Description

For small funds and PA Only

Griffin Industrial Realty is a real estate holding company that currently owns warehouses in Connecticut, Lehigh Valley, PA, and Charlotte, NC.   The company also owns some office/flex space in Connecticut and four thousand acres of land mostly in Connecticut and Florida. 

Warehouses 

1A) As of Nov 30, 2017, the Connecticut warehouse portfolio totals 1.818mm sqft and is 96% leased.  The Connecticut warehouse portfolio also has a build-to-suit new construction for 234k sqft with a 12.5 year lease.  The tenant also has an option to expand their building by 54k sqft which would require an extension of the lease term by an additional 10 years.  This new building should be completed and occupancy take place by year end 2018.  This should bring Connecticut portfolio to 2.052mm sqft by year end 2018.

1B) The Lehigh Valley Portfolio consists of roughly 1.183mm sqft and is 100% leased.  We suspect that the current leases are in the $4 range while market is likely in the $5-6 range.  In late 2017, Griffin recently closed on a 14 acre site intended for a 134k sqft warehouse development.  Construction is anticipated to begin in 2018 first quarter and complete around summer time of 2018.  In early 2018, The Company also purchased an additional 14 acre site with potential for development pending due diligence.  If both projects are built, the total portfolio should be 1.450mm sqft in the next 12-24 months. 

1C) In Jun of 2017, The Company bought a 277k sqft warehouse building in Concord, NC (Charlotte).  It was about 74% leased at the time and the company quickly filled the remaining 26% of the space shortly after closing.  In Oct 2017, The Company bought a 22 acre parcel and intends to develop a roughly 250k sqft warehouse.  The Charlotte acquisition was a beachhead acquisition to understand the local market.  The Company tends to study markets for years before entering a new market.  They also prefer to make an initial acquisition and use the local broker relationship and leasing information to make better decisions for future development and acquisitions.   

On an as is basis, the warehouse portfolio total 3.278mm sqft.  At $80-100 a sqft, it is valued at $262mm to $328mm or roughly $52 to $66 per share on an unlevered basis.  

Offices/Flex

2A) The Company also owns about 433k sqft of office/flex space in Connecticut.  This is clearly the challenging part of their business.  The portfolio is 71% occupied.  If we assume the same $80-100/sqft valuation, this portfolio is valued at $35-43mm or roughly $7 to $9 per share.  

Land Parcels

The 4,000 acres of land that Griffin owns is broken down to different uses.  Per their investor presentation from their 2017 shareholder meeting:

3A) 245 Acres of Master Planned Industrial Parcels at 7.1mm book value – We believe that this is worth roughly $22mm.  There is enough land to add about 1.1mm sqft of warehouses which would add about $6mm of NOI.  This part also includes land adjacent to Amazon and Trader Joe’s distribution centers built on land sold by The Company in the last few years.  This portion of land is most easily monetized via development of warehouses over time.  

3B) 307 Acres of Commercial/Mixed Use Parcels with a $1.6mm book value – We believe that this is worth another $22mm.  The Company have typically sold land parcels at about $100k/acre for this type of land near their office/flex portfolio.

3C) 644 Acres of Land Under Agreement for Solar Projects with a book value of $0.5mm – The contract prices are $15.5mm

3D) 297 Acres of Residential land with book value of $9.6mm – We will use the $9.6mm figure

3E) 1,736 Acres of Nursery Land with book value of $2.1mm – The tenant can buy for $12.9mm and Grif receive about  $1.0mm of rent a year. Although the Florida tenant recently filed for bankruptcy.  Florida rent is roughly $400k.

3F) 814 Acres of Misc Land Holdings with a $2.7mm book value – We valued the rest of the portfolio at $15k/acre which is significantly lower than the $100k for land near their office/flex portfolio or the $24k for solar, or the $32k for residential.  

Total Value of $94mm or roughly $19 a share.  We believe that we can be precisely wrong, but we are in the right ball park.  

Valuation

Low End $262mm Warehouse + $35mm Office + $94mm Land Parcels = $391mm value or $78 per share

High End $328mm + $43mm + $94mm = $465mm or $93 per share

Cap Rate Analysis

Low 7.0% blended cap rate for warehouse and office ($22mm)/7% + $94mm Land Parcels = $408mm or $82 per share

Mid 6.4% blended cap rate for warehouse and office ($22mm)/6.4% + $94mm Land parcels = $438mm or $88 per share

High 5.5% blended cap rate for warehouse and office ($22mm)/5.5% + $94mm Land Parcels = $494mm or $99 per share

As of Feb 28, 2018, The Company has net debt of $102mm or roughly $20 per share. 

So we have a range of value from $59 on the low end to $79 on the high end for NAV as of today versus the trading price of $37-38 per share.  This represents upsides of 59% to 112% as of today. 

Capital Structure

All of The Company’s assets are financed with non-recourse mortgages on individual buildings or cross collaterals of 2-3 buildings.  94% of mortgages mature after 2025.  Although the mortgages are floating, The Company has swapped into fixed rates in the low to mid 4% range.  Griffin retains the option to selectively default on the mortgages.     

Griffin’s run rate operating cashflow is about $10mm a year which would put the P/FFO at about 19x which may look on the high end.  But P/FFO of Prologis and Terreno Realty is in the 24-29x range because investors are bullish about industrial space.  Griffin is subscale and also pays for a lot of the development cost out of its SG&A.  So FFO would be depressed.  Yet Griffin trades at a 5-10x lower P/FFO multiple than its industry comps while it contains $19 per share of land parcels.   On a cap rate basis, Griffin is extremely cheap at 11-12% cap rate if we assume the land parcels are sold and used to buy back stock at the current price or at about 10% cap rate if they sold the land parcels and use 1031 exchanges to buy properties at a 6.5% cap rate.  The more realistic outcome is that Griffin will develop some of the land parcels into warehouses which equates to 700k sqft that we know about and probably another 1.0mm sqft pending.  This is against a 3.3mm sqft of warehouses today.  

On the low end - 2 Years Out

The 700k sqft of warehouses get built out adding $4mm of NOI and cost a $1.5mm of interest payment.  We also assume that the company takes on an additional $30mm of debt for the construction of the project.  This will bring NOI to about $26mm and FFO to about $12.5mm. 

Net Debt will be $102mm current net debt +$30mm additional debt - $23mm cash generation + $12mm cash used towards construction (assume $60/sqft of construction cost) = $121mm of net debt

The company will be trading at 15x P/FFO with over $90mm of land parcels while comps are 24-30x.  On a cap rate bases, the company will be trading at 8.4% cap rate with over $90mm of land parcels.  This assumes no land parcel sales. 

On the High End - 2 Years Out 

Griffin adds 1.2mm sqft of warehouses, partly through land sale and 1031 exchanges into warehouses and partly through internal developments.  Let’s say 1.0mm through internal build out and 0.2mm via 1031 exchange.  NOI will be about $7mm higher which will be $29mm.  Assume $60/sqft of construction cost.  The 1.0mm will cost $60mm.  Assume that we add $40mm in net debt and $20mm paid via operating cashflow.

Net debt will be $102mm + $40mm additional debt + $25mm additional cash build - $20mm cash used towards construction = $147mm net debt

200k sqft of warehouse at $80/sqft cost $16mm, hence $94mm of land parcel drops by $16mm and add $1mm of frictional cost.  Total land parcel becomes $77mm. 

New EV = $188mm + $147mm = $335mm

New NOI = $29mm

Cap Rate analysis = 8.7% plus $77mm of land parcels

FFO Analysis = Current FFO $10mm + $7mm additional NOI less $2mm of additional interest = $15mm

P/FFO = 12.6x plus $77mm of land parcels      

Management Team

The shares are heavily owned by insiders, Cullman and Ernst Group at 46.5%. Gabelli Fund owns 33.6%.  Our understanding is that the family has own the stock for a long time.  This entity is a spinoff of Culbro which traces back to tobacco farming in Connecticut over a hundred years ago.  Our understanding is that there are some factions of the family that wants to keep owning and there are factions who want liquidity.  The shares have traded in a range between $20 and $30 for over ten years now.  I am confident that the family and the CEO want a higher share price so that those who want liquidity can get it at the right price.  Hence the CEO is receptive to talking with investors.  If you are looking to talk to management, the CEO Michael Gamzon is the point person.        

Gabelli has been at odds with the family at times.  Overall, I am happy that he plays bad cop and keeps governance in check.  If the family members sell some shares, it would make activism much easier.  I am not advocating for activism.  The CEO and the management has actually executed very well in the last few years.  They made the right call getting into the LeHigh Valley at the right time.  Now they own a 1.2mm sqft that is 100% leased and could potentially have rent increases of 50% when the leases mature.  They have done an amazing job leasing up their Connecticut portfolio and bought occupancy to 98% in the warehouse portfolio.  They often study new markets for years before entering them and often make one acquisition to gain on-the-ground knowledge prior to additional activities.  They have publicly said that acquisitions are expensive.  They much prefer to develop via built-to-suit within their industrial park in Connecticut.  They have not experience any development difficulties and projects have been completed on time and on budget so far.  They have financed their portfolio well and put non-recourse debt on 1-3 buildings.  They have been laser focused on growing the warehouse portfolio and executed very well so far.  Overall, they have demonstrated patience and restraint regarding capital allocation.  In short, they likely behave this way because they own so much of the company.   I think management team should get 2-3 years to execute before contemplating any activist actions.  

Industry Trends and Comparables

We own FRP Holdings as well.  From that experience, we have been attending industrial conferences lately.  Generally, the market believes that as more retail sales shift from malls and shopping centers via Amazon and e-commerce, there is an increased demand for warehouses.  Most market participants believe that this trend is structural and will continue for a long time.  Warehouse in densely populated areas like San Diego, Seattle, Northern NJ are supposedly trading for 4% cap rates.  People generally like this asset class because warehouses are big boxes without a ton of tenant improvement needs.  All the common rules of real estate apply here as well.  Location, Barrier to Entry, Class A, Class B etc.  Where does Griffin fall?  Most of Griffin’s assets are Class A and built within the last 10 years.  Griffin also has more tenants that made their locations strategic as regional distribution centers rather than plain vanilla 3^rd party logistics warehouses that can fill and empty out along with the economy.  Griffin’s tenants are a bit more sticky than most.  In addition, Griffin’s Connecticut warehouse portfolio is in a master planned industrial park.  Per our conversation, people generally pay a premium for a park rather than an one-off building off some street.  LeHigh Valley is a strategic location.  It is within 4-6 hours to New Jersey and New York City and one can easily access the Midwest going west.  Although there appears to be a ton of farm land readily convertible into new warehouses, NIMBYism and truck traffic on small two lane roads acts as a barrier to new supply.  The annual shareholder presentation reference an industrial cap rate of 5.41% and estimate that Lehigh Valley cap rate to be 5 to 5.5%.  Coupling this with the delta between Griffin’s existing $4 rent in Lehigh Valley and the market of $6 rent, a 5% cap rate seems reasonable as the new rent would imply a 7-7.5% cap rate. 

Most importantly, Blackstone recently bought out FRP Holdings warehouse portfolio at an estimated 6.4% cap rate.  The portfolio is about the same size as Griffin.  Griffin actually has much better occupancy stats at 98% versus that of a 90-93% occupancy figure.  

If we start using a 5.5% to 6.4% cap rate for Griffin portfolio, NAV very quickly gets into the $67 to $78 or 80% to 110% higher than the current share price.  If we look out two years assuming 29mm of NOI and $147mm of net debt, the NAV starts to get into $76 to $91 range.  The NAV two years out represents 104% and 145% upside.   

Because this is Value Investors Club – We will use a conservative 7.0% cap rate and we still get a NAV of $61 as is today and a NAV of $69 per share in two years assuming $29mm of NOI.   The NAV today and two years out represents 64% and 86% upside.   

Long Term Goal

I speculate that Griffin wants to own about 5mm sqft of warehouses and convert into a REIT.  Although, there are no plans for a REIT conversion in the next 1-2 years because they have a slew of new projects to develop and lease up which is more difficult to do under a REIT structure since you have to pay out the cashflow.  In the long run, Griffin will likely be in 3-5 markets as the family doesn’t want too much of their assets concentrated in one geographic location.     

RISK

Interest Rate – Although somewhat mitigated by long term mortgages

Economic – Rent, occupancy etc

Management – Insiders own a large chunk somewhat mitigated by Gabelli, activism is likely available if needed given Gabelli’s large 33% stake.  Activism would be easier if family sells off some of the shares.  

Shelf Registration – Company recently filed a shelf registration and may dilute sharecount.  Additional share counts have a mitigating effect by diluting family ownership making activism easier if needed.  

Investor Presentation and Site Plans

This is a presentation from the 2017 annual shareholder meeting.  Many of the data points are now dated.  But it does provide a good overview of the company's assets and recent progress. 

http://www.griffinindustrial.com/assets/uploads/files/GRIFFIN%20INDUSTRIAL%20REALTY%20Annual%20Meeting%20Presentation%20May%202017%20FINAL%20%5BRead-Only%5D.pdf

These site maps provides good visuals of Griffin's various real estate holdings

http://www.griffinindustrial.com/assets/uploads/files/NETP%20-%20Master%20Plan(2).pdf

http://www.griffinindustrial.com/assets/uploads/files/GriffinLand-SiteMaps_PC.pdf

http://www.griffinindustrial.com/assets/uploads/files/GriffinLand-SiteMaps_GC.pdf

http://www.griffinindustrial.com/assets/uploads/files/GriffinLand-SiteMaps_LVTP.pdf

http://www.griffinindustrial.com/assets/uploads/files/GriffinLand-SiteMaps_PC.pdf

Catalyst

Rapid development of warehouses making it easier for investors to value on a NOI/Cap Rate and/or P/FFO multiple 

Sale of land parcels and recycled into income producing assets via 1031