Lessons learned: adversity is bitter but its uses can be sweet

Charlie Munger, a business partner of Warren Buffett, once said that “Life will have terrible blows, horrible blows, unfair blows. It doesn’t matter. And some people recover and some don’t.”

I can relate.

As many As you know, I was a successful real estate developer in my past life. The commercial and industrial portfolio I built was worth about $100 million by the time I turned 30.

I’m not saying that I made that money lounging on my sofa, drinking high-quality champagne and eating caviar. There was a lot of work involved.

At the same time, he was definitely enjoying the money he earned, flying private jets, vacationing in luxurious destinations, and buying speculative real estate without blinking an eye.

This is because it was very, very easy to get financing, mainly in the form of debt. Very little capital was invested in our real estate deals, as the lenders were very generous.

For example, I was a partner in a private real estate investment trust (‘REIT’) that had obtained a multi-million dollar line of credit from Lehman Brothers.

Yes, that Lehman Brothers.

There were many things that led to my financial collapse. But I’ll focus on just three lessons I learned in this article.

My goal, of course, is for you guys to become smart REIT investors from my mistakes.

As the late motivational speaker Zig Ziglar said:

Sometimes adversity is what you have to face to be successful.

But hopefully not in your case.

quality properties

Sometimes when I’m driving through my hometown, I see properties that I used to own. And I have to admit, some of them make me wonder why I owned them in the first place.

Take the warehouse I rented for you. goodyear tires (GT) in the past. He is now in his late 30s with low ceilings, which is not an attractive feature and was probably a factor in Goodyear’s move years ago. I’m so glad I don’t have it anymore.

Instead, I’m now a stakeholder in a much more cleverly allocated local portfolio of just under 4 million square feet, thanks to DEER Industrial (DEER).

As shown above, STAG has a large portfolio of high-quality stores in my hometown. Unlike my old property, these are relatively new and, as you may have guessed, have high ceilings.

About 31% of STAG’s portfolio manages e-commerce activity. And 55% of their portfolio here in the Carolinas is within 30 miles of the projects on the map below:

I think you’re getting my point, but let me share another one of my ugly ducklings that I used to have. This time, it’s a commercial property in Gaffney, South Carolina.

It appears to be leased to Hibbett Sports (HIBB) and CitiTrends, two retailers that were part of my original development plan. So they were good choices.

However, there are also obvious vacancies that will be difficult to fill as Gaffney is a small town. Its population is only about 50,000 inhabitants.

I am much happier to be an interested party in this high quality commercial property:

This time my investment is in Simon Real Estate Group (SPG) who happens to own the Haywood Mall in Greenville, South Carolina. It is an A-grade retail center with more than 120 stores, including national brands such as Belk, Dillard’s (DDS), Macy’s (M), JC Penney, Apple (AAPL), and The Cheesecake Factory (CAKE).

Another example is one of the single-family rentals I managed, located in downtown Spartanburg.

Owning an apartment is very complicated. But being a shareholder in an apartment owner like Apartment Communities in Central America (MAA)? Not so much.

Here is one of his properties in South Carolina:

The three REITs respect the concept of quality. Unlike how it operated in the past, they don’t just want to own property.

They want to own properties that continue to offer higher quality and obvious value year after year. And that’s why they don’t settle for less. Not for themselves. Not for your tenants.

And not for their investors.

Shouldn’t you demand the same?

quality balances

Now, as I said, most of my development deals were highly leveraged. The capital of my partner and mine was around 90% bank debt and 10% capital.

If this sounds scary, it is. But it was also the norm in the late 1990s and early 2000s. Banks were almost literally throwing money at us.

This means that we were personally responsible for paying most of the debt. So we were taking outsized risks to generate mediocre returns.

In 2004, my business partner decided to go head over heels for a hotel project in downtown Spartanburg. Fortunately, however, I was not a partner in that deal…

It became a huge loss of money for the association and eventually became the first domino to fall in my final accident.

The next domino piece was the Great Recession – the reset button with no holds barred for me and thousands of other real estate developers across the country.

So the friendly bankers who called me every week for lunch ignored me as they fretted over their delinquency lists.

I had no choice but to start over.

So in 2010, I appeared on Buscando Alfa.

I started studying REITs and almost became obsessed with their “forced” dividend attributes. I wasn’t used to that feature as my previous business partner had been racking up dividends for his hotel project.

The one that finally went into foreclosure.

I studied CEOs like Tom Lewis, who was with real estate income (O) at the moment; Craig Macnab, formerly of REIT NNN (NNN) and now a member of the board of directors of VICI Properties (VICI) and David Simon in Simón real estate group.

I became obsessed with quality balance sheets, investment grade ratings, and dividend payout ratios. I started reading books like The smart investor and Security analysis.

I was completely transformed and my thinking changed when I finally came to understand a double lesson of enormous importance: that money success involves gambling:

1. Good crime (i.e. making money)
2. Good defense (spend as little as possible).

Otherwise, you risk losing your true investment potential.

Quality management

The last piece of the puzzle for me was the people.

Although real estate is a property game, it takes people to create value. As legendary value investor Benjamin Graham wrote in the aforementioned article. Security analysis:

It should never be forgotten that a shareholder is the owner of the company and the employer of its officers.

I was involved in dozens of partnerships before the Great Recession, which I thought I was handling well. But after losing my first fortune, I began training myself to think like an owner instead of a shareholder.

Because the truth is that when I invest in a REIT – or any other company – I am actually paying the salaries of the executives.

As an owner, I deserve to be treated with respect and consideration…something I guess I wasn’t used to in my previous life. This included regular meetings with management teams.

Since then, I’ve interviewed more than 200 insiders, from executives to analysts and even a few billionaires.

Having access to management teams has been better than getting an MBA at an Ivy League school, with all due respect to Cornell, Georgetown, and Wharton, where I lecture as a guest. I am learning from some of the best risk managers in the world.

And although I know that it is a privilege that not all investors have at their disposal, I offer the best option to my readers…

My interactions and analysis of those interactions are presented in writing and on video (for members) each week.

Speaking of which, I love being able to help investors build wealth by investing in stocks… while teaching tens of thousands of people around the world at the same time.

Sometimes I even get to interact with all of you in person, whether it’s through lectures or book signings that I’ll start doing for REITs for Dummies in just a few weeks.

The first, by the way, will be in a Barnes & Noble store that I built back in the day, one of my best investments, even if I don’t own it anymore.

I am very excited about all the hard work I have put into my writing here at Buscando Alpha and my future prospects. I was once bitter about my financial problems, but a long time ago I decided to learn from my mistakes…

And help others avoid them altogether.

Ben Graham said it best when he said:

Adversity is bitter, but its uses can be sweet. Our loss was great, but in the end we could count on great compensation.

So thank you for being part of my trusted network! I hope my writing will encourage you to become a smart REIT investor and avoid speculative opportunities.

Note: Brad Thomas is a Wall Street writer, which means he doesn’t always hit the mark with his predictions or recommendations. Since that also applies to his grammar, he excuses any typos he may find. Also, this article is free: it is written and distributed solely to aid research while also providing a forum for second-tier thinking.