Griffin Industrial Realty: High Cap Rate Despite Portfolio Transition

Bill Chen of Rhizome Partners presented his in-depth investment thesis on Griffin Industrial Realty (US: GRIF) at Best Ideas 2020.

Thesis summary:

Griffin Industrial Realty owns a portfolio of Class A warehouses in the LeHigh Valley, Pennsylvania; Hartford North, Connecticut; and Charlotte, North Carolina. After netting out non-core office buildings and a land bank, the portfolio recently traded at a 9.4% cap rate while public comparables and private transactions indicated valuations in the 3.6% to 6% range. This implies private market values 70-80% higher than the recent price.

The company is growing NAV by about 10-12% a year at the recent price through cash flow generation, rent increases, development of warehouses, and sale of land parcels. This is likely the most misunderstood aspect of the Griffin thesis, as most investors focus solely on the cash flow yield relative to the market cap. The company is transitioning the portfolio from “hard-to-value” land parcels and using 1031 exchanges to buy income-producing warehouses. Warehouses enjoy a long-term structural tailwind due to the shift from bricks-and-mortar retail to e-commerce.

Griffin is also a natural acquisition target for publicly traded REITs and dozens of real estate private equity firms, such as Blackstone. In the last few years, there has been significant consolidation in the warehouse space as Blackstone has made more than a dozen acquisitions totaling almost $50 billion.

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About the instructor:

Bill Chen is the founder and managing partner of Rhizome Partners. Prior to forming Rhizome in March 2013, Mr. Chen traded and invested his own assets, utilizing strategies that focused on deep value investments and event-driven strategies. From August 2009 until January 2011, he was the Director of Research at New York Global Group, a private equity firm that invested in growth companies in mainland China. From October 2006 to March 2009, Mr. Chen was an Analyst in Citigroup’s real estate investment banking group, a group that focused on M&A transactions of up to $1 billion. From October 2005 until October 2006, Mr. Chen was a mechanical engineer for Bladykas Engineering. Mr. Chen received his B.S. in Mechanical and Aerospace Engineering from Cornell University in 2004. In addition to his professional activities, Mr. Chen volunteers his time as the director of the Epsilon Association which is the alumni association for Sigma Phi Society at Cornell University.