Today, I want to follow up on a Special Situation stock that we talked about earlier this year. Let’s quickly recap what that idea was all about, and then we’ll get into what you should do now.
Equity Commonwealth (EQC) is a real estate investment trust (REIT) that was taken over by investor Sam Zell and his team years ago as part of an activist campaign. At the time, EQC owned a bunch of properties, including suburban office buildings, around the United States.
But Zell decided that was not a market he wanted to be in, so he began to liquidate those properties. They’ve used some of the cash they raised to pay special dividends and buy back stock, driving up the share price. EQC is now down to about eight buildings, and they’re sitting on around $3 billion in cash.
Zell then started to look around at the post-pandemic landscape, such as what was going on in the supply chain, e-commerce and the new digital world, and he realized that the biggest investment opportunity for the next several decades is what’s known as industrial real estate.
That’s warehouse space, shipping centers and the properties that help get stuff from point A to point B.
So, Zell approached Monmouth Real Estate Investment Corporation (MNR) and made an all-stock purchase offer. The idea was to buy this company for stock, bring the MNR shareholders into Equity Commonwealth, and they would now have access to the ~$100 million in cash flow produced by the Monmouth properties they currently own.
But they would still have the $3 billion in cash that they could leverage up significantly in order to buy a lot more industrial real estate around the U.S.
I was in favor of that deal and really wanted it to go through, but Starwood Property Trust, Inc. (STWD) came in and said Zell’s offer was too low. Starwood offered $19.30 in cash and actively campaigned against Zell. So did another private activist by the name of Blackwell Capital Group, which owns almost 5% of the stock.
And when the Zell vote came up, the deal was voted down even though the board really wanted it to go through.
So, here’s where we are now… Blackwell is now actively campaigning against Starwood’s offer, saying that even its offer is too low, as the comparable value of Monmouth’s properties is probably over $30 a share to a rational buyer.
Now, here’s what this all means for us. If Monmouth takes the Starwood offer, which I view as doubtful, we’ll make a small gain. If they don’t take it, which is now what we want the bet to be, and there is no takeover, we will be the proud owners of 122 single-tenant properties.
The tenant base is heavily skewed to e-commerce. We’re talking United Parcel Service, Inc. (UPS), FedEx Corporation (FDX), Amazon.com, Inc. (AMZN) as well as Ulta Beauty, Inc. (ULTA), Best Buy Co., Inc. (BBY), The Home Depot, Inc. (HD) and a bunch of companies that need warehouse space.
So this is the play on e-commerce in addition to the play on the rebuilding of the supply chain that’s going to help drive Monmouth’s price higher. There’s also a 3.8% dividend yield, and they’ve got a great history of raising that dividend over time.
The properties are 99.7% leased, everyone is paying their rent on time and 83% of their tenants have investment-grade ratings, which is extremely high for a REIT portfolio.
The Big Story No One is Talking About
But there’s also the Panama Canal story here that no one really wants to talk about. Monmouth has put a lot of their properties down into the southeastern and mid-Atlantic markets because back in 2016, they completed the widening of the Panama Canal.
The west coast shipping ports are jammed and have been backed up for a very long time. A lot of that traffic is now coming through the canal and coming to the eastern shipping ports. After all, 60% of the US population lives within about 25 miles of I-95 on the east coast.
Why ship across country by truck when you can get it there much more cheaply and efficiently through the Panama Canal? They have most of their properties in markets where they’re taking market share from the west coast ports. And there’s very high demand for their industrial property locations.
So, again, worst case scenario is that we make a bit of money and Starwood’s cash offer is accepted. But the best case is that we get a much higher takeover offer and we own a fantastic collection of industrial real estate with the very best tenants and the powerful trends of e-commerce and the supply chain rebuild driving profits, dividends and the stock price a lot higher over time.
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