Tag Archive for: Welltower

Mauna Loa

Mauna Loa is Earth’s largest active volcano. The Hawaiian mountain is also the world’s tallest. Mauna Loa rises 30,085 feet from base to summit which is higher than Mount Everest measured from sea level to peak (29,029 feet). To say that much lies below the surface is an understatement. The weight of millions of years of volcanic eruptions has actually caused the Earth’s crust to sink by five miles. Therefore, the total height of Mauna Loa from the start of its eruptive history is an astounding 56,000 feet.

The 45,000 residents of Hilo, Hawaii, while living among some of the most beautiful surroundings in America, also face the possibility of extinction. Mauna Loa last erupted in 2022, but lava flows were minimal. Eruptions damaged small villages in 1926 and 1950. The most recent serious threat occurred in 1984, when massive rivers of molten rock stopped just a short distance from Hilo Bay. The threat to Hilo is not an apocalypse of Pompeian proportions. No, the real danger is a slow and painful demise. If Hilo Bay fills with lava, cargo ships can’t dock. The Big Island would cease to be habitable.

Now if you think I’m about to use my newfound knowledge of volcanic peril as some kind of metaphor for the current state of financial markets, you would be absolutely correct. It’s coming down Fifth Avenue. About as subtle as Captain Kirk wearing a Bill Cosby sweater.

In my metaphor, Warren Buffett is the Pacific Ocean near Hawaii. Vast, deep, and refreshingly cool with about $325 billion of cash on hand after selling more Apple stock, according to Saturday’s 3rd quarter report. Yes, he’s got some risk from storms but mostly it’s smooth sailing. Mauna Loa is the AI bubble. As lava keeps building up, the peak gets higher. It’s thrilling… and dangerous.

Technology companies will spend $200 billion this year on capital improvements related to artificial intelligence. This technology will require the addition of 14 gigawatts of additional power by 2030. To put that in perspective, Berkshire Hathaway Energy’s coal plant in Council Bluffs produces 1,600 megawatts of electricity.

Do you think nuclear is the solution? Well, Georgia just opened our country’s latest nuclear facility. The Alvin W. Vogtle Electrical Generating Plant sits along the Savannah River in Waynesboro. This marvel took 15 years to build and cost a mere $35 billion. Its generating capacity is 4,500 megawatts.

Technology has a history of delivering miracles, but it also bears witness to a poor track record of capital allocation. Look no further than Lumen Technologies (LUMN), the offspring of the fiber optic cable bubble of 1999-2001. Lumen holds the fiber assets of CenturyLink, Qwest and Level 3. If those names sound familiar, there was nothing like the Level 3 bubble for Omahans of a certain vintage who rode the Kiewit spinoff to dizzying heights and painful lows. And we all remember the Qwest Center. Despite a debt restructuring earlier this year, LUMN remains safely in junk territory and will be fortunate to stave off bankruptcy.

You didn’t come here for macro-economic observations or a mini-course in geography. There’s investment ideas to be had.

Welltower

My contention that Welltower remains 40% overpriced relative to the underlying value of its assets took a step back after the company raised annual per share FFO guidance to $4.33 from $4.20. In my estimation, this upgraded forecast is worth $1.3 billion of additional net asset value and raises the total to $50 billion. A nice boost, indeed. Shares rose accordingly.

Despite the improved performance, my bearish outlook for Welltower remains firmly intact. If you’re scoring at home, you’ve got a REIT with a market cap of $80 billion yielding less than 2% and trading at 30 times FFO. The company also announced a $5 billion equity offering. REITs like Welltower that invest capital at modest yields are forced to turn to equity for growth when the debt gets too expensive. They become dilution machines.

CK Hutchison

There are times when value traps are like a Siren’s song. It’s like watching Lethal Weapon when nothing else is on. You know that there is no plausible reason why Gary Busey’s henchmen can’t kill Danny Glover in the middle of the desert, but you’re damn well going to watch anyway because you need proof that this cinematic muddle was deserving of three sequels. But thank God they kept going! Lethal Weapon 2 has that fantastic moment when Joe Pesci brings Danny Glover to the South African consulate and tells them he wants to emigrate to the land of Apartheid.

Anyway, CK Hutchison is the descendant of the Hutchison Whampoa conglomerate built over decades by Li Ka-Shing in Hong Kong. I wish there was an updated biography of Li who is now in his mid-nineties and has passed the reigns to his son. He certainly belongs in the business hall of fame. CK Hutchison has a market capitalization of about $20 billion and holds some of the world’s largest port infrastructure assets and telecom businesses. The stock trades at 29% of book value and offers a dividend yield of about 6%.

I ran a few back of the envelope numbers, and CK Hutchison pencils to roughly $60 billion of value. Yet, the stock has been “cheap” for many years. Why decide to invest now? It seems like the second generation of Li’s family (now in their 60’s) has figured out that something needs to be done for long-suffering investors. The company listed its infrastructure assets on the London exchange in August as “CK Infrastructure”. They have also contributed their European mobile networks to a joint venture with Vodafone.

The appeal of CK Hutchison is that its port infrastructure is irreplaceable. Unlike auto manufacturers and steel companies which deservedly trade below book value due to brutal competition, ports are generally impervious to competition. Nature only created so many locations around the globe where massive cargoes can dock. Globalization may be taking a step back, but it’s not stopping. I’m going to dig more deeply into CK Hutchison.

Until next time.

DISCLAIMER

The information provided in this article is based on the opinions of the author after reviewing publicly available press reports and SEC filings. The author makes no representations or warranties as to accuracy of the content provided. This is not investment advice. You should perform your own due diligence before making any investments.

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Strange

In 1990, Jeremy Irons won an Oscar for his portrayal of the mercurial and debonair Claus Von Bülow in Reversal of Fortune. Von Bülow captured tabloid headlines for the attempted murder of his Newport socialite wife, Sunny (Glenn Close). The case seemed hopeless. Only Claus had access to the insulin that left Sunny in a diabetic coma. Evidence was only part of the problem. Claus was not exactly a warm and fuzzy guy. With his angular chin and vaguely European accent, the ascot-wearing Von Bülow was aloof and arrogant. Against the odds, the young professor Alan Dershowitz (Ron Silver) and his earnest team of Harvard Law students delivered a stunning acquittal. 

At the end of the movie, Claus sits in the back of his chauffeur-driven Jaguar as Dershowitz bids him farewell, saying: “You know, it’s very hard to trust someone you don’t understand. You’re a very strange man.” As the door closes, Von Bülow deadpans, “You have no idea.” 

“Strange” is subjective, of course, and context matters. Claus was probably a normal guy if your scene was 1970s ski chalets in Gstaad. To a working class jury in 1980s Rhode Island, he was eccentric. 

If you’re on the artificial intelligence bandwagon, everything might seem pretty normal right now. Short term interest rates are coming down and we may be on the cusp of a new information technology miracle. In this exuberant era where the NASDAQ sets new records nearly every day, Omaha’s Warren Von Büffett seems strange. After all, he’s sitting on $240 billion of T-bills. Imagine selling all that Apple stock right when this AI thing is just starting to take off!

What’s strange? What’s normal? I like Jodi Picoult’s thoughts on the matter: “I personally subscribe to the belief that normal is just a setting on the dryer.” Ms. Picoult usually digs deep into matters of the heart, but she could just as easily be opining on the current state of financial markets.

The value of corporate equities as a percentage of GDP has only been this high two other times. While most of us mortals must pay our debts by forking over cold hard cash to the lender, huge numbers of heavily indebted firms are paying their interest bills by issuing IOUs. You need to squint to see the spreads on corporate bond yields. It turns out that nearly losing one presidential candidate to assassination, and the other to dementia doesn’t have much of an effect on markets. Did I mention there are two wars with nuclear implications going on? How about the collapse of the world’s second largest housing market? Nope, hold my beer because the QQQs keep ripping higher. 

I remember the Three Mile Island meltdown. It was not an auspicious moment in American history. We had kind of a Jimmy Carter-malaise thing going down, and our status on the world stage was being put out to pasture by Ayatollah Khomeini. We couldn’t even manage nuclear power plants very well. When they said we’re re-starting Three Mile Island again because we need so much power to run these AI chips, my bullshit detector issued an alert. 🚩

Welltower (WELL) is a company that Claus Von Bülow might prefer: Very strange, indeed.  Welltower stock behaves like it belongs among the exalted world of artificial intelligence  – surging ahead by 45% over the past six months alone. Given the levitating stock price, it probably shouldn’t come as a surprise that Welltower’s CEO quoted Jensen Huang in his last shareholder letter. The excitement fades pretty fast when you realize that Welltower operates in the staid world of housing elderly folks.

While other senior living companies trade within a justifiable range of the value of the underlying assets, Welltower seems divorced from reality. By my reckoning, the company trades at a premium of over 40% to its underlying bricks and mortar. Welltower is a Toledo-based owner of senior living facilities that trades at a market capitalization of over $80 billion, or $132 per share. However, a reasonable valuation of the real estate indicates that the stock should trade closer to a level of $50 billion. That computes to a share price near $80.

As a real estate investment trust (REIT), Welltower is required to pay out most of its earnings as shareholder distributions. Yet the yield on offer is a paltry 2%. Growth can only be achieved by adding external capital, and Welltower has issued billions of dollars in new stock since the debt markets became less hospitable. In December 2022, the company also gained the dubious distinction of a write-up by Hindenburg, the famed short-seller, for questionable dealings with the mysterious Integra Health Properties.

Moreover, Welltower is not a simple business. WELL has a complex collection of disparate facilities throughout the country operated by a diverse set of managers. Many facilities are net-leased to other operators leaving Welltower the simple role of cashing rent checks as a landlord. Many others are operated hands-on by the company. Looking after the elderly is a tough business. You need skilled medical staff to run these properties in addition to a legion of cleaners and minders. The government is constantly looking over your shoulder (especially after the whole Covid fiasco), and Medicare money comes with strings attached.

Welltower also acts as sort of a bank for senior housing developers, with over $1.7 billion of notes receivable on the books. To complicate matters further, WELL also owns a collection of outpatient medical clinics.

There are certainly many reasons to praise Welltower. The company disposed of $5 billion of struggling assets during the dark times of Covid, and rebounded with a $10 billion acquisition frenzy over the past three years. Welltower added another $2 billion of development during that time. In 2023, operating income (including depreciation) increased by over 30%. 

Hindenburg’s questions aside, I don’t see anything nefarious about Welltower. It is just really expensive. Welltower is a business which earns returns on capital around 6% and returns on equity around 7-8%. This won’t set your nanna’s pulse racing. Through 6 months of 2024 reporting, operating income has only risen 5%. Meanwhile, notes receivable from operators have doubled since 2022. Who’s borrowing from Welltower at 10% interest rates? Probably not the most seaworthy. The firm racked up $36 million of impairments in 2023 and $68 million for the TTM period to June 2024. These aren’t horrible figures, but they show that not everything comes up smelling like roses in the senior living business. 

Management recently guided for $4.20 per share in funds from operations (FFO) for 2024. This preferred metric for real estate investment trusts adds back depreciation and other non-cash items. I reverse-engineered the guidance for FFO to arrive at a pro forma net operating income (NOI) for 2024 of $3.3 billion. This NOI calculation takes FFO a step further by removing debt service costs and the administrative costs of running the company to arrive at an unleveraged, asset-level value for the business. 

In fairness to Welltower, the increase in NOI is substantial compared with the $2.7 billion generated in 2023. The company has certainly improved operations, pruned underperforming assets, and had much stronger occupancy levels as the post-Covid senior market has recovered. A 22% increase in NOI is impressive for any business, especially a real estate company with slow-moving assets. 

How does $3.3 billion of net operating income translate into asset values? I capitalized the income using 5.97% to arrive at a gross asset value of $55 billion. 

The 5.97% “cap rate” was derived using the following logic: I simply applied the spread for Welltower’s Standard & Poor’s BBB credit rating to the “risk-free” 10-Year Treasury yield of 4.07% to arrive at a current debt cost of 5.15%. I assumed that the company earns an equity yield just 1% higher than this cost of debt (6.15%) and weighted the equity percentage at 85%. One could argue that this 5.97% cap rate is slightly high. Perhaps I could impute a bigger weighting to the less-expensive cost of debt. After all, Welltower has been able to raise debt at much lower rates in the past.

My counter-argument would be that a lower cap rate would be too aggressive for a business that has a mixture of assets, ongoing charge-offs for underperforming notes receivable, and a collection of diverse and unpredictable operators assigned to the facilities. Finally, I am not making any allowances for capital improvements at existing properties. These assets require nearly $600 million per year in upkeep that is not reflected in NOI. They are, however, certainly an ongoing cash obligation for Welltower. I am being very generous by excluding them in the value computation.

To arrive at a net asset value, I added cash of $2.6 billion as well as construction in progress at book value, and unconsolidated equity interests at 1.5x book value. After subtracting debt of $14 billion, Welltower’s net asset value pencils slightly above $48 billion.

You may say that I’m not appropriately valuing the future. There’s more upside at Welltower, says you. Yes, there is more upside. Unfortunately, as a REIT which is required to distribute its earnings to shareholders, incremental growth can only come from external capital: Sell more stock or raise more debt. When you’re earning returns on capital in the 6% range and you’re borrowing at 5%, you don’t have tremendous opportunities for upside. 

I am short Welltower. It’s a $132 stock that should be priced to yield in the mid 3% range around $80-85. 

I could leave you with some Jim Morrison lyrics. Instead I will give you something special by Wire. Or you may prefer REM’s 1987 cover version:

“There’s something strange going on tonight.

There’s something going on that’s not quite right

Joey’s nervous and the lights are bright

There’s something going on that’s not quite right.”

Until next time.

Disclaimer:

The information provided in this article is based on the opinions of the author after reviewing publicly available press reports and SEC filings. The author makes no representations or warranties as to accuracy of the content provided. This is not investment advice. You should perform your own due diligence before making any investments.

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Find me in the club with a bottle full of bub

I was in a couple of clubs this past week. Let’s start with the fun club. The Irish band Fontaines DC played a sold-out Slowdown on Saturday night. The band went on at 9 and I almost missed the opener. Maybe they saw the prevalence of white males over the age of 40 and reckoned it would need to be an early bedtime. This is a Grammy-nominated group of guys in their 20’s touring in support of their fourth album, so we’re not talking Van Morrison here. Where were all the kids? It made me think of the recent article with the hypothesis that rock and roll died with Kurt Cobain. This is a pretty dramatic take on the music industry, but I think a lot of youngsters are gravitating towards hip-hop and EDM where most of the sonic barriers are being broken.

You could hear the appeal to an older set: Carlos O’Connor has the guitar stylings of a Jonny Greenwood, and listeners of a certain vintage surely hear echoes of Nirvana, The Pixies, The Church, The Cure and even Weezer in the mix. Grian Chatten has an impressive vocal range and his cadence can sound almost like a Dublinesque Eminem at times. Maybe it’s the cyncial nature of the songs. After all, the band’s most powerful track “I Love You” has a chorus of “Say it to the man who profits, and the bastard walks by.” Jaded stuff. Excellent music, nonetheless.

Dublin rockers would sneer at the other club I visited last week. Jim Grant held his annual conference in New York, and I decided I wanted to see some different rock stars: Stan Druckenmiller on slide guitar and Bill Ackman on drums. Druckenmiller got the most headlines when he said that his old boss, George Soros, would be a little disappointed that he hadn’t committed more capital to his high-conviction trade: Short the long end of the yield curve. In a country running peacetime deficits of roughly 7-8% of GDP where neither presidential candidate has made a peep about a balanced budget, a long duration Treasury has much to blush at. Toss in a recession and war, and you have real downside risk holding anything longer than two-year paper. He was also firm is his belief that no foreigners were safe investing in a China controlled by Xi Jinping, despite David Tepper’s recent optimism.

I was most intrigued by Boaz Weinstein’s presentation. This chess prodigy was a Deutsche Bank managing director at 27. His firm, Saba Capital, has targeted the closed-end fund universe where wide discounts to underlying net asset values can persist for a long time. Saba has pressured some managers to narrow the discounts by taking large positions in the funds and gaining sufficient board control to advocate buying back shares or liquidating altogether.

Weinstein was particularly vocal about his legal brushes with BlackRock. The battles with the asset management behemoth have been contentious (and expensive), and it was slightly appalling to hear about the lengths BlackRock would go to suppress actions that could benefit widows and orphans trapped in underperforming closed-end vehicles. Saba’s Closed-End Funds ETF trades a with the ticker CEFS and has a current distribution rate of 7.62%. There’s limited downside, and you get to earn a nice yield while you let Mr. Weinstein work his craft. Seems like a good club.

Michael Green’s presentation on the distortion of passive vehicles in the market was compelling, but I couldn’t help but think he was preaching to the choir. I invite you to read his thought-provoking pieces. His point has validity: The concentration of market capitalization in the biggest stocks is increasingly reinforced by the automated passive funds which allocate towards a market-cap weighted index. Passive funds have made a mockery of most performances of the managers in the audience, however, and I had a feeling that Larry Fink was sitting down at Hudson Yards watching the proceedings remotely with a smile on his face.

I can tell you who is not in the club: Warren Buffett. The man is sitting on nearly $300 billion of cash. Sure, he could be hedging the likely increase in capital gains taxes should the Democrats take control. He could be getting his “affairs in order,” as they say. But for a guy who famously says you shouldn’t time the market, it feels an awful lot like market timing to me. I offer the chart from Jennifer Nash at Advisor Perspectives:

Corporate equities as a percentage of GDP have rarely been so high. The Fed is cutting rates into an environment of very loose financial conditions. What could go wrong?

So where are the clubs that I want to hang? I mentioned Saba’s ETF above. A few weeks ago, I talked about relative value at Peakstone Realty Trust (PKST) and the ethanol producer REX American Resources (REX). Sam Zell’s (RIP) Equity Commonwealth has a no-brainer preferred yielding north of 6%. I’m supposed to hang out in the real estate club, but developing apartments at a 6.5% return on cost with a looming oversupply of units at rents that need to be 30% higher than pandemic era prices seems like an unfriendly wager.

I’d rather hang out with Barry Sternlicht. He can often be found on CNBC lately crying the blues and talking his book, but the guy is a legend. Starwood will probably have some messes to clean up, but they will also seize opportunities to profit from distress. Meanwhile you can hold STWD at a 9.5% dividend yield with the best capital allocators in the business. It makes illiquid and highly leveraged suburban Omaha apartments seem like a visit to the yearbook club after school. Anchored to old memories, the club is far too optimistic that the good times will return. Go to the reunion in 30 years and see what decades of high leverage and “equity” subordinated to a 9% preference can do to a guy. It ain’t pretty.

I tried to get interested in Heartland Express trucking (HTLD) recently. The company’s stock has seen a lot of insider buying in recent months. I can make an argument that HTLD is selling at a discount to its intrinsic value. It trades at an EBITDA multiple of about 7x. If you figure free cash flow can hit $115 million in 2024 during a freight recession, then there should be a lot of upside. The recent market cap is around $900 million for a company that could be worth $1.2 billion.

My enthusiasm waned quite a bit when I noticed that much of the aforementioned cash flow came from a lack of investment in trucks. Heartland depreciated nearly $100 million of its vehicles in the first six months of 2024, but only invested about $3 million (net) in new trucks. By comparison, local company Werner Enterprises depreciated $146 million of vehicles during the first six months of 2024 and reinvested a net $118 million in new equipment. The freight market is probably recovering, but it will take a lot of capital for Heartland to modernize its fleet. This one’s a pass for me.

I’m working on a write up for Welltower (WELL). I mentioned it several weeks ago as a very expensive stock with slightly dubious amounts of asset churn. There is a lack of a clear strategy with medical office buildings paired with B-quality senior living assets. The company is a REIT and yields a sub-par 2.2%. The stock has risen 54% over the past 12 months and trades hands at a $76 billion market cap. It strikes me as absurdly overvalued and is my strongest candidate for a short position. You can talk all you want about favorable demographics, but the earnings are weak and the operating costs are not improving as more states impose minimum staffing requirements. Medicare reimbursements are dropping and the company is highly levered.

Until next time.

Appendix: Heartland Trucking income statement and return on capital.

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Too Hard

I’m getting a little weary of Charlie Munger quotes, to be honest. Don’t get me wrong, there’s no question that we recently lost an intellectual giant and a man of high moral character. His investment acumen and the genius ability to cut straight to the heart of a matter was legendary. But I think the elevation of his aphorisms to a form of business gospel reduces our own capacity to think for ourselves. He was just a man. Mortal. It’s ok to have heroes, but it’s not safe to put them on pedestals.

I imagine Munger could be insufferable at times. A real crusty bastard. Did you ever see his dorm design for USC? He must have been a dynamo when he was earning his capital as a lawyer and real estate developer. You probably regretted getting in his way. He was unapologetic about his desire to be rich and I’m sure he never suffered fools gladly. Ah, but yes, at his core he was among the wisest of the wise. So, after a long-winded preface, here is my Charles Munger quote: “If something is too hard to do, we look for something that isn’t too hard to do.”

I’m filing Welltower in the “too hard” category. Welltower (WELL) is a $62 billion market cap REIT that owns senior living facilities and medical office buildings. WELL is also a bank of sorts. It lends money to developers of properties. It has JVs with a bunch of developers. Some of the assets are leased triple-net to operators, many are operated directly by Welltower. The company is also a prolific issuer of new stock and an expert at churning real estate. It’s head-spinning and hard to completely grasp. This is a company whose CEO, Shankh Mitra, quoted Jensen Huang in the annual report. I’m not saying that running real estate for old people doesn’t have much in common with NVDIA. Ah hell, who am I kidding? This is the vibes economy. Everything runs on NVDIA.

In fairness to Mr. Mitra, he also candidly told a 2023 audience, speaking of the industry, “On average, in the last 10 years we haven’t made any money for capital [providers].” The oversupply conditions of the middle part of the last decade were just beginning to recede when COVID hit. Now, prospects for better economics seem to finally be destined for senior housing operators due to the unfeasibility of new supply and the rapid aging of the boomer generation. The stock market seems to agree. The stock has run up 24% since the start of the year as occupancy and margins vaulted upwards.

Despite Mr. Mitra’s humility, there’s not much for me to like about the company as an investment. A REIT with a mixed collection of properties doesn’t deserve to trade at a higher multiple than apartment buildings, and certainly not better than medical office buildings. The demographic story has legs, I’ll grant you that. But you can say that about Skechers slip-ons or Hey Dudes.

I was first intrigued by Welltower late in 2022, when Hindenburg published a report questioning the absorption of some troubled JV assets. The short-seller specifically cast doubt upon the relationship with Integra Healthcare Properties. There was a lot of mystery about Integra. Hindenburg called it a phony transaction. Integra’s website is still just a collection of canned photos of smiling elderly folks with zero substance (at least they updated the copyright date to 2024!). Crickets from the market.

In my view, the only thing Welltower is guilty of is being exceptionally underwhelming. Welltower generated $6.4 billion in revenues during 2023. Property operating expenses absorbed 59% of revenues vs 52% of revenues in 2018. The industry sees itself getting back to pre-pandemic margins as staffing issues abate. I’m not so sure. States have ramped up calls for minimum staffing levels. The industry is also facing a lot of scrutiny about Medicare reimbursements. I don’t know enough about these challenges, so I can’t opine about the true risks to the company. I just know they exist.

What I can tell you is that I don’t think Welltower has much room to expand its distributions to shareholders above it’s current paltry yield of 2.35%. Once you deduct maintenance capital items from operating income and interest on over $15 billion of debt, there’s not much left.

No matter how many assets the company churns, the return on capital seems mired in the mid-single digits. The company has issued over $14.4 billion of stock since 2018, acquired $18 billion of assets during the period, while selling $9.9 billion. All this huffing and puffing hasn’t produced a formula that shows it can distribute increasing levels of cash to shareholders in a sustainable way. It is not unfair to say that some of the distributions are being funded with new equity. That’s not a great recipe. And for a CEO that says there aren’t many opportunities for new construction, the deal guys didn’t get the memo because Welltower had about $1 billion of construction in progress at the end of 2023.

Apparently, the market completely disagrees with me about the Welltower story. A 25% stock increase for a senior housing play is impressive. I am equally impressed that Welltower just raised over $1 billion of new debt at 3.25%. Is it pure debt? No, not for Welltower. It’s another dilutive offering. A convertible note due in 2029 that vests once the stock price rises 22.5%. I’m not sure who buys such debt when the five-year Treasury yield can be had for 4%, but it was probably a couple of fund managers who were feeling as frisky as Wilfred Brimley and Don Ameche in swim shorts.

So, I bid you adieu, Welltower. Low returns on capital, poor coverage on a low dividend yield, a churn of assets, acting like a loan shark, pumping new stock and forming a lot of unconsolidated JV’s… sounds like this one’s just too hard.

The easy column. I missed a fat pitch. I looked at it and didn’t have time to get my bat off my shoulder. It may not be too late, but I still need to dig deeper. Hat tip to Adam Block on social media who noticed Peakstone Realty Trust (PKST) was trading around $11 per share on July 10, giving the REIT a market cap of about $382 million. It sported a dividend yield north of 8%. Alas, it ran up 20% in two days. It still trades well below the $39 per share of last summer, so there may be juice left in the squeeze.

Peakstone had $436 million in cash at the end of March with a book value of real estate (excluding depreciation) in the neighborhood of $3.3 billion. Yes, there is debt of $1.4 billion. It costs Peakstone about 6.75% to finance the loans which roll over during the 2025-26 period. So, there’s loan renewal risk as well. But this is a pretty good portfolio of assets. The buildings consist of office and industrial space, but they’re mostly leased to single users with high credit such as Pepsi Bottling, Amazon and Maxar. Total square footage of the assets is 16.6 million. Net operating income for the quarter was $47.6 million. As far as I can tell, the market was essentially ascribing zero value to the assets at the beginning of last week. Even if you figure a monstrous 12% capitalization rate on an annualized run of quarterly NOI, there is adequate cushion above the debt. Seems like one to dig into. Easy? No. Simple to comprehend? Yes.

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