After yesterday's column I got several requests to name a few names of companies where I hope to see earnings season weakness. This is the point where I am supposed to say something along the line of I love all my children equally and will make no distinctions between stocks if they are priced right. In theory, that should be true. However, the reality is that there are a few stocks I have strong hopes that they fall below book value because I would love to lock up long-term ownership of these companies at a bargain price.
Apple Hospitality (APLE) is a hotel REIT currently trading at 1.2x tangible book value. The shares have seen some selling pressure as APLE just completed a merger with Apple REIT Ten that has provided liquidity for Apple Ten shareholders and they have been doing some selling.
The deal added 56 hotels to Apple Hospitality's portfolio and helped give the REIT a market presence in 96 metropolitan statistical areas in 22 states. All of the REIT's hotels operate under the Hilton (HLT) or Marriott (MAR) brands, and business is not bad for the company. CEO Justin Knight commented on the recent results, telling shareholders, "We are pleased with our second-quarter results, including comparable hotels RevPAR growth of 5.1%, adjusted EBITDA growth of 11.6% and an increase in comparable hotels adjusted hotel EBITDA margin of 90 basis points."
Apple Hospitality shares yield 6.51%, which is very attractive in today's yield-starved world. If the stock were to fall on an earnings miss and trade at book value, we could lock up a dividend yield of about 8%, which is even more attractive. This REIT is a fantastic collection of hotel assets that I would love to own for the very long term if I can buy it at the right price.
I own shares of Equity Commonwealth (EQC) , so a decline in the stock would hurt my short-term results. I nonetheless hope it drops below book value on weak earnings.
EQC is one of my big three real estate investments that I hope to never sell, and I would like to own more. Sam Zell is the company's chairman, and the CEO has worked with Mr. Zell and I assume learned from him for many years. The company has been selling real estate in the current market and is sitting on an enormous pile of cash right now. While it has used some of the proceeds to buy back stock, it still is sitting on $1.7 billion in cash to spend when it feels pricing has improved. I think the long-term results from this management team's discipline on both the current selling and eventual buying of real estate when markets turn at some point will produce outstanding long-term results and I hope to buy more at lower.
Farmland Partners (FPI) currently is trading at 1.1x book value, and I would love to establish a position in the company at lower prices in advance of the merger with American Farmland (AFCO) . The merger will create a farm REIT that has 133,000 acres across 16 states. The company will have about 75% row crop farmland and 25% specialty crops by value.
Michael Burry of "Big Short" fame recently said the best way to invest in water was going to be owning farmlands in areas with water and selling it places where water is in short supply. I agree with that theory and would love to see short-term earnings concerns create an opportunity to get involved with farmland at a bargain price. The combined REIT should have a yield of 3% to 4%, so there will be a decent level of income as well as the long appreciation potential of the land itself. If I can get it at my price, it is my intent to put it on dividend reinvestment and forget about it for a decade or so.
I have no idea if these REITs will fall back to my price. If I knew that sort of thing, I would be the world's richest options trader. I do know that with the current short-term obsession with earnings a weak quarter could push them back to bargain prices. When and if they do, I will be a ready buyer.