Letting winners run
A lot of investors have rules on how far they let their winners run before taking the gains. I find these rules to be confining and largely based on emotion. I would much rather take it on a case by case basis.
Why I am letting MPW and GMRE run despite having sold GOOD?
MPW and GMRE have been excellent long run holdings. GOOD also did fairly well over its hold period, so why did I sell GOOD while keeping MPW and GMRE?
Its really a simple matter of current valuation relative to fair value. Gladstone Commercial is a great company, but at ~$23 it was close to fair value. GMRE and MPW remain substantially discounted to peers and their fundamental trajectories warrant a higher multiple than that at which they currently trade.
GMRE has arguably a faster growth outlook than peer medical office REITs, DOC and HTA yet it trades at 15X forward FFO compared to 17X for the peers.
MPW, despite its runup trades at 12.4X forward FFO as its bottom line has risen just as much as the price. We view this as a great price for the leading hospital owner in the nation.
Cutting losers loose
A lot of investors use things like stop-losses to automatically sell their stocks if they fall a certain amount. In my opinion this is far too broad of a brush. We do not want to sell a stock we still like just because it fell x%. In fact, we would usually like it more at the lower price.
Just as with the winners we prefer to take a case by case approach.
Why I sold RLJ but kept CBL-E
RLJ Lodging performed poorly over our hold period as has CBL-E. So why did I sell RLJ but keep CBL-E?
Just as with the winners it comes down to fair value versus current price.
Quite frankly, I was wrong about hotels. The fundamentals of the hotel ownership industry deteriorated materially such that RLJ no longer looks like it has a favorable trajectory. Labor costs have inflated, real estate taxes rose dramatically and AirBNB proved to be a far more formidable threat than I had anticipated. So while price dropped, fair value also dropped.
CBL-E is different because I think my initial fair value estimate of $25 still holds. CBL is showing excellent signs of turning around their business. Redevelopments are progressing nicely and occupancy has been largely maintained during the bulk of the retailer bankruptcies. Mall REITs across the board are guiding for 2020 to be a positive year. While we are still underwater on CBL-E relative to our cost basis, I am very glad we did not lock in our losses when it was trading below $7.