Don't Go Swinging For The Fences

There's a relatively old idiom out there that advises people to "swing for the fences." You’ve no doubt heard it before.

You’ve probably even used it before about something unrelated to sports. It's become part of everyday lingo here in the U.S. We say it without even thinking half the time.

That (and one other to-be-explained reason) is why I’ll state the supposedly obvious. Quoting from online aide The Free Dictionary, here's its "official" definition:

The other reason I included that description – even at the risk of making eyes roll – was because of the example sentences. They work well for the point I want to make about when you should swing for the fences.

And when you probably shouldn't.

Photo Source

This might not be the most popular opinion, but I don't think you should always swing for the fences. Not even in baseball.

Now, this isn't to say I’m completely against it in baseball. There are definitely times to go right for the gusto, as it were. Two types of situations come to mind right away:

If the odds are with you, then why not go for it? And if the odds aren't but they don't matter anyway, again… why not go for it?

Let say's it's the bottom of the ninth. And the only way a team can win is if its last batter brings it home. All the way home.

In that case, there's really only one thing to do. It's obvious.

But overall, swinging for the fences means putting a lot more emphasis on power than precision. Which means it can be a great way to lose out on opportunities. Or whole entire games.

I just don't see the point of that when the opposite – putting a lot more emphasis on precision over power – can get you so much farther.

More often than not, precision is going to get you more points. That's why athletes train the way they do: to focus their strengths.

Raw power might lead to awesome individual moments. But it's well-honed consistency that tends to carry the game.

The same can be said about investing. Except that, with investing, there's a lot more on the line.

I’m not trying to downplay what athletes do. I’m a basketball man myself, and you’d better believe I took the game seriously when I was playing.

But there's something more serious still out there.

That last line above, of course, refers to your financial security. Building a solid retirement is actually so important that I don't believe in swinging for the fences at all. I just don't see a scenario where it's worth it.

I’m fine with allocating a small portion of your portfolio to more speculative positions – provided you have enough money and time to "play" with.

However, I wouldn't call that swinging for the fences. To me, swinging for the fences in investing involves buying sizable positions in skyrocketing stocks fueled by nothing but passion.

And while, again, passion is important, it needs to be backed by solid fundamentals.

That even applies to "safe and sound" investments like real estate investment trusts, or REITs. Just because they’re less volatile doesn't mean they’re volatility-free.

There are many ways to determine that kind of likelihood, but yield is a big one. If the yield is sky high, run.

The higher the yield, the more wary you should be, as evidenced by CBL & Associates Properties (CBL). Thankfully, we avoided the preferred shares – the 7.375% Series D Cumulative Redeemable and 6.625% Series E Cumulative Redeemable shares – that have now sunk around 50% after the company's announcement that it will suspend all dividend payments through 2020.

Source: Yahoo Finance

To explore this concept further, consider that other example The Free Dictionary gave us: the one about the lawyer.

The site might be "impressed when he came out swinging for the fences" right away. I, however, have to wonder if that's all he's got.

If a lawyer goes in guns a-blazing from the get-go, is he going to run out of ammunition? Moreover, does he know he's going to run out and that's why he's overcompensating?

That's what high yields signify to me.

As you know, I remain highly skeptical of high-yielding REITs that promise stability and reliability. That's one of the reasons we stay away from certain ones – for fear that investors will lose substantial sums while chasing fool's gold.

Take Colony Capital (CLNY). It's one of the most complicated REITs available. And while we don't provide ongoing coverage, we’re amazed to see investors continue to pile onto this train wreck.

Just take a look at the FAST Graph below to get a picture of the poorly constructed business model that has already led to painful losses over the years:

Source: FAST Graphs

Without going into a lot of needless details, Colony is now under attack by Blackwells Capital LLC, an alternative investment management firm with about 1.85% ownership interest in it.

Blackwells, now an activist, believes the root of the problem is Colony's CEO and executive chairman, Tom Barrack. Moreover, it sees the best course of action as casting a vote to reconstitute the board and remove Barrack.

Colony's share price has fallen more than 20% following the Q2-19 earnings call and the common shares payout $.11 per share (quarterly) and yields 9.8%. While deep value investors may argue that shares are cheap, we would contend that they’re cheap for a reason. The payout ratio (based on AFFO) is 110% and analysts forecast a dividend cut in 2020 (-10% FFO growth forecasted in 2020).

And while deep value investors may argue that shares are cheap, we’d contend that they’re cheap for a reason.

In other words, there's no sense in swinging for the fences and betting on a turnaround. That's especially true since there's a good chance that Barrack will be removed – which means there's likely more volatility up ahead.

Then there's Preferred Apartment Communities (APTS). As much as we like the apartment sector, this REIT has a more diversified approach to investing in areas such as:

It's not so much that those are terrible property sectors. It's more that the company's capitalization has become increasingly dangerous as related to its non-traded preferred equity platform.

Preferred said through an 8K filing that it was going to determine the benefit of internalizing its manager into the public entity. The CEO recently explained, "There's no way we could have been able to grow the company both in size and results without this structure."

I’m glad to see that being discussed. However, our true concern is with its skewed preferred issues, which are worth around $2 billion. That's around 3x more than its common capitalization.

Source: FAST Graphs

Also, in the latest quarter, Preferred's adjusted funds from operations (AFFO) payout ratio was over 200%. While this was an outlier-quarter related to lending practices since the company earned $27 million "but not yet booked AFFO and accrued interest," it got our attention.

Essentially what this means is that the non-traded business is literally "printing money," so the company just can't spend it fast enough. (That's why it has steered into other property sectors such as office, for example.)

If you’re a common shareholder here, you’re investing in one of the most highly leveraged REITs. We’re talking about $2.6 billion in debt: $1.9 billion in preferred and $509 million in common equity.

So while the 7.9% dividend yield may appear appealing, it's important to consider the capital structure and choppy earnings history. Internalization appears to be a positive step. But we’re waiting to see how that cost is absorbed and who pays for it.

While we give Washington Prime (WPG) credit for its creative financial engineering (i.e., selling land and leasing it back, selling outparcels, etc.), the music is just about over in terms of maintaining its dividend.

We’re highly confident that, in 2020, the dividend will be cut. Here's why.

This year is looking to be a record year for retail store closures. We saw bankruptcies from Forever 21, Fred's, Charlotte Russe, and Charming Charlie – to name a few.

Looking to 2020, the mall space is in for more trouble, with store closures and additional bankruptcies inevitable. The best operators will be the ones that have:

Sears (OTC:SHLDQ) is still operating, albeit under a new owner, and will have about 180 stores (including Kmarts) still open for business once it closes the 96 it already announced would shutter after the holidays.

Source: FAST Graphs

J.C. Penney (JCP) still has more than 850 stores – which we think is far too many. And Macy's (M) is evaluating how to handle its lower-tier mall locations, something it plans to address in early 2020.

Meanwhile, Victoria's Secret is still struggling with sluggish sales. Gap (GPS) is having a hard time growing. And Ascena Retail (ASNA), which owns Justice, Lane Bryant, and Catherines, remains on many analysts' negative watchlists.

Meanwhile, Forever 21 says it still plans to keep many of its U.S. stores. But it's actively seeking rent concessions from its landlords. Truth be told, most retailers are in a powerful position to renegotiate such things considering the sector's ongoing turbulence.

Some analysts say that's already priced in. But we consider the 28% divided yield very troubling.

The most reasonable course of action is to avoid WPG at all costs.

As my loyal readers know, I’ve learned to maintain skepticism as a result of past painful losses. One of my goals as a Wall Street writer is to persuade readers to avoid dangerous investment ideas and adopt sound ones that are designed to preserve hard-earned capital.

So the next time you step up to the plate, ask yourself this: "Is the thrill of victory worth the agony of defeat?"

Source: Yahoo Finance

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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This article was written by

Brad Thomas is the CEO of Wide Moat Research ("WMR"), a subscription-based publisher of financial information, serving over 100,000 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) iREIT on Alpha (Seeking Alpha), and (2) The Dividend Kings (Seeking Alpha), and (3) Wide Moat Research. He is also the editor of The Forbes Real Estate Investor.

Thomas has also been featured in Barron's, 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, 2019, 2020, 2021, and 2022 (based on page views) and has over 108,000 followers (on Seeking Alpha). Thomas is also the author of The Intelligent REIT Investor Guide (Wiley) and is writing a new book, REITs For Dummies.

Analyst's Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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