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Rhizome Partners Pitches REIT Stocks Vornado and HHC In 2020 Q1 Investor Letter

Alex Smith

New York-based Rhizome Partners published its Q1 2020 investor letter recently. A copy of the letter can be downloaded here. Bill Chen is Rhizome Partners’ founder and managing partner. The fund was founded in 2013. In Q1 2020, Class B investors of Rhizome Partners witnessed a 14.0% net loss compared to a 19.6% net loss witnessed by the S&P 500. The markets delivered negative returns due to uncertainty amid the COVID-19 pandemic.

In the said letter, Rhizome Partners highlighted a few stocks and Vornado Realty Trust (NYSE: VNO) is one of them. Vornado Realty Trust is a real estate investment trust which invests in office buildings. Here is what Bill Chen said:

"we recently bought Vornado Realty Trust which owns New York City office buildings. We are buying at around $700 per square foot for the New York City office portfolio and we get some development and non‐ NYC assets for free. The implied cap rate is in the high single digits while private market transactions are in the 4‐5% cap rate. Most importantly, the replacement cost for these assets are close to $2,000 a square foot. The company has historically published a NAV estimate in the $90s and we bought our shares for $34."

Bill Chen is bullish about Vornado Realty Trust but hedge funds have been getting out of Vornado since the end of September (see the chart here).

Rhizome Partners comments on HHC

In the said letter, Rhizome Partners also highlighted Howard Hughes Corp (NYSE:HHC) stock. Howard Hughes is a Dallas-based major real estate development and management company. Here is what Bill Chen said:

"Howard Hughes Corporation experienced challenges across all of their regions due to shutdowns and low oil prices in Texas. Recently, the company raised $600mm of equity capital from Pershing Square and other institutional investors. We have very mixed feelings on this transaction. This deal was done at a large discount to NAV. This equity raise does transfer away a lot of the future upside. At the same time, Howard Hughes Corporation now has over $1 billion of cash on the balance sheet and has the staying power to weather a total shut down for 2‐3 years rather than 1 year. We have mitigated this negative development due to our hedging which generated almost $24 per share profit from hedging versus a cost basis of $0.90. With some tactical trading, we further lowered our cost basis."

Hedge funds have been getting out of Howard Hughes stock since the end of June (see the chart here).

Disclosure: None. This article is originally published at Insider Monkey.