I Sold These REITs | Seeking Alpha

We have sold quite a few REITs in 2024.

In most cases, this wasn’t because we thought that these REITs had reached fair value, but rather because we could recycle the capital into better opportunities.

Here are 3 such examples:

STAG Industrial (STAG)

STAG is one of the most popular industrial REITs on Seeking Alpha.

It has historically traded at lower valuations than its close peers like Prologis (PLD) and also offered a much higher dividend yield during most times.

As a result, investors have seen it as an opportunity to invest in high-growth industrial properties with a lower valuation and higher yield.

But here’s why we sold it:

Some of its close peers, including First Industrial (FR) dropped a lot more in this recent bear market, and it caused their valuation spreads to close down to historically low levels.

We were happy to invest in STAG when the spread was large, but we would much rather own FR now that the spread has become small.

While STAG is a good REIT, it deserves to trade at a discount because of its unique strategy.

Historically, STAG has mostly focused on value-add properties in secondary markets. It would typically buy properties with deferred capex, short leases, and other issues, and then fix them up to create value. It is a good approach, and they have executed it very well.

However, it then isn’t surprising that on average, the quality of their assets will be inferior to that of a REIT like First Industrial, which built most of its own properties and focuses on high-growth supply constrained markets.

This difference in approach is also well-reflected in their releasing spreads.

First Industrial is today able to push for ~50% rent hikes as its leases gradually expire, but STAG’s releasing spreads are only about half of that.

Even then, their valuations are now fairly similar if you adjust for FR’s lower leverage:

Click to enlarge

For this reason, we sold STAG and reinvested the proceeds into FR. We think that it currently offers slightly better risk-to-reward.

CBL & Associates (CBL)

CBL is probably one of my biggest investment failures ever.

Overall, I have done quite well over time and managed to significantly outperform my sector benchmarks like the Vanguard Real Estate ETF (VNQ), but I have had my share of setbacks along the way and CBL was one of them.

Long story short, I invested in its Series E preferred shares in 2019, shortly before the pandemic.

The thesis back then was that Class B/B+ malls were facing some headwinds, but that they would remain valuable assets over the long run.

What you need to understand here is that Class B is actually quite good. Often, Class B is simply a Class A mall in a secondary market. Here is the quality distribution of the mall sector:

Therefore, we thought that Class B would do fine over the long run. Yes, the mall space is oversupplied and Amazon (AMZN) would keep stealing market share from them, but this would mostly affect the inferior Class C, D, and E malls, and as they close down, it would lead to traffic consolidation, benefiting the remaining Class A and B malls.

Moreover, CBL was heavily reinvesting in its properties to diversify their uses to include more services, entertainment, and non-retail uses, which would make them e-commerce proof over the long run.

Finally, to enjoy even better margin of safety, we strategically invested in the preferred shares of the company, thinking that they might need to reduce the common dividend to reinvest in their properties, but the preferred would be safe.

But here’s what went wrong:

The first thing was the pandemic. That was a big black swan that I simply didn’t predict. Sometimes, risk factors play out, and you lose money even if your thesis was correct.

But the second issue is that I overlooked the importance of capex. I viewed it mostly as discretionary growth capex when in reality, this capex was badly needed to keep the malls afloat. Without it, they would face growing vacancies and declining sales per square foot.

Adjusted for this capex, the leverage of the REIT was far higher than I had imagined, and this ultimately pushed the REIT into bankruptcy during the pandemic.

Our preferred equity was converted into common equity, resulting in significant dilution. I held on to the common equity for a while, and I still think that it may do well over time, but I still ended up selling because I could use some tax losses to counter-balance the big gains that we earned on the buyouts of Tricon Residential (TCN) and Apartment Income REIT (AIRC).

Moreover, we prefer the risk-to-reward of some other speculative REITs.

Global Medical REIT (GMRE)

My latest sale is Global Medical REIT (GMRE).

Again, I am not bearish on the company, but we identified a better opportunity in its peer group that offered higher return potential with lower risk and therefore, it did not make sense for us to hold on to GMRE.

Also, it is fair to say that I am not as bullish on GMRE as I used to be.

GMRE was on fire in 2021 / 2022 when interest rates were low because its common equity commonly traded at a premium to its NAV, and it was able to consistently buy properties at large spreads over its cost of capital, resulting in rapid growth in its FFO per share.

Moreover, despite growing at a rapid pace, the company was still offering a relatively high dividend yield, which was the result of its focus on higher cap rate medical office buildings.

High growth coupled with high yield was a recipe for a high total returns.

But then interest rates surged, its equity crashed, its cost of capital went way up, and this put an end to its rapid growth.

Now, the company isn’t able to earn good spreads, and its heavy debt load is putting the company at high risk of cutting its dividend. Its payout ratio is already near 100% and its interest expense will only rise further in the coming years.

It should still benefit from rate cuts and this may ultimately save the dividend yield, but the risk-to-reward just isn’t as good as it once was.

We earned a 56% total return on our 2-year holding period.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.