Diligence Is The Mother Of Good Luck

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Includes: AMT, APTS, CCI, CONE, DLR, HASI, O, SPG, VNQ, VTR
by: Brad Thomas
Summary

"Diligence is the mother of good luck". Ben Franklin.

"Greatness Isn’t Just Talent. It’s Talent Applied Consistently". Gary Player.

"An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return." Benjamin Graham.

Ben Franklin said, “diligence is the mother of good luck.

I interpret this phrase to mean that success has more to do with careful planning and persistence than being just plain lucky. I am confident that Ben Franklin was suggesting that there is no such thing as ‘luck’, but simply that good things come from people who work hard.

In my previous career as a real estate developer, I learned how to carefully analyze a prospective investment opportunity by conducting necessary due diligence prior to closing on the deal. I had a check list that I would review that includes items such as survey, environmental reports, structural inspections, lease estoppels, appraisals, and title work.

Over the years, I found that by investing more time in due diligence, my outcomes (returns) were much better.

For example, I began to conduct tenant interviews, research competing properties, study traffic patterns, analyze area demographics, and even interview people shopping at Wal-Mart (NYSE:WMT).

I would always try to find one “nugget of wisdom” that would enable me to determine whether to move forward or “kill the deal.”

I read an article recently that suggested that “investors who spend more than the median of 20 hours on due diligence get better results than those who spend less than 20 hours.”

Although this seems intuitive, the practical reality is that few people have the time to devote to extensive due diligence when selecting their investments.

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When it comes to my wheelhouse, selecting the best REITs, I have found that the phrase “diligence is the mother of good luck” is the mantra. As many of you know, I spend around 50 hours weekly conducting due diligence on each of my portfolio companies.

I’m not sure if there is another individual who spends 2,400 hours per year analyzing REITs, but it’s a process that I take seriously. Careful, expert due diligence is, hands down, a key determining factor in successful REIT investing.

Yes, there are other ways to play the game, thanks in part to the wave of REIT ETF products that are as easy as VNQ.

By owning shares in Vanguard REIT (VNQ) or a similar ETF, an investor can gain access to the good, the bad, and the ugly. Last year I wrote an article and explained that “ETFs are simple to explain to clients, and they limit the amount of career risk for advisors who can blame the movements of broad indices, not their own stock-picking ability.”

I warned that “an ETF portfolio will perform in line with the indices, and the advisor can also charge fees in addition to the underlying ETF fees. The ability to mimic the indices, without the risk of deviating far from them, has been a boon for financial advisors.”

Alternatively, gaining market exposure without the risk of significant underperformance, without the necessity to understand company specific fundamentals, and without having to pay for active management is not necessarily a bad thing. It simply boils down to “different strokes for different folks.”

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Greatness Isn’t Just Talent. It’s Talent Applied Consistently

That’s a quote from the legendary golfer, Gary Player.

While I have met Player and I have played on a few of his golf courses, I am not a great golfer. (As I said, I spend 50 hours a week researching REITs, so who has the time for golf?)

Yet, I am a big disciple of hard work and the benefits of owning shares in companies that apply the same standards of consistency and predictability.

A large part of the time I spend on my REIT research has to do with dividend diligence. As far as I’m concerned, the best way to weed out the “best from the rest” is to dig deep into the sources of dividend income that a REIT generates.

When I find the companies that I consider “talented” and they grow dividends frequently and consistently, I call them SWANs – because they help me “sleep well at night.”

In my monthly newsletter (Forbes Real Estate Investor), I help investors identify the SWANs and within my Durable Income Portfolio, I maintain outsized exposure to the “greatest” and safest dividend growers.

Just in my previous career, as a shopping center developer, I built the foundation out of concrete recognizing that it would provide the most durable ingredients to the foundation.

Likewise, my Durable Income Portfolio is built-to-last. For the most part, I seek out REITs that provide stable dividend growth, recognizing that the power of compounding principle applies to REITs and income-producing real estate.

A Few Lucky Charms

Now let’s merge the first quote (by Ben Franklin) with the second one (by Gary Player). By conducting careful due diligence, I have selected the best REITs that offer the most reliable and predictable dividend growth.

My Durable Income Portfolio consists of 39 REITs that have generated a weighted average YTD return of 8.9% (around 3x better than VNQ). Keep in mind that this portfolio also includes many retail REITs (such as SPG, SKT, TCO, KIM, O, etc...) and I am maintaining exposure (riding out the storm).

The reason that the Durable Income Portfolio has performed well is because of the time and effort that went into it. It’s not that I am a great stock picker or that I’m a day trader, it simply boils down to 3 simple words: Focusing on Fundamentals.

Now, I could easily show you my worst performers, but I’ll save that for another article (I already mentioned 3 of them: SKT, TCO, and KIM).

However, today I want to showcase my winners – aka the “Lucky Charms” – that have provided me with durable sources of dividend income and exceptional price appreciation. These top 5 REITs have been carefully vetted and they have generated an average YTD Total Return of 30%.

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I have written about all of these REITs recently (that’s due diligence) and you can find my recent articles here:

Digital Realty (DLR)

Hannon Armstrong (HASI)

Crown Castle (CCI)

Preferred Apartment (NYSEMKT:APTS)

CyrusOne (CONE)

A few weeks ago, I coined the ‘DAVOS’ acronym to mimic Jim Cramer’s ‘FANG’ (tech-focused) basket. See my article HERE. I decided it would be cool to compare the ‘DAVOS’ performance with my top 5 REITs in the Durable Income Portfolio.

My top 5 REIT returned ~30% and the ‘DAVOS’ returned an average of 14.6% (year-to-date):

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Before you rush out to buy the 5 REITs in the ‘DAVOS’ or the top 5 REITs in my Durable Income Portfolio, let me remind you of one last quote, that is also a mantra for an “intelligent REIT investor.”

“An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.” Benjamin Graham

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Photo Source

ALWAYS do your homework! It’s the key to SLEEPING WELL AT NIGHT….

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Note: Brad Thomas is a Wall Street writer, and that means he is not always right with his predictions or recommendations. That also applies to his grammar. Please excuse any typos, and be assured that he will do his best to correct any errors, if they are overlooked.

Finally, this article is free, and the sole purpose for writing it is to assist with research, while also providing a forum for second-level thinking. If you have not followed him, please take five seconds and click his name above (top of the page).

REITs mentioned: (CONE), (APTS), (HASI), (CCI), (DLR), (AMT), (VTR), (O), and (SPG).

Disclosure: I am/we are long APTS, ARI, BRX, BXMT, CCI, CHCT, CIO, CLDT, CONE, CORR, CUBE, DLR, DOC, EPR, EXR, FPI, GMRE, GPT, HASI, HTA, IRM, JCAP, KIM, LADR, LTC, MNR, NXRT, O, OHI, OUT, PEB, PEI, PK, QTS, ROIC, SKT, SPG, STAG, STOR, STWD, TCO, UBA, UNIT, VER, VTR, WPC. 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.