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Investing is a process, and even the best investors make mistakes. That means that, every so often, you'll need to sell a holding that just didn't live up to your expectations (or that you were just wrong about). In fact, it's usually better to figure these things out and move on, learning from the situation. Today, Macerich (NYSE: MAC), EPR Properties Trust (NYSE: EPR), and Preferred Apartment Communities (NYSE: APTS) are all prime selling candidates in the real estate investment trust (REIT) space. Here's why.
1. Good malls, bad balance sheet
Macerich is one of a small number of real estate investment trusts that focus on malls. It owns nearly 50 properties, and they are, for the most part, located near wealthy population centers. In fact, Macerich has a long history of successfully running its properties, with operating metrics that sit at or near the top of its peer group. That's the good stuff.
The problem is that Macerich and the rest of the mall sector are facing major headwinds today, thanks to the mix of the retail apocalypse and the global coronavirus pandemic that is leading to retailers closing stores or, worse, going bankrupt. It's very tough out there right now, with Macerich forced to trim its dividend in 2020 and pay part of it with stock.
Adding to the company's woes is that its financial debt-to-equity ratio is notably higher than peers, meaning it's balance sheet just isn't as good. That's likely one of the reasons why the Ontario Teachers Pension Plan sold all of its 16% stake not too long ago. Even if you think malls will come back from the current pandemic-driven hit, you might want to sell Macerich and shift into a name with a stronger financial foundation.
2. The pain will linger
The next name to consider selling is EPR Properties Trust, which owns entertainment-themed properties from movie theaters to amusement parks. It also owns educational assets, which kids probably wouldn't describe as entertaining but that have a similar experiential quality to them. Before the pandemic, owning properties that people had to visit to enjoy was a way to sidestep the increased use of online shopping. However, the pandemic is a major headwind for any business built around bringing people together into groups. The REIT eliminated its dividend in 2020.
The big concern with EPR Properties is that roughly 45% of its pre-pandemic revenue came from movie theaters. This industry has been devastated by the coronavirus, with some key industry players teetering on the brink of bankruptcy. But that's just one piece of the problem, the other side is that new movies are increasingly being streamed over the internet. This is a trend that may well continue even after the world gets a better handle on the coronavirus.
With nearly half of its revenues tied to the movie business, EPR Properties is potentially facing a threat that will forever alter its business -- and likely not in a good way. Conservative investors should probably sit this one out while more aggressive investors should think carefully about what the pandemic means for the REIT's long-term future.
3. An odd platform
The last name up is Preferred Apartment Communities. Based on the name, you'd think it owned apartments that were "preferred," but that's not quite right. It owns apartments, strip malls, and office buildings. A little diversification could actually be a good thing, so it's hard to be too upset about the mix of assets even if including the word "apartment" in the name is misleading. The real problem, however, is the word "preferred."
This REIT has a unique funding platform in which it sells preferred shares on a continual basis. Preferreds and their dividends rank higher than common stock and common stock dividends. Moreover, the preferred owners can force the REIT to buy their preferred shares, which can result in Preferred Apartment Communities selling stock to cover the cost.
This happened in 2020 when the pandemic started to spread and stocks were in a bear market. Perhaps not surprisingly, the REIT cut its dividend last year. If constantly selling preferred stock was such a great model, a lot more REITs would be doing it. Since that's not the case and the pandemic exposed a major weakness of the approach, investors should probably take the hint and avoid this REIT.
Stick with the "best"
There's no such thing as a perfect company or investment. You have to take the good with the bad. However, in some cases, the bad isn't worth the risk. Macerich knows how to run a mall, but investors will be better off in peers with stronger balance sheets. EPR Properties is too reliant on one type of property that serves an industry facing potentially massive change -- a frightening prospect. Preferred Apartment Communities relies heavily on a funding approach that's not an industry standard and has proven to be problematic when times get tough. All three should be sell candidates if you own them.
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