The Most Important Lessons Of 2019

Recently, we took a step back to review our 2019 results in an effort to determine what we did right, what we did wrong, and what we can improve in 2020.

Overall, my real-money real estate investments (including international) earned a 48.99% total return – after tax – in 2019. In comparison, the RMZ REIT index returned 19.24%.

(*See relevant disclosures at the end of this article)

We made some good investment decisions. But we also did a few important mistakes. As an example, our investments in Uniti Group (UNIT) and CBL Preferred Shares (CBL.PE) have been catastrophic so far.

Reviewing the good and the bad is essential to improve our strategy in 2020. Below we outline all the most important lessons from the past year.

Lesson #1: Don’t Skip International REITs

Our best performers in 2019 were select international REIT investments that shoot to the upside. My two largest international investments, Big Yellow Group (OTC:BYLOF) and DIC Asset, returned ~40% and ~75% in 2019 alone.

Both companies are recommended at High Yield Landlord and part of our International Portfolio. Yet, I suspect that many of you would have never invested in these companies due to “home bias” – or the tendency for investors to only focus on domestic equities.

It’s especially costly to ignore international REIT markets because this is where we often find the best opportunities. They boost my performance, but also mitigate risks through diversification.

If you missed out on international REITs in 2019, don’t make the same mistake in 2020 and beyond. You can now take actions to learn more about International REIT markets and get ready to take action.

I recently spent three months in Asia in an effort to identify the best Asian REIT opportunities. In 2020, we expect to expand our international REIT portfolio further. We will be traveling to Japan, Australia and several European countries in search of the next opportunities.

Lesson #2: Don’t Be Too Cheap

Price is what you pay, value is what you get. In this sense, a great company won’t make a great investment, unless the price is right. Many high-quality REITs are way overpriced, and this will inevitably hold down their performance in the long run.

At the same time, there’s a difference between being a “value” investor and just being too cheap. You never want to overpay, but you should not take excessive risks either just to get a slightly lower price.

From our experience, picking the 10% cheapest REITs never worked well. These are companies that are undergoing significant challenges and cheap can very quickly get even cheaper. Think of our investments in UNIT and CBL.E in 2019. Both are great examples of how a seemingly compelling idea can quickly turn south.

Granted, they also have enormous upside potential and we were well aware of the risks. But looking back, we are seeing increasing evidence that “Deep Value” REITs rarely rise up to the occasion. Global Net Lease (GNL), Ashford Hospitality (AHT), Senior Investment (SNR), Office Properties Income (OPI), Industrial Logistics Properties (ILPT), etc., are all good examples of deep value REITs that are popular on Seeking Alpha due to their high yield land low valuations. Yet, their total returns have been disappointing, and investors have strongly underperformed market indexes (VNQ).

In active REIT investing, you do not want to pay full price, but you should not be too cheap either.

Over time, we have found that our sweet spot is in quality companies undergoing temporary challenges that are solvable over time. They are not the cheapest in their peer group, but they are discounted relative to the average and provide good alpha-generation potential as they solve the issues and reprice closer to peers.

Our contrarian investment in Spirit Realty Capital (SRC) in May of 2017 is a great example of that. The company had great qualities with one exception: A minor portion of its portfolio was causing problems. This issue could be solved by selling these assets. Picking up the shares when they were discounted resulted in nearly 4x greater returns than those of the REIT indexes (VNQ):

In 2020, we should remain laser focused on “quality value,” and not let the “deep value” opportunities distract us.

Lesson #3: Keep Speculative Positions Small

If even after reading Lesson #2, you still decide to invest in speculative deep value REITs, at the very least, keep the position small.

If we did something right with UNIT and CBL.E, it’s that we recognized the speculative nature and intentionally kept the positions small. We would have been better off to avoid them altogether, but the damage would have been much worse if we had built large positions and gotten greedy.

From this standpoint, one mistake we did in 2019 was to build an excessively large position in Jernigan Capital (JCAP). We like JCAP very much and we remain confident in the thesis, but looking back, this is the only “high-risk” rated company that we built into a sizable position.

In 2020, if we ever decide to take speculative positions, it will only be small positions representing 1%-3% of the Core Portfolio.

Lesson #4: Know When to Average Down

Our best decision of the entire year was to add capital to our account in early January when the market sold off and REITs were exceptionally cheap. We took full advantage of the sale, and just one year later, many of these same companies were up by 20%-30%.

Investors are emotional beasts. And a 10%-20% drop in share price causes many to panic. We got a taste of that in early 2019, but we held strong and did the right thing by buying more and thinking long term.

Sometime in 2020, it’s very possible that we experience another correction. We have no clue when that will be. And we do not know what the reason will be. We know however that when it happens, we will not hesitate to increase positions. When you adopt the “landlord” mentality, seeing REIT prices drop becomes a blessing, instead of a curse.

Lesson #5: Stick to The Game-Plan

Our value strategy to real estate investing produces solid returns in the long run. That said, anything can happen in any given year. We enjoyed good returns in 2019, but this does not mean that we will enjoy strong returns in 2020.

In fact, we have no clue what the results will be in 2020. I don’t think that anybody does and you must accept this uncertainty if you want to invest with us.

We are not here to trade securities. We are here to buy REITs as if we were buying rental properties. We look for high and sustainable income and always try to get a good deal. Money is made at the acquisition by buying at below fair value. We then hold patiently to these undervalued REITs, earn high income, and wait for long-term appreciation. We like to call this the “landlord” approach to REIT investing.

In 2020, your patience will be tested once again. The market will be volatile and you will need to make an active effort to stick to the game-plan.

To Recap…

  1. Invest in foreign real estate through international REITs
  2. Stick to “quality value” and avoid “deep value”
  3. If you decide to invest in deep value anyways, keep the position small.
  4. Have cash aside to buy more when a correction comes.
  5. Patience, patience, patience.

Right now, our Portfolio is stronger than ever with:

  • ~80% invested in defensive sectors.
  • Mostly dividend grower.
  • Backed by solid assets and conservative balance sheets.

We are quickly approaching the $100,000 bar which we expect to break in the first half of 2020 – through a combination of dividend increases, upside realization, and cash additions. Opportunities remain abundant today and we will continue to take advantage of them.

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Disclosure: I am/we are long UNIT; CBL.E. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Relevant disclosure to presented performance: past performance is no indication of future results. Our portfolio may not be perfectly comparable to the relevant index. It is more concentrated, includes international REITs, and may at times invest in companies that are not typically included in REIT indexes. The performance of our portfolio is underrepresented because it is affected by withholding taxes on all dividends. Calculations done by Interactive Borkers.

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