforts to unlock that value by selling properties and buying stocks.
Recently, they announced that they had sold other properties worth $70 million. That brings the total to $120 million year-to-date, which is pretty significant considering the company only has a market cap of $500 million.
These sales occurred at an average profit of 17%, and this is despite the sale of some of their weaker non-core properties in water-challenged areas.
The chairman of the company made this clear recently conference call:
“Please recognize that we are not selling our best farms. We are selling farms where we are concerned about water challenges or market volatility challenges or they are more outliers for some reason in our portfolio. The valuation we have in the lots of the portfolio we’re not selling are even stronger than what we’re selling.”
The General Director of the company did the following Other comments regarding their most recent asset sales (emphasis added):
“We sold more than 30 farms this summer—many of which were in water-challenged areas—and earned strong asset appreciation returns for our shareholders,” said Luca Fabbri, President and CEO of FPI. “These sales demonstrate the continued strength of the farmland market and enabled us create value for our shareholders through share repurchases at a discount to their underlying value and to redeploy capital to other priorities such as debt repayment and new acquisitions in more stable countries.”
So they are selling assets at a premium to NAV to buy shares at a huge discount to NAV – all while paying down their floating rate debt.
This is an excellent move and shows that the company is managed in the best interest of the shareholders. They are not just trying to increase the portfolio to justify higher wages. On the contrary, they do not hesitate to scale back operations to create shareholder value.
And it gets better:
FPI Chairman Paul Pittman just bought an additional $1 million worth of shares on the open market. This despite already owning $25 million worth of stock, which represents the majority of his net worth.
Paul Pittman is one of the most knowledgeable farmland investors in the world, so you couldn’t ask for a stronger vote of confidence than this:
He said the following in a recent phone call (emphasis added):
“As you all know, I’m a big shareholder myself and we’re taking actions that essentially arbitrage very high values for farmland against a deeply discounted stock. We will continue to do so for as long as it takes to reward our shareholders.“
We believe that as they continue to sell assets, buy back shares, pay down debt and interest rates eventually return to lower levels, FPI shares will revalue materially higher. The upside potential could be more than 50% given how far the stock has fallen, and much more in the long run, especially if they manage to build the asset management business they’ve been talking about.
RCI Hospitality Holdings, Inc. (RIK) is not formally structured as a REIT, but essentially operates as one. It is the only publicly listed company that specializes in the ownership and management of nightclubs. In case you are not familiar with the company, you can start by reading our investment thesis from by clicking here.
Its share price has fallen sharply over the past year, even as its cash flow has continued to grow:
As a result, management is now buying back shares.
RICK has a clear capital allocation plan to buy back shares whenever their price is greater than 10% FCF of cash flow and we are much more than that today.
Earlier this year, they said they would buy shares if they traded at $72 a share or less.
Today, they are trading at about $550, and so they have been buying about $100,000 worth of shares every day.
I think now may be a particularly good time to buy more shares of the company because we are now nearing the end of the period of difficult complications, which is actually what caused this recent selloff. Their same property number fell in recent quarters as things normalized in the post-Covid world. Here’s what the CEO recently posted (emphasis added):
“A lot of things have affected us. Bombs had a big increase post-Covid, so we’re up against tough compounds. We’ve had some labor struggles that we’ve had to deal with and recently the extreme temperatures in Texas that killed the night late. Which are mainly appetizers and drinks.
On the club side, comps have been great for about 2 years with free money and low fees. A slowdown in the economy always hurts for a few quarters as we adjust from guest quality to guest quantity. The summer holidays and the return to a more normal business cycle I think added additional pressure on SSS. Adjustments are made and compounds become lighter in mid-November. Let’s see how everything looks in December. If you listen to the last earnings call, you will hear me warn that this quarter would be weaker and that I expect to recover in 1-24.“
So the companies should improve starting in November and they expect a recovery in same-property sales in early 2024.
Additionally, RICK has many tailwinds going into 2024. New casinos will open and are expected to add ~$1 per share in free cash flow (“FCF”) once they stabilize. That’s huge for a company that’s currently earning $7-$8 FCF per share.
Finally, they have hinted at new club acquisitions in recent calls and they have money for it. If they were to announce another big deal, it would only add more upheaval.
So overall, we think $55 per share is very cheap, and we’re happy to have the opportunity to pick up more shares at these lows.
Insiders have also made a number of purchases over the past month:
Management knows best what the fair value of their assets is.
If they are aggressively buying stocks, this is a strong hint that their stock may be undervalued.
But if, in addition, you have significant internal purchases, then this is a very strong vote of confidence.
There are many such cases in the REIT sector today.