Dilok Klaisataporn/iStock by way of Getty Photographs
Charlie Munger, Warren Buffett’s enterprise associate, as soon as mentioned that “life can have horrible blows in it, horrible blows, unfair blows. It would not matter. And a few folks recuperate, and others do not.”
I can relate.
As many of you understand, I used to be a profitable actual property developer in my previous life. The retail and industrial portfolio I constructed was value round $100 million by the point I hit my late-30s.
I am not saying I made that cash by lounging on my sofa, sipping high-end champagne and consuming caviar. There was numerous work concerned.
On the similar time, I used to be undoubtedly having fun with that cash made, flying on non-public jets, vacationing at luxurious locations, and shopping for speculative actual property with out blinking a watch.
That is as a result of financing was so very, very simple to come back by, largely within the type of debt. There was little or no fairness that went into our actual property offers, as lenders had been very beneficiant.
For example, I used to be a associate in a non-public actual property funding belief (‘REIT’) that had obtained a multi-million greenback credit score facility from Lehman Brothers.
Sure, that Lehman Brothers.
There have been many issues that led to my monetary collapse. However I’ll give attention to simply three classes I realized on this article.
My purpose, in fact, is so that you can change into clever REIT traders from my errors.
As late motivational speaker Zig Ziglar mentioned,
Generally adversity is what it is advisable face to be able to change into profitable.
However hopefully not in your case.
High quality Properties
Generally, after I’m driving round my hometown, I get to see properties I used to personal. And a few of them, I’ve to confess, make me ask why I owned them within the first place.
Take the warehouse that I leased to Goodyear Tire (GT) again within the day. It is now over 30 years outdated and has low ceiling heights – hardly a pretty characteristic and possibly one which factored into Goodyear shifting out years in the past. I am so glad I do not personal it anymore.
As a substitute, I am now a stakeholder in a way more intelligently allotted native portfolio of just below four million sq. ft, due to STAG Industrial (STAG).
STAG web site
As proven above, STAG has a big portfolio of high-quality warehouses in my hometown. Not like my outdated property, these ones are comparatively new with – you guessed it – excessive ceilings.
About 31% of STAG’s portfolio handles e-commerce exercise. And 55% of its portfolio right here within the Carolinas is positioned inside 30 miles of the tasks on the map under:
STAG Investor Presentation
I feel you are getting my level, however let me share one other certainly one of my previously held ugly ducklings anyway. This time, it is a retail property in Gaffney, South Carolina.
It seems to be leased to Hibbett Sports activities (HIBB) and CitiTrends, two retailers that had been a part of my unique growth plan. In order that they had been good picks.
Nevertheless, there are additionally apparent vacancies that might be troublesome to lease since Gaffney is a small city. Its inhabitants is just round 50,000.
I am a lot happier being a stakeholder on this high-quality retail property:
Simon web site
This time, my funding is in Simon Property Group (SPG) that occurs to personal the Haywood Mall in Greenville, South Carolina. It is an A-quality retail heart with greater than 120 outlets, together with nationwide manufacturers like Belk, Dillard’s (DDS), Macy’s (M), JC Penney, Apple (AAPL), and The Cheesecake Manufacturing unit (CAKE).
One other instance is without doubt one of the single-family leases I ran, positioned in downtown Spartanburg.
Being an house landlord could be very concerned. However being a shareholder of an house landlord like Mid-America Condominium Communities (MAA)? Not a lot.
Here is certainly one of its South Carolina properties:
MAA web site
All three of those REITs respect the idea of high quality. Not like how I operated again within the day, they do not simply wish to personal properties.
They wish to personal properties that proceed to supply apparent, higher-end worth yr in and yr out. And they also do not accept something much less. Not for themselves. Not for his or her tenants.
And never for his or her traders.
Should not you be demanding the identical?
High quality Steadiness Sheets
Now, as I mentioned, most of my growth offers had been extremely leveraged. My associate’s and my capital stack was round 90% financial institution debt and 10% fairness.
If that sounds appalling, it’s. But it surely was additionally the norm again within the late ’90s and early 2000s. The banks had been nearly actually throwing cash at us.
This implies we had been personally liable for paying off many of the debt. So we had been taking over outsized dangers to generate mediocre returns.
In 2004, my enterprise associate determined to go head over heels right into a lodge challenge in downtown Spartanburg. Happily, I wasn’t a associate in that deal, nevertheless…
It grew to become an enormous cash suck for the partnership and finally grew to become the primary domino to fall for my final crash.
Marriott.com
The subsequent domino was the Nice Recession – the no-holds-barred reset button for me and 1000’s of different actual property builders throughout the nation.
Similar to that, the pleasant bankers who had been calling me each week eager to go to lunch had been ignoring me whereas getting nervous over their default lists.
I had little alternative than to begin over.
So in 2010, I confirmed up on Looking for Alpha.
I started to check REITs, nearly turning into obsessive about their “compelled” dividend attributes. I wasn’t used to that characteristic since my earlier enterprise associate had been hoarding dividends for his lodge challenge.
The one which finally went into foreclosures.
I studied CEOs like Tom Lewis, who was with Realty Revenue (O) on the time; Craig Macnab, previously of NNN REIT (NNN) and now board member at VICI Properties (VICI) and David Simon over at Simon Property Group.
I grew to become fixated on high quality steadiness sheets, investment-grade rankings, and dividend payout ratios. I started studying books like The Clever Investor and Safety Evaluation.
I used to be fully reworked, with my mindset reshaped as I lastly got here to know an enormously necessary two-pronged lesson: that financial success entails enjoying:
- Good offense (i.e., incomes cash)
- Good protection (spending as little as doable).
In any other case, you are risking shedding out in your true funding potential.
High quality Administration
The final piece of the puzzle for me was folks.
Though actual property is a property recreation, it takes folks to generate the worth. As legendary worth investor Benjamin Graham wrote within the aforementioned Safety Evaluation:
It must not ever be forgotten {that a} stockholder is an proprietor of the enterprise and an employer of its officers.
I used to be concerned in dozens of partnerships earlier than the Nice Recession, which I assumed I used to be dealing with nicely. However after I misplaced my first fortune, I started to coach myself to suppose like an proprietor as an alternative of as a shareholder.
As a result of the reality is that after I spend money on a REIT – or another firm – I am really paying the executives’ salaries.
As an proprietor, I need to be handled with respect and consideration… one thing I suppose I wasn’t used to in my earlier life. This included assembly with administration groups regularly.
I’ve since interviewed nicely over 200 insiders, starting from executives to analysts to even a number of billionaires.
Gaining access to administration groups has been higher than acquiring an MBA at an Ivy League college – with all due respect to Cornell, Georgetown, and Wharton, the place I visitor lecture. I am studying from a few of the greatest danger managers on this planet.
iREIT
And whereas I do know that is a privilege not each investor has at their disposal, I supply the following smartest thing to my readers…
My interactions and evaluation of these interactions specified by written and video (for members) type each week.
Talking of which, I really like that I now get to assist traders construct wealth by investing in shares… whereas concurrently instructing tens of 1000’s of individuals across the globe.
Generally, I even get to work together with you all in individual, whether or not by conferences or the e book signings I will start doing for REITs for Dummies in just some weeks.
The primary one, by the way, might be at a Barnes & Noble retailer I constructed again within the day – certainly one of my higher investments, even when I do not personal it anymore.
Barnes and Noble
I am so enthusiastic about all of the arduous work I’ve put into my writing right here at Looking for Alpha and my future prospects. I used to be as soon as bitter about my monetary troubles, however I made a decision way back to study from my errors…
And to assist others keep away from them altogether.
Ben Graham mentioned it greatest when he mentioned:
Adversity is bitter, however its makes use of could also be candy. Our loss was nice, however ultimately, we may rely nice compensations.
So thanks for being a part of my trusted community! I hope that my writing encourages you to change into an clever REIT investor and to keep away from speculative alternatives.
Notice: Brad Thomas is a Wall Avenue author, which suggests he is not all the time proper together with his predictions or suggestions. Since that additionally applies to his grammar, please excuse any typos you might discover. Additionally, this text is free: Written and distributed solely to help in analysis whereas offering a discussion board for second-level considering.