REIT Value Cocktail: Mix Gas Stations, Farmland and Prisons

 | Oct 24, 2016 | 12:00 PM EDT
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Stock quotes in this article:

gty

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fpi

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afco

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cxw

My fascination with real estate and real assets occasionally leads to the purchase of REITs. This is not done predominantly for the higher yield they typically provide, but more opportunistically as interesting situations arise. Typically, I do reinvest dividends in these situations.

I've written previously about Getty Realty, (GTY) , the leading REIT that specializes in gas stations and convenience stores. This name was heavily distressed back in 2012, when its largest tenant hit financial trouble and the dividend was slashed. That's rarely good news, especially for REIT, and the shares suffered. The company has recovered nicely. The dividend is not back to where it was pre-crisis, but throws off a decent 4.5% yield. As of the end of last quarter, Getty owned nearly 800 properties, and we'll get the next dose of progress when the company reports third-quarter earnings on Wednesday.

Last week, fellow Real Money contributor Tim Melvin mentioned farmland REITs Farmland Partners (FPI) and American Farmland (AFCO) , which are merging. I've owned FPI for a couple years, and while it's been just marginally profitable, I view it as a long-term holding, and recently increased my exposure. However, I did not do so through the outright purchase of FPI shares; I found a cheaper way.

The deal calls for FPI to exchange 0.7417 shares for each share of AFCO. With FPI trading at $10.74 and AFCO at $7.40, the purchase of AFCO shares currently provides a 7.5% discount to FPI. This, of course, assumes the deal goes through. Some might consider this a potential arbitrage play -- short FPI, use the proceeds to purchase AFCO, and lock in the premium. This is not in my playbook, and besides, FPI shares would likely be difficult to short given the size of the company. FPI currently yields 4.75%, while AFCO yields 3.4%.

Last but not least, I recently took a position in prison REIT Corrections Corporation of America (CXW) , one of the more controversial REITs on the market. The company and others in private corrections have been hammered as the Federal Bureau of Prisons has stated its intention to halt the use of for-profit corrections providers. While political pressures also are increasing, I believe there has been an over-reaction.

While I expect that the CXW dividend will be cut from its current 15.4% level, the death of private, for-profit corrections has been greatly exaggerated. Since taking an initial position, this is one that I've continued to nibble at. It's not for the faint of heart, however, and will likely continue to be volatile.

The combination of gas stations, farmland and prisons is without a doubt an eclectic mix, conjured up in the mind of a value investor.

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