If you guys follow me you know that I often say #trustinyourwork. What I mean by that is that if your investment thesis is intact (thus your conviction level remaining high with a particular company that you own) take advantage of price dislocations that the market provides and build your stake. Despite JCAP doing nothing but going down since the IPO, but especially over the past few weeks, I have been an aggressive buyer. I believed in my research and I believed in the reasons I was owning the stock, thus I had the confidence to add to my position when there was plenty of fear and misconceptions in the investment community surrounding the company. Well, the Q1 2016 numbers should alleviate any concerns investors have had as it was a highly impressive report, with forward guidance even more impressive. I am happy to say that the company is well ahead of my initial investment thesis in its short existence thus far as a public company.
Simply stated, I don't think the market was expecting anything near this powerful of a release from JCAP. If they hit the guidance that they project they will hit by year end, the stock should be trading in the mid-$20s. In the short-term I wouldn't be surprised to see the stock quickly move back to around BV, which would represent a move up to $16 or so.
The only real flaw in the report that I can find is that the credit facility negotiations fell thru. But the alternative capital arrangement of selling senior participations to a financial institution is cheaper and more lucrative to the company, so it's a win for them despite a deviation from company guidance. While this may give some investors some pause about investing in the company due to a business model that may not seem "mature", keep in mind that the company did something that will create more shareholder value, not less, and for that reason I am pretty excited about this new strategy of raising capital and realizing some early returns on some of its self-storage properties.
A quick note on the dividend. A lot of folks will want to see the company cut the dividend so that it does not continue to diminish the BV of the company since the payout is not yet covered by the company's income. While it may be prudent to cut the dividend slightly, I would not expect the company to deviate much from the current payout. The dividend is covered with net income, but that includes fair value marks on the investment portfolio (in effect a "prepayment" of future profits on investments as reflected in fair value increases). The G&A of roughly $1.7M per quarter obviously has to be covered as well. Let's not forget as a REIT the company has to pay out 90% of their net income to shareholders.
Some highlights from Q1:
- $0.53 adjusted earnings per share and $0.18 earnings per share (including transaction-related costs of $2.0 million); book value of $16.30 per share at quarter end;
- 8.6% decrease in general and administrative expenses from fourth quarter 2015;
- $115.0 million of new capital to fund existing and future commitments, including $110.0 million in an institutional joint venture and $5.0 million from subordinated participations, or “A Notes” sold to a Tennessee bank;
- Increased annual guidance for change in fair value of investments by approximately 50.0% from $5.0 - $7.0 million to $7.5 - $10.0 million, provided updated annual earnings per share guidance of $0.59 - $1.14 per share and provided earnings per share guidance for the three months ending June 30, 2016 of $0.22 - $0.34 per share; and
- Increased annual adjusted earnings per share guidance by an average of 34.0%, from $0.79 - $1.24 per share to $1.10 - $1.61 per share; issued adjusted earnings per share guidance of $0.29 - $0.40 per share for three months ending June 30, 2016.
And look at the guidance!
I will follow up in the comments section below with any key details discussed on the conference call.