I got a phone call last night form a friend wondering why I had not commented on the Doha meeting and the lack of agreement between OPEC nations and Russia as to production levels. Frankly, I didn't see any point adding to the clamour. By the time I got the little one off to school, the dog walked and consumed enough coffee to clear the cobwebs of Monday morning, pretty much everyone else on the planet had something to say.
The meeting ended exactly as I thought it would, and anyone who expected a meeting that would result in Saudi Arabia, Russia and Iran to come to any sort of agreement was a tad confused. I thought both Jim Cramer and Dan Dicker posted spot-on comments on post-Doha oil prices.
I spent most of yesterday thinking about various real estate markets. I spend a lot of time focusing on real estate as I think the health of the commercial real estate markets is probably the single-biggest economic tell. If CRE is healthy then the chances of a serious recession are pretty small. Residential markets can give a good reading on the individual consumer and his state of mind. Of course, since the majority of my portfolio is invested in small banks, the collateral value of all types of real estate is of great concern to me. I find that staying up on real estate provides significant information that I can use to guide my investment activities.
Of course, digging around in real estate helps me find some pretty interesting real estate opportunities, as well. While small banks remains the source of the biggest profits in my career, real estate-related securities are not that far behind. Owning real estate investment trusts (REITs) and other real estate investments has made me a lot of money over the years, and I expect that to be true for the rest of my career, as well. Real estate bought on the cheap and owned for a long period of time is a smart way to invest. The problem right now is that not much is cheap.
I ran some screens yesterday afternoon, looking for real estate stocks that traded below asset value. There are not many. Just 56 stocks hit my screens -- and most of them are Mortgage REITs focused on the residential mortgage markets. Many of the remaining non M-REITs I have mentioned recently include Ashford Hospitality Trust (AHT), Silver Bay Realty (SBY) and Arbor Realty (ABR). I still like all of these, and would be a buyer around current prices.
I also stumbled across Jernigan Capital (JCAP). This REIT has seen its shares tumble in the past few months as a result of its formation of a joint venture with Heitman Capital to invest in self-storage development lending projects. As a result of the JV, it also was late with its 10k filing, as execs delayed filing to get the new information into the report.
Investors really don't like the fact the Jernigan is only a 10% partner in the new venture. Jernigan is the managing partner -- despite having the junior equity position. In the FAQ section of JCAP's website it says, "We believe that our 10% equity investment in the joint venture likely will yield to us significantly more than 10% of the capital proceeds from the joint venture's investments. We believe this joint venture is more accretive to our net asset value than any other investment strategy we could have pursued with the limited capital we had."
Having read the appropriate documents and the 10k filing itself, I am inclined to agree with them. Founder and CEO Dean Jernigan has been involved in the self-storage markets for over 30 years and has been a CEO of two other REITs in the sector: Storage USA and CubeSmart (CUBE), which delivered solid shareholder returns during his tenure.
Jernigan management estimates that the top 50 markets are undersupplied by 1,600 self-storage facilities, and since most of the major storage REITs frown on development, there is a huge opportunity to deploy capital at high rates of return. They also see significant opportunities in loans for acquisitions of storage facilities and to refinance existing locations.
I am familiar with the self-storage business, and think they may be in the right place at the right time. It helps that management has a great track record. The shares are trading at 70% of book value, after the recent decline, and currently yield a little over 12%. Long term investor who want to benefit from growing demand for self-storage facilities might want to take a deeper look.