Oh, Lord, please don't let me be misunderstood. The Animals' version of that classic track was running through my head as I did a deep dive on Gladstone Commercial (GOOD) . When any one of my holdings is not performing up to expectations, that's what I do. Others spout cliches on financial television and wait for the "Greater Fool" to pay a higher multiple, I do not. I focus on cash flows and sustainability thereof.
My process is all about finding a narrative that is demonstrably false ... and exploiting that falsehood to make money for my clients and myself. These days, there are so many from which to choose.
Vornado Realty (VNO) suspended its dividend today, and although the shares ended down only slightly in the midst of Thursday's bull run in the markets, VNO now trades at a level not seen since the mid-1990s; So, cue the narrative-makers.
"Commercial real estate is the next shoe to drop," the problem is that there are millions of gradations of commercial real estate.
But, again, these market-driving buffoons don't want to do any research, so they make these broad stereotype-driven trading decisions. A.I. is hot. Buy Microsoft (MSFT) ! Commercial real estate is dying! Sell Gladstone Commercial. Crucially, unlike Vornado, GOOD doesn't own skyscrapers like VNO's flagship properties, 731 Lexington here in New York City and 555 California St. in San Francisco.
Rather, according to Gladstone Commercial's corporate presentation:
The Company owns approximately 17.2 million square feet of predominantly industrial and office real estate nationwide. Gladstone COmmercial owns a diversified portfolio of 137 properties in 27 states leased to 112 different tenants in 19 industries
So, Gladstone Commercial couldn't possibly be any less similar to Vornado Realty.
Another favorite narrative of mine is "higher interest rates are killing the commercial real estate market." Uh, actually the most important rates for any enterprise, long rates, have fallen this year. Short rates have risen, and are likely to rise again as Fed Chair Jerome Powell can't actually run the Fed properly, but the yield on the 10-year UST was 3.88% on Dec. 31, and is trading now at 3.52%. Facts.
But, hey, let's just ditch everything and ask questions later. I am not playing Pollyanna here. The "business model" of stocking 10,000 people into a glass and steel box and watching them scatter like ants at lunchtime may in fact be dying out. Work from home, Zoom (ZM) , you know all the contributing factors.
But, and this is a crucial distinction, not all commercial real estate is skyscrapers. Gladstone Commercial doesn't own office towers, they own industrial parks and small-to-midsize office buildings. 56% of of GOOD's portfolio is industrial, with an additional 4% spread among retail and other categories, so only 40% of GOOD's portfolio is composed of office properties. Look at GOOD's corporate presentation, which I pored over for an hour Thursday. You will see photos of a Morgan Stanley (MS) retail office in Salt Lake City and read that GM is GOOD's largest tenant, although GM's (GM) rentals represent only 1% of GOOD's owned square footage. Also you will read that GOOD owns nothing in New York City and nothing in California. There are no shoes dropping on these sleepy, small properties. Gladstone Commercial will keep collecting rent on them. Bank on it.
So, why are Gladstone's fixed-income securities being hammered so much that GOODO (GOODO) , the 6% preferreds, were trading at 60 cents on the dollar and yielding nearly 10%, as they were this morning? Because the smart man on the television told me that commercial real estate is the next shoe to drop.
Give me a freaking break.
But that's how the stock market works. You allocate assets and reallocate when opportunities arise. To buy GOODO in size, which I did Thursday afternoon for clients, I had to sell some Gladstone LD Term pref. shares (LANDM) , preferred issued by GOOD's cousin company, Gladstone Land. It killed me to have to sell LANDM, as I believe their portfolio if farmland is epically safe, but, again, sometimes Mr. Market forces an active manager make tough choices.
I ran toward the fire today with GOODO. If offered the opportunity by the myopic market to do so again, you know I will be there. GOOD reports earnings next Wednesday, May 3, with a conference call hosted by David Gladstone set for next Thursday morning.
Those numbers and facts will help me develop my fair valuation for GOOD/GOODO/GOODN, but as a small company (GOOD's market cap is under $550 million) I doubt that will change the narrative overnight .
I really don't care. Sometimes a story takes time to develop. When you're getting paid monthly in preferred dividends, as GOODO does (GOOD common does as well,) I don't mind waiting.
Misunderstandings can be quite lucrative, as long as you know how to exploit them.
(Please note that due to factors including low market capitalization and/or insufficient public float, we consider this stock to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.)
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