ORLY - Is The Thrill Of Victory Worth The Agony Of Defeat?

2023-07-25 07:00:00 ET

Summary

• I began writing on Seeking Alpha because I enjoy writing and because it provided me with an opportunity to share investing ideas and strategies with other like-minded investors.
• Today I want to continue with my “lessons learned” series.
• Now, whenever I decide to invest in a stock, business, or direct real estate, I always ask myself “is the thrill of victory worth the agony of defeat?"

In my last “lessons learned” article I explained that “one of the unique advantages that I have as an investor and research analyst is that I have decades of experience in commercial real estate. I’ve been down in the trenches, with tons of blood, sweat and tears…”

Many of you know that I landed on Seeking Alpha in 2010, just as most investors were clawing out of the Great Recession.

I began writing on this platform because I enjoy writing and because it provided me with an opportunity to share investing ideas and strategies with other like-minded investors.

I suppose that my story is unique to many other analysts on Seeking Alpha because I have three decades of experience which of course means that there have been failures. As I mentioned, "I have a “few battle scars to prove it."

Today I want to continue with my “lessons learned” series to focus on how I was able to capitalize on the hard times to turn them into opportunity. As Benjamin Graham famously said,

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

Cash Is King

Back in the 2000s I was a developer and I built and leased back stores for many well-known companies like Advance Auto ( AAP ), O’Reilly Automotive ( ORLY ), Walmart ( WMT ), Dollar General ( DG ), and others,

As drugstores began to expand, I began working with Florida-based Eckerd Drug to develop stores across the Carolinas.

I secured a site in Spartanburg, S.C., owned by Red Lobster for around $1.2 million. I had a small window to close on the land which means I couldn’t obtain permits and traditional bank financing.

I needed to close in 30 days or less.

When an opportunity comes around you should always have adequate cash to take advantage of opportunities.

One of the most valuable assets to have is cash and that applies to investing (preparing for a stock market crash) and in life (always keep an ample emergency fund to sustain a household during a job loss or health crisis).

For the Eckerd Drug deal, I would have normally secured bank financing, but that would have taken me around 60 days to close due to things like an appraisal, environmental report, and zoning.

So, I was able to dial up a trusted business partner who had completed dozens of transactions in the past. The call went something like this,

“Ricky, I need $1.2 million to close on the land and I have already obtained a 20-year lease with Eckerd. The total project will be around $4 million (including land) and I should have the project finished within six months.”

Ricky replied,

“Ok. I will wire it tomorrow. I want 50%.”

I’ve known Ricky a long time and I recognize that he’s worth hundreds of millions because of his shrewd business acumen. Ricky always reminds me of the “golden rule” which means "he who has the gold makes up all of the rules."

So, Ricky wired $1.2 million to my lawyer and we closed the land. Six months later, just as the building was finished, I secured a contract to sale the property to a 1031 Exchange investor for $5.5 million. There also was a small parcel leftover that I sold to a Bruster’s ice cream franchisee for $250,000.

So, in just six months, I was able to generate $1.75 million in profit, which I gladly gave Ricky 50%, or $875,000.

By having access to cash (i.e. Ricky) I was able to take advantage of the opportunity that led to significant profit. And that’s why it’s important to have ample liquidity during this chaotic real estate market.

Generally, most investors keep at least 5% of their portfolio in cash to take advantage of buying opportunities. Others would argue that you should keep between 10% and 20% in cash as a hedge and for buying opportunities.

These days (using my cash) I’m buying up shares in American Tower ( AMT ), a cell tower REIT with more than 225,00 sites in 25 countries. I currently have around 3% of my REIT portfolio in AMT but it’s moving to 5%.

I view AMT as the best way to invest in the international thematic of wireless connectivity and increasing data usage. The company should deliver average AFFO per share growth of 8% from 2023 to 2025 and around 10% annual dividend growth.

Although the yield (of 3.3%) is lower than direct peer Crown Castle ( CCI ) – that yields 5.8%, I like the more favorable risk-reward setup.

AMT trades at 18.5x 2024E P/AFFO, below its one-, three-, and five-year averages of 21.4x/24.5x/24.2x and we forecast shares could fetch $135.00 by the end of 2024, which could result in annual returns of 25% or higher.

Understand Your Circle of Competence

Once upon a time I built a small shopping center in Chester, S.C., that was anchored by Dollar Tree (DLTR). I had leased up most of the property with the exception of a small 1,500 square foot space.

My friend owned a Papa John’s Pizza franchise, and I was trying to get him to lease the space, but instead he convinced me to become a franchisee.

A few months later I opened up my first store that led to seven more stores over the course of two years.

Keep in mind, my primary job was investing in real estate, and I had no experience in operating businesses. However, as I convinced myself to diversify into franchises (like Papa Johns) I asked myself, “how hard could it be to sell pizza and breadsticks?”

Two years into the business venture, it wasn’t fun.

Out of the eight stores, two were profitable, three were operating at breakeven, and three were losers. My biggest loser was eating up all of the profit of my best performing store.

On top of that, I was in a partnership dispute (with my real estate partner), which essentially means that he was taking advantage of his “managing member” role by diverting “our” rent checks to his personal bank account.

It took two years to build out the franchise in which I had invested over $1 million (including debt). At the peak, I had over 100 employees and sales of around $3.5 million per year.

Eventually, I closed all of the stores and took a significant write off.

I had leased all the stores except for one, which was a free-standing store on a high-traffic corner.

Recognizing my “circle of competence,” I was able to ground lease the land to ( CVS ) and I sold it to a 1031 investor which generated a profit of around $400,000.

That’s when I decided that I’m much better at collecting rent checks than paying them. Of course, you now know why I like to invest in high-quality real estate and not weak franchisees (like I was) that are literally one snowstorm away from going out of business.

Along these lines, I prefer landlords like Realty Income ( O ) and Agree Realty ( ADC ) that focus on best-in-class net lease tenants. They’re able to buy in bulk by using their low-cost-of-capital advantage to generate predictable dividends month-after-month.

I already own a chunk of shares in Realty Income and I’m still buying more now. Shares are trading at $62.75 and a dividend yield of 4.9%. The P/AFFO multiple of 15.8x, well below the normal multiple of 17.8x. We forecast the company to generate 20% annual returns.

Agree Realty also is an attractive buy as shares are trading at $67.30 with a dividend yield of 4.3%. The P/AFFO multiple is 17.3x and normal multiple of 18.9x. We forecast the company to generate 20% annual returns.

Follow Your Passion

As I mentioned earlier, I began writing on Seeking Alpha over 13 years ago and it’s been a fun ride. I never imagined that when I wrote my first article back in 2010 that I would keep writing…

But now, 3,200-plus articles and 111,000 followers later, I’m still pumping them out…

It’s become a habit for me, but I do it because I enjoy seeing your names on the chat board.

Whether we agree or disagree isn’t relevant, because what’s important is that we’re all learning from our mistakes . And I’m honored that you take the time to read articles like these, and to comment below.

Now, whenever I decide to invest in a stock, business, or direct real estate, I always ask myself, “ is the thrill of victory worth the agony of defeat? ”

In other words, risk is inescapable (as Howard Marks wrote), but it’s “ managing risk that separates the best from the rest."

As always, thanks for reading and happy SWAN investing!

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