Interview With Cibus Nordic (Buy Rating Upgrade)

Before going into this update, we recommend that you start by first reading our investment thesis by clicking here.

In short, Cibus Nordic (CIBUS) is a landlord that focuses mainly on grocery-anchored properties in Finland, Sweden, Norway, and Denmark. Prior to the recent surge in interest rates, the company was doing very well with its share price nearly tripling in just 4 years following its IPO as it was able to consistently acquire properties at large positive spreads over its cost of capital, resulting in significant value creation. But then interest rates surged, its share price collapsed, and it wasn't able to close accretive deals anymore. That's when we first invested in the company, expecting this to be just a temporary setback that would set the stage for the company's next phase of growth:

Since then, the share price of the company has nicely recovered. In fact, Cibus has been one of our best investments over the past year.

We doubled down on the shares of the company in March of 2023 and it has nearly doubled our money since then.

But what now? Is it time to sell and lock our gains or does it still offer more upside?

To answer this question, we reached out to the company and had the chance to talk with their CEO, Christian Fredrixon, and their CFO, Pia-Lena Olofsson.

Christian Fredrixon, CEO of Cibus Nordic:

Pia-Lena Olofsson, CFO of Cibus Nordic:

We asked them questions about their future growth prospects and also more general questions about the nature of their business to help us understand how they differ from traditional American net lease REITs.

Below, we share the three main takeaways from our interview:

Takeaway #1: Back in Growth Mode

The biggest takeaway of all is that they are now back on the offense.

They couldn't do much in terms of acquisitions for the past two years because their equity was discounted and issuing shares would dilute shareholders.

In that sense, one of the main risks to our investment was that the company would remain stuck in this position in which they couldn't raise capital to grow accretively.

But the great news is that they have now earned back their premium to NAV valuation and this has allowed them to return to growth.

Earlier this year, they acquired a portfolio in Sweden, and just last month, they issued more shares to acquire a portfolio in Denmark.

Both deals were immediately accretive and expanded their FFO per share.

Since then, their share price has risen even higher, which further lowers their cost of capital for future acquisitions.

At this point, future deals should be highly accretive because they are trading at a significant premium to their NAV.

This is very good news because this is what made them so successful in the past. The #1 reason behind the company's exceptional performance from its IPO in 2018 till the surge in interest rates in 2022 was its ability to raise capital and allocate it accretively.

Now they are back to it, which suggests that we could see a repeat of that in the coming years, and this is ultimately the main reason why we plan to keep holding on to our position.

Takeaway #2: Significant Pipeline In The Nordics

Key to our thesis is also that Cibus still has ample opportunities in the Nordics.

The management confirms that they are still far from reaching the limits of their target markets. Today, they still only own a very low single-digit percentage of their targeted properties in Sweden, Denmark, and Norway.

This is reassuring because one of the concerns that I have had about the company is that its markets may be too small, forcing Cibus to expand into potentially more competitive and/or riskier markets already in the near term.

It would seem to us that Cibus finds itself in a similar situation as Canadian Net REIT (NET.UN:CA) in that they are focusing on markets that are probably too small for the very big players like Realty Income, and it is resulting in lower competition for deals and better spreads. 

Therefore, we think their unique focus is a valuable competitive advantage relative to American net lease REITs which are facing much greater competition for new acquisitions. 

Takeaway #3: Uncapped CPI-Based Rent Adjustments

Another major advantage of Cibus relative to American net lease REITs is that the majority of its leases enjoy uncapped CPI-based rent adjustments. This has resulted in much faster rent growth in recent years for Cibus in comparison to most American net lease REITs. 

This superior inflation protection allows them to use somewhat higher leverage than their US peers. 

This explains why they feel comfortable operating with a ~55% LTV versus the 30-40% range of most American net lease REITs. 

We like this as we expect faster rent growth and higher leverage to result in superior returns over a full cycle. 

Closing Note

Cibus is one of a few REIT-like entities that have the potential to offer both: high yield and high growth at the same time. 

If a REIT is offered at a high yield, it is typically because it has relatively poor growth prospects. 

But in this case, Cibus is offering a near 6% dividend yield at today's share price on a forward basis, and we think that it is in a position to create 5-10% of value annually by executing its strategy, resulting in 10-15% annual total returns going forward. 

For this reason, we continue to like the risk-to-reward and expect to keep holding on to our position as part of our International Portfolio. 

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Finally, feel free to contact us anytime. You can send me a direct message on the chat or email me at jaskola@leonbergcapital.com

Sincerely,

Jussi Askola

Analyst's Disclosure: I/we have a beneficial long position in the shares of all companies held in the CORE PORTFOLIO, RETIREMENT PORTFOLIO, and INTERNATIONAL PORTFOLIO either through stock ownership, options, or other derivatives. High Yield Landlord® ('HYL') is managed by Leonberg Research, a subsidiary of Leonberg Capital. All rights are reserved. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. The newsletter is impersonal and subscribers/readers should not make any investment decision without conducting their own due diligence, and consulting their financial advisor about their specific situation. The information is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. The opinions expressed are those of the publisher and are subject to change without notice. We are a team of five analysts, each contributing distinct perspectives. Nonetheless, Jussi Askola, the leader of the service, is responsible for making the final investment decisions and overseeing the portfolio. We do not always agree with each other and an investment by Jussi should not be taken as an endorsement by other authors. Past performance is no guarantee of future results. Our portfolio performance data is provided by Interactive Brokers and believed to be accurate but its accuracy has not been audited and cannot be guaranteed. Our portfolio may not be perfectly comparable to the relevant index. It is more concentrated and may at times use margin and/or invest in companies that are not typically included in REIT indexes. Finally, High Yield Landlord is not a licensed securities dealer, broker, US investment adviser, or investment bank. We simply share research on the REIT sector.