ILPT - Adversity Is Bitter But Its Uses May Be Sweet

2023-10-14 07:00:00 ET

Summary

• I had a long personal journey of getting into commercial real estate and building a portfolio worth close to $100 million.
• This taught me the importance of partnerships and the need to align interests when investing in businesses.
• It also taught me the value of being in control of one's investments and staying within one's circle of competence.

When I finished college over three decades ago, I knew that I wanted to get into commercial real estate.

That’s why I took my first job as a leasing agent, helping landlords rent out space. As it turned out, I was pretty good at it.

Too good, in fact. There I was doing all that successful work while reaping mere modest rewards.

It was the landlords themselves who were getting rich. So, I decided to get into their game instead.

Maybe I should have realized that sooner, since it was in my DNA.

My grandfather was a very successful motel landlord in Myrtle Beach, South Carolina, in the 1960s. I always enjoyed myself when my mom would take me to visit him.

How could I not when his properties featured trampolines and pools and beautiful landscaping? Plus, he was the first motel landlord on the "Grand Strand” to include color TVs in the rooms.

However, he eventually sold his last motel to Best Western. So, I didn’t benefit from inheriting anything. I had to start small, buying my first property when I was around 26.

It was a single-family rental I converted into a duplex, living in one side of the house with a roommate and renting out the top floor.

Hardly the most impressive beginning. But you’ve got to start where you are to get where you want to be.

Moving On Up

The rent from that starter property was just enough to cover my mortgage payments, with a few dollars left over for beer. But that was okay with me.

For one thing, the house was right beside the all-women’s school Converse Collège.

As they say, the three most important words in real estate are location, location, location.

Plus, on perhaps a more practical note, I went on to use that house to convince the bank I was creditworthy enough to take out a loan. And so, slowly but surely, I began adding more assets to my portfolio.

I ended up buying around a dozen more duplexes, and my net worth grew to over $1 million.

But that was still only the beginning stages of my real estate journey. I knew that if I wanted to continue expanding, it was time to really try on my big boy pants.

I heard about a tiny auto parts chain located in Roanoke, Virginia, that was expanding south. It was called Advance Auto Parts ( AAP ), and I figured we might be able to help each other out.

So I dialed up the real estate manager, telling him I had a site in the small town of Laurens, South Carolina. It would be ideal, didn’t he know, for Advance Auto.

The call worked and, around 60 days later, I began constructing the store.

Which led to another contract for Walterboro, South Carolina.

And another one in Mauldin, South Carolina.

Before long, I had around 40 deals under my belt and was diversifying by building stores for Blockbuster Video… Payless ShoeSource… CVS… Walgreens… PetSmart… Dollar Tree…

And, drumroll please…

Walmart.

That’s how, over a span of 20 years, I amassed a portfolio of assets worth close to $100 million. Life was good!

So Much to Build on From the Ground Up

I learned a lot in that time. A lot about the construction business, the businesses I built for, and the business I was running myself.

I already told you how easy it was to select sites back then. So, I can’t really brag about developing that strategy.

The same goes for securing funding. Because it got easier and easier to get bank backing after that first home/rental project of mine.

I’d love to say that it was because the financial institutions I worked with recognized what a smart, trustworthy businessman I was.

But I genuinely think they would have lent money to a boa constrictor if it told them it was going to build commercial real estate. The housing boom was that big and the resulting real estate expansion that profitable.

For as long as it lasted, anyway.

But even so, I did learn a lot. I didn’t do the actual designing or constructing, merely supervising the experts I hired. However, that “merely” meant I had to take crash courses on:

• Zoning permits and other paperwork hassles
• Building blueprints
• Foundation formation
• Material costs and considerations.

I already knew about finding tenants and swaying them to sign on. But after I began building properties not just for others but to rent out myself, I learned even more about working with people.

The more you engage with, the more chances you have to learn. In which case, boy did I have an education.

It’s pretty safe to say I didn’t ace every test, considering how I eventually lost both my rental properties and development business in the 2008 crash.

But even that was a lesson to be learned, which is why I’m writing to you today. Out of all those past-life experiences, here are three that really stand out…

When You Lay Down With Dogs, You Wake Up With Fleas

Partnerships can be good…and they can be bad.

That’s what I mean by the saying, “when you wake up with dogs, you lay down with fleas.”

In this example, I’m referring to a bad business partnership that costs me millions of dollars.

Whenever you invest in a business (which includes a stock) you must always do the necessary due diligence to make sure that your interests are aligned.

And given the fact that my “bad” partnership almost forced me into bankruptcy, I’m extremely picky when it comes to selecting real estate investment trusts, or REITs.

That theory was tested a few weeks ago when I ejected W. P. Carey Inc. ( WPC ) from my portfolio.

As I explained , “management will try to spin (the dividend cut) positively,” but I didn’t mess around one minute because “statistically dividend cutters generate terrible returns, with high volatility and widely underperform dividend growers.”

It’s hard for me to trust externally managed REITs, and I’m happy that I’ve avoided to get suckered into names like Gladstone Commercial ( GOOD ) and Industrial Logistics Properties Trust ( ILPT ).

Management plays a critical role, and that can never be ignored, which is why Warren Buffett explains,

“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”

The Golden Rule

One of the biggest lessons of my 30-year investing career can be summed up with “The Golden Rule,” which is simply another way of saying, “he who has the gold makes all the rules.”

In my earlier days, I was an investor in over 50 LLCs, and in most of the entities I was not the managing member.

So, whenever there was a problem with one of the properties, I had limited input since the managing member was calling all of the shots.

Of course, the older you get, the smarter you get, and I decided that for me to sleep well at night I needed to be in full control of the business.

In other words, I had the gold, so I could make my own rules.

These days, most of my real estate holdings are REITs, which means I’m in full control of my investments; my investment committee consists of me, myself, and I.

That also goes for the stocks that I own.

I insist on owning strong companies that can use the “golden rule” to grow profits.

These days, I’m laser-focused on buying just the dream team within the REIT sector that have rock-solid balance sheets. Names like Realty Income ( O ), Agree Realty ( ADC ), VICI Properties ( VICI ), Extra Space ( EXR ), Mid-America ( MAA ), and others.

Being in a position of strength is of the utmost importance, and I will never play second fiddle again.

I’m working on a large deal right now (in excess of $50 million), and I insist on owning a majority of the partnership so that I can always be in the front row seat (and behind the steering wheel).

Understanding Your Circle of Competence

In the past, I’ve strayed from my circle of competence, and it cost me.

I once owned multi-unit franchises with Papa John’s Pizza and Athlete’s Foot.

While I thought I could become a multi-millionaire owning franchises like these, I was wrong, and ended up losing a small fortune.

That’s not to say I would never invest in a franchise again, but it needs to be real estate oriented, since this is my circle of competence.

I’m proud to say that I’ve been able to build back my net worth, and today I’m in the best financial, mental, and physical shape of my lifetime.

The key to that success is discipline.

This means that I always:

• Pay off credit card balances.
• Go to the gym at 5:00 am daily.
• Eat 3 healthy meals.
• Avoid alcohol.
• Research 5 stocks every week.
• Invest 50% of cash flow into stocks.
• Send thank you cards out every week.
• Call my mother once a day (very important).
• Respond to readers daily.
• Schedule time away from social media (walking).

One of my favorite Benjamin Graham quotes is,

“Adversity is bitter, but its uses may be sweet. Our loss was great, but in the end we could count great compensations.”

All of us go through tough times, and one of the great things about experience is that it becomes a terrific teacher.

As you know by now, I’m not a yield chaser and I avoid many of the so-called “hot stocks” because I believe that my “extreme conservatism” gives me an enormous advantage over other writers. As Ben Graham recounted,

“the best, and perhaps the only, durable education is self education.”

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