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Did you read my article on Monday?
You should have. Really. I’m not being egotistical saying so. I can barely even believe how quickly my warning came true.
Titled “The April ‘Fool’s Gold’ REITs,” it was all about real estate investment trusts that my spidey sense (and technical analysis) was telling me to avoid.
In other words, it was on one of my favorite topics to talk about: sucker yields.
There were three REITs in particular that I listed as being in danger of having to chop their dividend offerings to a sustainable size. But the write-up could have applied to any dividend-yielding stock paying out more than it should.
Sadly, there are more than a few of those out there all told.
To capture the article’s main point, think about it this way… Companies that know their worth don’t need to brag and boast about how well they’re doing. They just keep on doing well.
These entities know their business models and what works best to sustain them. And while they operate in the present, utilizing what they have when they have it, they do so with a firm focus on the future. That way, these companies can enjoy the good times and prepare for the bad – surviving and thriving much longer than their flashy, desperate competitors can ever dream of.
Bling, Bling, Baby!
You know how it’s obvious a person is overcompensating when he wears certain outfits, drives certain cars and otherwise throws around cash as if Mommy or Daddy’s got it made in the shade? That kind of individual is always surrounded by others who are ready to pat him on the back, tell him how awesome he is and otherwise feed his needy little ego.
Just as long as the fun keeps flowing, they’re there at his side. Once reality hits though – and it always eventually does – those friends are nowhere to find.
The same exact thing applies to investment opportunities.
Businesses that offer noticeably high dividend yields are almost always trying to hide terrible fundamentals. As I mentioned on Monday, we’re talking about “deteriorating business models and cash flows, and weak balance sheets. So ultimately, there’s a very good chance that the dividends will be cut or even eliminated.”
Admittedly, a too-high yield might not turn you into a sucker right away. It might take a little while to work its evil mojo on your money.
You could be flying high for weeks… months… perhaps even a year. You just never know.
But that’s what makes it so dangerous. When you’re messing around with REITs – or any other kind of company – that’s messing around with their own money, your money is never going to be truly safe.
That was my warning about Washington Prime (WPG), Global Net Lease (GNL) and Senior Housing Properties (SNH). And, not two days later, one of those stocks has already proved me correct.
Shares in Senior Housing dropped by around 20% today as the company modified its existing business arrangements with Five Star Senior Living (FVE), Senior Housing’s top tenant/operator. Keep in mind, Senior Housing is externally-managed by RMR Group (RMR) and also owns Five Star, so it doesn’t take a rocket science to recognize the potential that exists for conflicts of interest (always read filings carefully).
The new deal with the landlord, Senior Housing, and the tenant, Five Star, led to a dividend cut (yes, I predicated it was coming over a year ago) of around 15%, from $.65 per share to $.55 per share for the landlord (Senior Housing). As part of the new deal, Senior Housing will increase its exposure to Five Star from 8.3% to approximately 34%.
None the less, this dividend cut is just another example of avoiding external management and also paying close attention to fundamentals.
I don not own shares in SNH or RMR.