3 Of My Worst REIT Picks Ever (No. 3 Might Shock You)

Nov. 19, 2021 7:00 AM ETCDR, CXW, EPR, GEO, SKT, SPG147 Comments67 Likes

Summary

  • The achievement of a .400 batting average in a season is recognized as "the standard of hitting excellence."
  • I wish I could tell you I’m the Ted Williams or Ty Cobb of REITs with a remarkable record of "excellence." But that's just not the case.
  • Fortunately, I can say I’ve hit far more winners than losers.
  • Looking for a helping hand in the market? Members of iREIT on Alpha get exclusive ideas and guidance to navigate any climate. Learn More »

Woman looking back at friend falling from cliff

Klaus Vedfelt/DigitalVision via Getty Images

I should probably apologize right now for today's title. I was originally going to just call it "My Worst Picks Ever." But then I saw one of those click-bait ads, and that was that.

I hope you find it as entertaining as I do.

As for the actual worst picks listed here, I hope you find them as educational as I do. If we don't learn from our missteps, we're probably not going to do that well in life.

Everyone makes them. It's part of the human experience. Some mistakes are even simply natural steppingstones in success stories.

It's rare that anybody makes a major (or even minor) breakthrough on the first try or by pure accident. And don't throw (or drop) Isaac Newton at me to prove me wrong about that.

While he was reportedly inspired by an apple falling, that was only the spark for his now-famous theory. There was a lot of work - and no doubt plenty of failure - in actually proving the point.

Besides, I said "it's rare," not impossible. I have to assume there's at least an example or two out there where it was nothing but "Eureka!" from start to finish.

(Don't you just hate those guys?)

What's impossible, however, is going through life in general without making mistakes. There are just too many opportunities to go awry.

Too many opportunities and too many factors involved as well.

Why We Make The Mistakes We Do

No doubt, you can come up with a few reasons why people in general - and maybe you in particular - make mistakes. Here's the list I've compiled:

  • Bad information
  • Incomplete information
  • Refusal to consider good information
  • Bad advice
  • Bad company
  • Poor self-esteem
  • Ego
  • Destructive backgrounds
  • Present distractions
  • Future fears
  • Outside pressure
  • Inside pressure
  • Selfishness
  • Exhaustion
  • Greed.

For the record, when I say "selfishness" and "greed," I'm still referring to flat-out mistakes, not crimes: The kind of everyday decisions we humans make that have unfortunate results.

To give one example, stop and think about how many times you've thought over the possibilities and reached the correct conclusion… but then second guessed yourself into deciding on a wrong one instead.

And all because of the internal pressure of not wanting to fail or lose whatever's at stake or let someone down.

In that last case of not wanting to disappoint, it could easily be considered not just inside pressure but outside pressure as well. Which brings me to another reason why we're so error-prone…

There are so many times when the factors above (and those not listed) gang up on us. Exhaustion and incomplete information, for instance: How often have we acted and reacted based on that combination?

To our detriment. And perhaps to the detriment of those around us.

With that in mind, I decided to do a search for "the worst mistakes in history." That brought me right to a Business Insider piece from 2011 titled, "The 25 Worst Mistakes in History."

Being a decade old, who knows. There might be a few of the entries bumped off the list. Not to mention that probably everyone is going to have their own compilation that varies at least a little.

Still though, I find some of these examples very worth mentioning.

These Mistakes Were Costly On Every Single Level

Written on April 26, the article begins by mentioning that it was "the 25th anniversary of the Chernobyl meltdown." It lists that one as costing "$358 billion in clean-up and the value of lost farmland."

The inflation-adjusted price, it adds, would be $720 billion.

And, again, that was 10 years ago.

The writer lists "faulty equipment" as the reason why what happened. But I've heard it said by people who lived in the Soviet Bloc that it was sheer overworked exhaustion to blame.

A far lesser loss listed - though one I wasn't surprised to see - was AOL's $182 billion purchase of Time Warner right before the dot.com bubble burst. "Nine years later, Time Warner spun off with a market cap of $36 billion - a $178 billion loss. The newly separated AOL was valued at only $2.5 billion."

That one was probably at least partially due to hubris. It's said that Steve Case, then CEO of AOL, was adamant about ignoring cautionary advice about the deal.

There also was the Titanic, which cost $7.5 million to build… for a single ill-fated voyage. Much has been discussed about who was to blame for that tragedy, which resulted in 1,517 people dying.

Depending on who the actual culprit was, you could attribute this one to ego, exhaustion, present distractions, bad information, incomplete information, refusal to consider good information, outside pressure, inside pressure, bad advice…

Take your pick.

Fortunately for me, while I've fallen victim to every one of those at one time or another, none of my bad stock picks have ended in lives lost. I've been able to live and learn from the experiences, as have those around me.

So with that same goal in mind, let's discuss my biggest ones today.

Loser REIT Picks No. 1 & 2

You may recall an article I wrote on October 22, 2019. "Geo and CoreCivic: Why It's the Best Time Since 2016 to Buy Prison REITs" explained how:

"Prison stocks are now selling as cheaply as they were in mid-2016, when it appeared Hillary Clinton would win. Priced like mall REITs, prison REITs don't have to face down Amazon. Their grim reaper comes in the form of politicians."

But clearly, considering the title, I was bullish on them anyway. Yet here's what happened next to The GEO Group (GEO) in particular:

The GEO Group chart

(Yahoo Finance)

That's a lot of red ink, to say the least.

GEO has plummeted by around 40% since I wrote:

"… the 13% dividend yield is covered out of cash flow and leaves enough left over for capital expenditures. Meanwhile, its capex (capital expenditure) budget is quite modest compared to its operating income and cash flows."

In that same article, I recommended CoreCivic (CXW), a C-corporation that was once a REIT. Knowing that, it should be any surprise that it's lost over 25% in value since.

Keep in mind, we always maintained mere modest exposure in the prison space. Yet even a Speculative Buy recommendation deserves scrutiny.

There are always lessons learned when it comes to investing. And my biggest regret with this specialty subsector is that it I didn't fully grasp the regulatory uncertainty within the private prison industry.

When the major banks quit lending to both REITs, I should have bailed immediately. In short, my lesson learned is that "REITs require capital to grow and without it shares will suffer. Always insist on multiple forms of debt and robust equity analyst coverage."

Loser REIT Pick No. 3

My next meltdown came in the form of Cedar Realty Trust (CDR). Back in February 2020 - just before COVID-19 became a household name - I wrote an article explaining that, "We're inclined to add this REIT to our Strong Spec Buy bucket, with potential returns targeted at 25% or higher."

CDR had all the right things going for it:

  • QA low payout ratio (40% based on funds from operations, or FFO)
  • High-quality properties (82% grocery-anchored)
  • Insider ownership (about 5%)
  • A really cheap price (5.6x P/FFO, which was the lowest in its subsector)

In my defense, I also highlighted the potential risk, acknowledging how:

"What's admittedly not so pleasant is how former COO Nancy Mozzachio filed a lawsuit against CEO Bruce Schanzer for sexual discrimination and retaliation in 2016. On the most recent earnings call, Cedar's CFO said: 'In 2016, we accrued a contingent liability of $1.5 million associated with the termination of our former COO. Recently, the arbitration related to this contingent liability concluded and we reversed the accrual.'"

But, according to The Wall Street Journal:

"In a ruling handed down in December 2019 and unsealed in May, the arbitrator said Cedar Realty had legitimate reasons for terminating Ms. Mozzachio and denied her other claims."

Now fast forward to September 2021, where the company said it had begun a dual-track board process. The purpose? To consider a sale, merger, or the unloading of its core grocery-anchored shopping center portfolio and mixed-use development projects.

Cedar had previously begun to explore strategic alternatives late in 2019, but COVID disrupted that process.

It also announced the exit of CFO Philip Mays. He'll be replaced by Jennifer Bitterman, who has been with the company since 2011.

Chart, histogram Description automatically generated

(Source: Yahoo Finance)

As shown above, shares have bounced back since. They're up over 35% since my Strong Buy call back then.

Nonetheless, I didn't take advantage of the drastic pullback due to concerns over the lingering situation. I sold CDR in 2020 before the rally, so my performance looked more like this:

Cedar Realty Trust chart

(Source: Yahoo Finance)

So here's my lesson learned, taken from Guy Spier's book, The Education of a Value Investor:

"Are any of the key members of the company's management team going through a difficult personal experience that might radically affect their ability to act for the benefit of their shareholders?"

A wise consideration, as is this one:

"These slow losers suck up an enormous amount of your mental energy over an extended period of time."

Now, these are just two examples of REITs that I have actually lost money own, and by the way,

Sometimes you must cut your losers, and that's exactly what I did with CDR and CXW, but this allowed me to become laser-focused on tactical REIT investing in one of the best buying opportunities of my lifetime.

2 (Of Many) REIT Winners To Soothe Those Worst-Pick Wounds

Fortunately, a large majority of the REITs in my portfolio are battle-tested. And, as a general rule, I also seek out the highest-quality names operating in defensive categories.

To help us with that in the midst of last year's chaos, my team and I began to examine our portfolio diversification. We also created a scoring model tool, iREIT Tracker, to screen for quality and value.

Together, that helped us dump our losers.

Fortunately, we were already underweight lodging and office. And WE had no exposure to REITs like EPR Properties (EPR), CBL Properties (CBL), or Washington Prime (OTC:WPGGQ).

But Simon Property Group (SPG) and Tanger Outlets (SKT) had to go, much as it pained me. The retail sector was getting clobbered, after all.

Ultimately though, we agreed with Guy Spier that "temperament is more important than IQ when it comes to investing."

So we went back into SKT in July 2020 - and watched shares bounce back to around $15 before we exited our position. (We still have very modest exposure).

Then in December, we were convinced that SPG was going to survive, with shares easily hitting $150.00. As I explained:

"If we had to take a bet on whether Simon was headed to $50 or $150, we're clearly siding with $150. This company is a survivor, and we look forward to seeing what it can do from here."

This dollar cost averaging concept proved to be extremely powerful. Our average return for SPG since we first purchased shares in May 2017 is over 25%.

Durable income portfolio

(Sharesight - iREIT on Alpha)

The Checklist

If you haven't read Spier's book, I encourage you to. I read it a few weeks ago while flying back from Europe, including the suggestion that:

"Before pulling the trigger on any investment, I pull out the checklist… to see what I may be missing. A checklist is a way of managing your own mind and guarding against your own proclivities. So it needs to be based on this kind of self-awareness."

His checklist includes the following questions:

  • "Are any of the key members of the company's management team going through a difficult personal experience that might radically affect their ability to act for the benefit of their shareholders?"
  • "Is this company providing a win-win for its entire ecosystem?"
  • "How could this business be affected by changes in other parts of the value chain that lie beyond the company's control?"
  • "Is this stock cheap enough? Am I sure that I'm paying for the business as it is today - not for an excessively rosy expectation of where it might be in the future?"

That last one is perhaps one of the most important. It's a risk mitigator that allows you to maintain a buffer - or margin of safety - that protects you against uncertainties.

As Warren Buffett told an audience at Columbia Business School in 1984:

"You do not cut it close. That is what Ben Graham meant by having a margin of safety. You don't try to buy businesses worth $83 million for $80 million. You leave yourself an enormous margin. When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000-pund tricks across it. And that same principle works in investing."

Happy REIT Investing!

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This article was written by

Brad Thomas profile picture
102.61K Followers
Author of iREIT on Alpha
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Brad Thomas is the CEO of Wide Moat Research ("WMR"), a subscription-based publisher of financial information, serving over 6,000 investors around the world. WMR has a team of experienced multi-disciplined analysts covering all dividend categories, including REITs, MLPs, BDCs, and traditional C-Corps.

The WMR brands include: (1) The Intelligent REIT Investor (newsletter), (2) The Intelligent Dividend Investor (newsletter), (3) iREIT on Alpha (Seeking Alpha), and (4) The Dividend Kings (Seeking Alpha). Thomas is also the editor of The Forbes Real Estate Investor and the Property Chronicle North America.

Thomas has also been featured in Forbes Magazine, Kiplinger’s, US News & World Report, Money, NPR, Institutional Investor, GlobeStreet, CNN, Newsmax, and Fox. He is the #1 contributing analyst on Seeking Alpha in 2014, 2015, 2016, 2017, 2018, and 2019 (based on page views) and has over 102,000 followers (on Seeking Alpha). Thomas is also the author of The Intelligent REIT Investor Guide (Wiley). 

Thomas received a Bachelor of Science degree in Business/Economics from Presbyterian College and he is married with 5 wonderful kids. He has over 30 years of real estate investing experience and is one of the most prolific writers on Seeking Alpha (2,800+ articles since 2010). To learn more about Brad visit HERE.
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Disclosure: I/we have a beneficial long position in the shares of SPG, SKT either through stock ownership, options, or other derivatives. 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: Author's Note: Brad Thomas is a Wall Street writer, which means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: written and distributed only to assist in research while providing a forum for second-level thinking.

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