Rhizome Partners recently released its Q2 2020 Investor Letter, a copy of which you can download here. The fund posted a return of 18.3% for the second quarter (net of fees), underperforming its benchmark, the S&P 500 Index which returned 20.6% in the same quarter. You should check out Rhizome Partners' top 5 stock picks for investors to buy right now, which could be the biggest winners of the stock market crash.
In the said letter, Rhizome Partners highlighted a few stocks and Griffin Industrial Realty Inc. (NASDAQ:GRIF) is one of them. Griffin Industrial Realty Inc. (NASDAQ:GRIF) is engaged in real estate business. Year-to-date, Griffin Industrial Realty Inc. (NASDAQ:GRIF) stock gained 29.5% and on August 21st it had a closing price of $51.50. Here is what Rhizome Partners said:
"Griffin Industrial Realty – Griffin Industrial Realty experienced a 66% price gain during Q2 and contributed a roughly 5% gross return to the fund. We have been stating for years that Griffin trades at a large discount to net asset value. The market shrugged and ignored the progress that the company has been making until the company announced that Gordon Dugan has joined the board as the new chairman. Since then, the company has started to host a pre‐recorded webcast for its quarterly earnings call. It has also overhauled its investor presentation and it now looks “institutional quality.”
Fundamentally, the company came through the crisis unscathed. Griffin leased 409k sqft of space at an 8.1% cash increase over the expiring leases. The company collected 100% of April rent, and 99% of both May and June rent. We knew that Griffin conducted high quality tenant selection. But this extraordinary outcome surprised us. While we believe the quality of our underwriting was demonstrated here, there is an element of “luck” that COVID‐19 favorably affected the warehouse sector as manufacturers and retailers scrambled for warehouse space during the quarter. A supply chain transformation that would have normally taken 3‐5 years occurred in a matter of 2‐3 months. Every recession is different. During the Great Financial Crisis, warehouses were disproportionally hurt as the US economy contracted. While the US GDP decreased at an annualized rate of over 30% during Q2, the logistics networks were rearranged from stores to warehouses leading to increased demand for warehouses.
Value investing is fascinating in that we can under perform for years despite conducting thorough underwriting and buying at a very large discount to intrinsic value. Griffin Industrial Realty is a prime example of this. There were minimal mark‐to‐market returns for Griffin from 2017 to 2019. All the returns occurred in a matter of 2 months in May and June of 2020. The mark‐to‐market performance on Griffin was essentially flat for 3 years and then spiked to an 18% CAGR for the shares that we still own today. We believe that the sudden re‐rate is due to the convergence of the market’s views of Griffin towards our view as illustrated by the crude sketch. We have physically visited Griffin’s warehouses all over the US, analyzed their capital allocation, and spoke with management frequently. We believe that the CEO is a high caliber operator and capital allocator. The market generally believed that the company was being run for the benefit of the family. We believe that the warehouses are Class A and well‐located and the market does not believe that the warehouses deserve a 4.5‐6.0% cap rate. The market also assigns virtually no value for Griffin’s land holdings.
We attribute the convergence in perception of value to the following factors. First, Gordon Dugan joined the board as Chairman and invested $2.5mm of his own capital. The rest of the market took notice and started pondering “What does Mr. Dugan see in Griffin?” After all, he did generate a 6X return for his previous shareholders at Gramercy Property Trust that was sold to Blackstone in a $7.6bn deal. Investors have been looking for a way to ride “side car” on his new public venture. Second, the rent collection and new lease signing during Q2 alleviated investor doubts of Griffin’s business. As the shares rallied in May and June, we trimmed our holdings in Griffin. But we had a light bulb moment and decided to hold onto some of our shares. This is largely due to us recognizing the new possibility that Griffin may actually trade above private market NAV. Our channel checks revealed that Gordon Dugan has an incredible Rolodex of buy side contacts. He is well‐respected and well‐connected. Michael Gamzon, Griffin’s CEO, essentially recruited Gordon Dugan to join the board because he understood that Mr. Dugan’s involvement would bring instant credibility. In addition, his father‐in‐law had to step down and give up $350k of annual executive chairman compensation. These facts reflect the opposite of a business being run in the interests of a large controlling family.
Under normal circumstances, we would fully exit our position at 80‐90% of NAV. But Griffin has an exciting story tied to the theme of e‐commerce taking share from traditional brick‐and‐mortar retail. Most of the comparable warehouse REITs trade at a premium to NAV. We believe that there is a chance that Griffin may trade at a 10% premium to NAV and then use the common stock as a currency to make accretive acquisitions and development deals. Due to the small size, a few successful deals could move the needle and we can see the shares trade to $80‐$100, a substantial upside to the current price. While we have trimmed our position by about half, we will wait and see if the company can convince the capital markets to buy into their growth strategy."
Stuart Monk / shutterstock.com
This isn’t the first time Rhizome Partners talked about Griffin Industrial Realty Inc. (NASDAQ:GRIF) favorably either. The investment firm has been a long time Griffin Industrial Realty Inc. (NASDAQ:GRIF) bull. In April, we shared Rhizome Partners bullish Griffin Industrial Realty Inc. (NASDAQ:GRIF) thesis in this article.
In Q1 2020, the number of bullish hedge fund positions on Griffin Industrial Realty Inc. (NASDAQ:GRIF) stock increased by about 33% from the previous quarter (see the chart here), so a number of other hedge fund managers seem to agree with Griffin's growth potential. Our calculations showed that Griffin Industrial Realty Inc. (NASDAQ:GRIF) isn't ranked among the 30 most popular stocks among hedge funds.
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