Description

Griffin Industrial, Inc

Nasdaq: GRIF

Recent Price: $40

Summary

• Griffin owns a portfolio of Industrial and Warehouse properties. Macroeconomic factors - including a shift to online commerce - have driven strong momentum for real estate in this market segment.
• Shares of Industrial REITS have benefitted, growing 156% since 2013 and outperforming general REITs by more than 2:1. Despite its pure-play Industrial portfolio, GRIF’s stock has moved relatively little.
• In the same timeframe, GRIF’s industrial leased sqft has grown 105%, NOI has grown 91%, it gained $33m on land sales, and realized 2.1x its cash investment on new development.
• GRIF has been left behind as there is no analyst coverage, no IR outreach, no earnings calls, 46% inside ownership, and a sizeable bank of undeveloped land.
• The acquisition of GRIF would be immediately accretive for a comparable REIT up to $85/sh representing +112%. Our target is set at $64 for a 61% return.

Summary

GRIF sits at the intersection of positive macro, regional, internal, and market trends yet has remained in obscurity thus presenting a compelling opportunity for buyers at today’s prices.

The substantial growth of global e-Commerce has driven a considerable increase in demand for Industrial and Warehouse space (“industrial” going forward in this article). Meanwhile, the concentration of industrial RE demand overlaps one-for-one with the centers of population in the United States.

Cities and their respective surrounding areas have a scarcity of undeveloped land, stringent zoning policies, and social/political opposition to increasing the number of industrial warehouses and 18-wheel trucks on their roads. As a result, the value of existing Industrial/Warehouse real estate - especially near major cities (and/or growing cities) - has seen a boom in demand. Share prices of industrial REITs have grown by >2x since 2013, far outpacing the broader REIT index.

GRIF owns 3.9m square feet of industrial RE representing 90% of its portfolio. 86% of GRIF’s industrial RE is located less two-hours’ drive from New York City. Industrial RE acquisitions in GRIF’s markets have been executed at cap rates that would suggest more than a double for GRIF shares. In addition to the increase in market value for GRIF’s industrial RE, the Company’s management team has created significant value from several internal areas.

Since 2013, GRIF’s leased square footage has grown 105%, its NOI has grown 91%, it has realized a 2.1x return on its net cash investment and sold $42m of real estate for a pretax gain of $32m. The Company has maintained conservative leverage primarily through single property mortgages, has realized leverage on its opex, and has grown its dividend 125%. Its shares however, have not experienced the rise commensurate with its RE value or management’s value-creation efforts. This is likely due to the lack of analyst coverage, limited IR outreach by management, no earnings calls, and a sizeable bank of undeveloped land.

Ultimately, we believe that GRIF represents a “no-brainer” acquisition candidate in a market that has seen $40b of acquisitions last year. An acquisition of GRIF would be immediately accretive to a larger publicly-traded acquirer at any price below $85 representing 112% upside. Meanwhile, our conservative valuation approach results in a $64 share price, 61% above today’s print.

Space Race

According to Bloomberg, over $40 billion of Industrial M&A has been announced last year. Large acquirers include Blackstone and Prologis, along with smaller REITS and PE Funds.

In fact, over the last five years warehouses, industrial properties have experienced significant growth. Historically the manufacturing and retail sectors have driven demand for industrial real estate. More recently however e-commerce companies such as Amazon (Nasdaq:AMNZ) have experienced significant growth have been taking up space in warehouses to fulfill online customer deliveries. As sales continue to grow, e-commerce companies are seeking urban infill warehouse locations to provide faster deliveries to customers. E-commerce product returns are also filling space due to the reverse logistics needs. Recent elevated M&A validates the notion that acquisitions are the fastest way to expand, especially in land-constrained markets where demand continues to outpace supply. Limited supply tends to keep vacancy low and allows for above-average rent increases.

These factors have driven strong momentum for real estate in the Industrial segment and the S&P 500 Industrial REITS sub-industry index has outperformed the overall S&P 500 REITS industry index by more than 2:1.

The Company

Griffin Land and Nurseries became Griffin Industrial Realty in May 2015 after its January 2014 sale of Imperial Nurseries to Monrovia. Griffin’s primary business is the acquisition, development, and management of industrial real estate properties in select infill, emerging, and regional markets.

The Company focuses on smaller light industrial/warehouse buildings in the range of 100-400k sqft. Griffin’s buildings are located in strategic markets of Hartford CT, the Lehigh Valley of PA, and the Greater Charlotte NC areas. In addition, Griffin owns a considerable bank of undeveloped land that it has a history of either selling for considerable gain or internally converting into income producing properties.

Griffin’s current lease portfolio consists of 3.9m square feet of Industrial/Warehouse (our focus) and 433k of Office/Flex Properties (ancillary assets).

Key markets and Assets

Hartford, CT (52% of Industrial/Warehouse Sqft | 100% of Office/Flex)

Griffin’s New England Tradeport (pictured below) is adjacent to Bradley International Airport and directly connected to I-91. It’s a premier master-planned industrial park. Major tenants include Tire Rack, Ford Motor, and Domino’s and the site is adjacent to Amazon, Dollar Tree, TJX, Walgreens, Home Depot, Tire Rack, Serta Simmons, Ford Motor, Domino’s, XPO Logistics, FedEx, and UPS.

One-Third of the US population is within a one-day drive of New England Tradeport and 24 million people are within a two-hour drive. The complex has major connectivity to New England and Middle Atlantic, and both NYC and Boston are two hours away. This region is densely populated with difficult entitlements (not-in-my-backyard) and industrial land sites are limited.

Lehigh Valley, PA (34% of Industrial/Warehouse)

The Lehigh Valley referred to colloquially as The Valley is a metropolitan region officially consisting of Carbon, Lehigh and Northampton counties in eastern Pennsylvania and Warren county on the western edge of New Jersey. The region is well-located for local and regional distribution, has lower operating costs vs. areas closer to the coast, and has considerable barriers to entry due to the scarcity of well-located development sites, a protracted approval process, and onerous zoning regulations.

Griffin’s 1.3m square feet of Class A buildings are within a one-day drive of 80% of the US population. Its facilities have multi-directional connectivity to I-78, US 22, and Route 33. It’s 60 miles to Philadelphia, 90 miles to NJ Ports and NYC, and 175 miles to DC.

Charlotte, NC (14% of Industrial/Warehouse)

Charlotte is a high-growth MSA at the intersection of major ports (Charleston & Savannah) and major highways (I-yy, I-85, I-40). The industrial market is well located for local, regional, super-regional distribution and has Class A rents below the national average. As a result, the markets Industrial vacancy rate is 6.2% with 33.4% rent growth from 2012 to 2019. Griffin has a significant pipeline for expansion in this region.

Current Investment Opportunity

Despite its pure-play direct industrial exposure, GRIF’s stock has moved little relative to the Industrial REIT index since 2013. During this same period GRIF’s leased square footage has grown 105% and its NOI has grown by 91%.

Moreover, since 2013 GRIF has gained $32m on land sales and generated a 2.1x return on cash deployed for industrial / warehouse property development.

The Net Operating Income (NOI) from Griffin’s industrial property portfolio at conservative cap rate of 6.5% is worth $370m. The Company’s portfolio of undeveloped property is conservatively worth another $69m. Finally, its office space portfolio is worth $18m at book value. Altogether, GRIF’s collection of assets is worth $457m; or $327m net of debt. Meanwhile, its market cap is only $203m. The delta represents 61% upside for investors at today’s prices.

We believe GRIF has been left behind despite its significant growth and execution. There is no analyst coverage, the Company has done little IR outreach, and management does not conduct earnings calls. Further, insiders represent 46% ownership of the stock, and the balance sheet contains a sizable bank of undeveloped land. None of the above indicate to us an existential flaw in the business, management, execution, or forward opportunities. An acquisition of this business by a larger REIT is the likely outcome in our view.

Valuation

The table below depicts a summary view of ACM’s valuation for GRIF’s shares from a number of angles. The sections that follow detail each of the key valuation components in the Summary chart.

Valuation Component #1: Industrial Portfolio

Recent comparable transactions including Prologis’ acquisition of Liberty Property (NYSE:LPT) announced late last year and FRP Holdings’ (Nasdaq:FRPH) sale to Blackstone in March 2018 have been at 4.9% average cap rates representing 124% upside for GRIF:

Prologis’ Acquisition of Liberty Property Late last year Prologis (PLD) announced the acquisition of Liberty Property (LPT) for $12.4b. In the TTM period, LPT generated $489m of NOI representing a 3.9% cap rate. This transaction deepens Prologis’ presence in markets including Lehigh Valley and Central PA; key markets for GRIF. A 3.9% cap rate on GRIF’s industrial portfolio would represent 186% upside from today’s share price

FRP Holdings’ Asset sale to Blackstone In March 2018, FRP Holdings (Nasdaq: FRPH) sold 3.9 million square feet across 41 industrial warehouses to Blackstone for $358.9m. Total NOI generated from the assets sold to Blackstone was $21.1m representing a 5.9% cap rate, superior to our 6.5% assumption in our valuation of GRIF. The FRPH portfolio of properties are mainly located in Baltimore (Tier II) and Washington DC (Tier I) markets which are either on par to - or inferior to - Griffin’s markets.

Meanwhile comparable companies Prologis and STAG Industrial (NYSE:STAG) trade at 3.9% average cap rates representing 180% upside for GRIF. Finally, CBRE’s Cap Rate Survey indicates 93% upside on a blended basis.

Valuation Component #2: Excess / Undeveloped Land

It is clear that the value of GRIF’s excess land is under-reported on its periodic balance sheets. For example, since 2013 GRIF has sold $41.8m of undeveloped land for $32.4m of gains net of expenses. This implies that the Market Value for the land that GRIF sold was 4.5x the value that GRIF held the assets on its balance sheet for.

GRIF still holds a considerable volume of undeveloped land on its balance sheet. The Company doesn't dis-aggregate the undeveloped portion of its holdings on its balance sheet. Management does however, break out the book value of its undeveloped land holdings in the annual investor presentation. Per its Annual Meeting presentation in May 2019, GRIF holds 3,435 acres of land at a book value of $18.5m.

Our analysis on a line-item basis suggests that GRIF’s undeveloped land holdings are worth $51m more than is reflected on the books.

Specifically:

• Master-Planned Industrial: GRIF holds 227 acres in its New England Tradeport. It sold 99 Acres of this land in 2012 for $75k / acre. This land has only increased in value over time. Assuming the 2012 sale at $75k per acre implies a market value of $17.1m vs. a book value of $4.3m.
• Commercial / Mixed Use: This acreage is in Griffin Center. A 2017 sale brought $122k / acre. Although land in this area has increased in value considerably since then, we take a conservative approach by haircutting this to $80k / acre to arrive at a market value of $25.1m vs. the $1.6m reflected on GRIF's books.
• Nursery Land for Lease: the Connecticut nursery generates $700k / year in triple-net lease revenue. Assuming a 6.5% cap rate implies this asset is worth $10.8m despite it being on GRIF's balance sheet at $1.5m
• Other Land Holdings: GRIF sold 116 acres out of this parcel for $7,500 / acre. Applying that price to the remaining acreage implies a $6.7m market value for this asset vs. a $1.5m mark on GRIF's books.

Valuation Component #3: Office / Flex Portfolio

We value GRIF’s Office / Flex portfolio at net book value.

Investment Considerations

• Cap rates for Industrial / Warehouse properties are at low levels. While we believe trends are in place (eCommerce, difficulty permitting new land) for this to continue, to the extent that cap rates have an adverse move, the overall industry will be impacted including GRIF.
• An adverse interest rate trend would have an impact on GRIF's refinancings although this is somewhat mitigated by the long-term mortgages and largely single-property collateralization.
• An activist could have a field day with this company if he or she were unconcerned about the smaller size and inside ownership; the 46% inside ownership makes this route difficult but not impossible.

Catalyst

Ultimately, we believe that GRIF represents a “no-brainer” acquisition candidate in a market that has seen $40b of acquisitions last year. An acquisition of GRIF would be immediately accretive to a larger publicly-traded acquirer at any price below $85 representing 112% upside. Meanwhile, the Company continues to accrete value to shareholders via the transition of its non-income producing land through both development and profitable sales.

We believe that GRIF has flown under the radar of potential acquirers to date. It has grown largely organically over the last several years without making any market "splashes" with significant acquisitions or large sales. Moreover, it was previously known moreso as a nursery company the majority of its lifespan; the transition from which has the added benefit of making it easier to understand and value the business.

GRIF has sold $42m of excess land in the last 6-7 years and reinvested those proceeds into Industrial assets which are considerably easier to value both from a value per square foot as well as from an NOI / Cap rate standpoint. As GRIF transitions from an opaque collection of undeveloped assets to an income-producing business with well-defined assets, we believe potential acquirers will take note.