Recent Sale

brokenpiggybankTwo stock sales in less than a month. What is going on around here? Have I lost my marbles?

I certainly hope not.

Although I’m a buy-and-hold investor, the occasional sale is necessary if it means making the portfolio better over the long run. Some of my past sales have turned out well, some have not. All in all, I have to make a decision with all known data at the time, and hindsight is of course 20/20.

I often say that I look at every stock in my portfolio like a fruit-bearing branch on my dividend tree. And I repeat myself because it’s true. I plan to one day live completely off of the dividend income my portfolio (the tree) provides, which will alleviate me of the need to cut down branches (sell stocks), which could possibly end up killing the tree in the long run. However, if that analogy makes sense to you, the particular stock that this article is about was like a branch that was showing signs of rot. After weeks of deliberation, I decided to cut that branch so as to limit any further damages to the rest of the tree.

I sold 280 shares of American Realty Capital Properties Inc. (ARCP) on 12/16/14 for $7.88 per share.

Overview

American Realty Capital Properties is a real estate investment trust that acquires, owns, and operates single-tenant and multi-tenant commercial real estate.

Changing Fundamentals

I discussed ARCP’s fundamentals, qualitative aspects, risks, and valuation back in October, when I decided to untimely add to my position in the REIT. I don’t regret the logic at the time, but the timing couldn’t have been worse. At any rate, I won’t rehash all of that information as, up until that date, that information is correct.

I often cite three reasons to sell a dividend growth stock:

  1. The fundamentals of the company have changed.
  2. The dividend has been eliminated/reduced or held static for more than two years.
  3. The stock has become grossly overvalued.

Unfortunately, ARCP’s fundamentals have changed rather dramatically over the last few months. I’m going to discuss a little of what has happened with this REIT, which kind of plays out like a soap opera (something I always try to avoid with companies I invest in).

First, and most importantly, the company announced in late October potentially fraudulent behavior by Brian Block, who was CFO at the time. Apparently, and unbeknownst to most of the rest of the management team (as far as we now know), adjusted funds from operations were found to be incorrect, but intentionally not corrected. Mr. Block was promptly replaced as CFO, as was Lisa McAlister, the former chief accounting officer.

So there is an audit currently underway, but the company has already announced that fiscal year 2014 numbers can not be relied upon. This is obviously a big problem because it’s impossible to value a business or trust management at all when the numbers aren’t being provided correctly. The preliminary findings were announced to believe that AFFO/share for the year was improperly inflated by about $0.04. This isn’t a big deal in itself, but the fact that the numbers were not properly corrected and presented is. However, the final results won’t be known until January.

There was also the canceled sale of Cole Capital from ARCP to RCS Capital Corp. after the latter agreed to purchase Cole Capital from the former for $700 million. Due to a breach of contract, RCS Capital Corp. agreed to pay ARCP $60 million, as well as to unwind any other business between the two companies and their subsidiaries.

Now, I had to this point decided to continue holding ARCP as the final results of the audit were supposed to be released with Q3 results. My mindset was such that a $0.04 adjustment to AFFO wasn’t detrimental to the business. ARCP still has a solid portfolio of real properties that have real tenants sending real checks which funds real dividends. The cash flow is real, which is sometimes hard to see through the fog of all the drama.

Unfortunately, ARCP then announced that they had received a waiver and extension, allowing them to delay releasing Q3 results (and the results of the audit) until January 5, 2015. Now, that’s not to say that the results will take that long. But they could. As such, this put me in a bit of a bind. If the results were much worse than expected, I’d have to continue holding ARCP through the end of the year and into 2015 before finding out. It became clear at this point that there was a possibility that I may need to unload my position in the company before the end of the year to realize any capital loss on the shares to offset some of my capital gains. Waiting until 2015 wouldn’t really help with the capital gains I’ve realized this year from a tax standpoint.

It also started to concern me that there were delays in the reporting. Perhaps just an emotional response, but I do wonder if the results are much worse than shareholders are being led to believe.

Then just yesterday, ARCP announced that Nick Schorsch, Executive Chairman and former CEO of ARCP, had stepped down. In addition, he would step down from his position in the BOD for both ARCP and Cole Capital. Mr. Schorsch is really credited with the mastermind role in putting ARCP together and fueling its tremendous growth over the last few years. Obviously, this growth has come with substantial kinks. In my view, this was to be applauded. But it gets worse.

ARCP then swiftly thereafter announced that David Kay, CEO of ARCP, and Lisa Beeson, President and COO, had both stepped down. So, if you’re following, the company has lost its CEO, president and COO, CFO, CAO, and executive chairman and former CEO over just the last few months. I’ve only been investing for almost five years now, but I’ve never seen anything like this before.

With the above announcement, ARCP also stated it had hired Morgan Stanley & Co. LLC to “to provide advice around capital structure, business strategy and capital allocation.”

And finally today, Moody’s Corporation (MCO) cut ARCP to junk status.

Investment Versus Speculation

I’m not making a call as to what happens with ARCP moving forward. Maybe the dividend is cut, maybe it isn’t. Maybe the accounting issue is truly just a $0.04 adjustment. Maybe an entirely new management team will get ARCP on the right track. Or maybe ARCP has much larger problems and the audit is discovering a rabbit hole that is deeper than some expect. I truly do not know.

What I do know, however, is that ARCP has moved from an investment to a speculation. All of the above possible outcomes are just that: speculation. I have a good idea as to where The Coca-Cola Company (KO) is going. I have a fairly good picture of where Johnson & Johnson (JNJ) might be in 10 years. But I have no idea where ARCP is going right now and where this ultimately leads.

I’m an investor, not a speculator. As such, these shares no longer belong in my portfolio.

It should be noted that I almost always relish an opportunity to buy more shares in a company after a significant pullback. Cheaper equity means my money goes further and I can buy more dividend income for the same dollar amount. But that’s assuming the company’s fundamentals haven’t changed. It’s one thing to buy shares in Coca-Cola after a 6% drop due to weak earnings, and quite another to buy shares in ARCP after a 30%+ drop because of fraudulent accounting and a clean sweep of management. Very different events. Again, there’s a difference between investing and speculation. You can certainly make some money speculating, but it’s not a game that I’d like to play or one I think I might be good at.

Now, I did highlight some of this as a potential risk back in October:

As previously mentioned, they’ve grown incredibly quickly. So there is operational risk there. It remains to be seen, because of their short history, how well they can manage their growth and portfolio.

However, I clearly didn’t anticipate anything like this. But it is now obvious that they have had troubles managing this growth. If that weren’t the case, the entire upper management team wouldn’t have exited the company in such swift fashion.

I thought this was a high-risk investment. But I felt the risk was priced in, as very little growth needed to be had in order for ARCP to be a satisfactory investment. Shares were selling at just over 11 times AFFO in early October, using the midpoint of 2014 guidance. That was a substantial discount to major peers, and really unwarranted when you look at the quality of the real estate portfolio.

Where I believe I made a mistake, however, was not requiring a lengthier track record before investing here with ARCP. I generally invest in companies with fairly substantial dividend growth records. I usually like to see at least five consecutive years of dividend increases, but prefer at least 10. Long dividend growth streaks tend to say a lot about management, the company, and the ability to profit over long periods of time through multiple economic cycles. ARCP didn’t have this rich history, but I felt the valuation, yield, and real estate portfolio quality were enough to offset this. I was wrong.

I’ve noticed some investors beating themselves up over ARCP, and I’m not quite sure that’s fair. Fraudulent accounting isn’t something that can be predicted and it’s also not something that is somehow isolated to fast-growing companies or REITs. Many major companies have been taken down over such measures, and these are things that simply cannot be foreseen. The best one can do is diversify and always try to focus on quality,which is why I’m glad that ARCP was a relatively small part of my portfolio.

Conclusion

This closes out my position in ARCP completely. My cost basis in ARCP is $3,519.91 as of right now, though that will probably be adjusted in 2015 to account for any return of capital. My total proceeds from the sale of all 280 shares of the REIT amount to $2,199.38. Factoring in total dividends of $212.34 and my loss on ARCP was 31.5%.

This is my worst investment to date, both in terms of amount of money lost and the percentage of negative return. I’ll try to take as much education from it as possible, though, again, I still stick to the belief that most of this just couldn’t have been predicted. I do admit it was a high-risk investment, though, and high-risk investments sometimes come back to bite you. That certainly happened here. Not only is the loss disappointing, but knowing that the opportunity cost was even greater pains me more.

For now, I’ll take the tax-loss against some capital gains for the year and continue to follow the ARCP story from afar. If the audit turns up that it was truly just a minor adjustment to AFFO and the business clears up dramatically, I’ll consider re-initiating a position in the future. For now, I’m happy to move on as this one stock was disproportionately sucking up my time in relation to the other 50+ stocks I’m invested in and the other 50+ I watch on a regular basis.

I will conclude with just a quick note. This is now my 10th article on stock sales for this blog (against 87 purchase articles). I’m planning on capping it there. Unless another ARCP rolls down the pike forcing my hand, I don’t plan to sell any more stocks…ever. We’ll see how that goes. I’ve mentioned before that I like the analogy between a portfolio and a bar of soap – the more you handle either, the less you’ll have in the end. Perhaps I should have just left ARCP be, but it’s moved too far over to a speculation, in my view. I hope that this is my last sale.

I usually include valuation opinions by professional analysts as a comparison, but neither Morningstar nor S&P Capital IQ rate this stock.

This sale reduces my annual dividend income by $280.00, based on the current $0.0833 monthly dividend.

I’ll update my Freedom Fund in early January to reflect this recent sale.

Full Disclosure: Long KO and JNJ.

What do you think? Is ARCP headed in the right direction? Is this more of a speculation than an investment? 

Thanks for reading.

Photo Credit: Stuart Miles/FreeDigitalPhotos.net

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119 Comments

  1. I was thingking of selling ARCP since yesterday after hearing that David Kay had stepped down. He has a very good track record in his resume, I didnt sell right away hoping that he can turn the tide around. I guess I was wrong. I am probably going to sell my position before the end of the year.

  2. I already did some tax loss harvesting on ARCP, but ended up with the same level of shares after that. I know it is tough to hold on to a company, when things are very difficult, and there are bad news all the time about it. However, I still think that the core of the business is triple lease real estate, which is under long-term leases. Bad management can mess things up, but at its core, the business should not do too bad. There will be turbulence, and the dividend will likely be cut – but I think that the REIT will survive, and will keep paying decent dividends during that time period.

    Hence, I will keep on those REIT shares. I do not think this REIT will go under (because of stability of long-term leases), and therefore I believe that the pass-through nature of this entity will allow it to keep paying some dividends during the turbulence. At the end of the day, the lesson I get from ARCP is that I should never sacrifice quality and operational track record. I will sell if they suspend the dividend altogether however.

    Dividend Growth Investor

  3. Good decision on the sale I think, there are too much things going on with ARCP. When there’s smoke, there’s fire. It’s better to cut the loss and step away from this mess.

  4. I just read a comment you left for someone on your ‘portfolio’ page regarding your thoughts about ARCP. I guess you made that decision. It has been a roller coaster stock to say the least the last month plus. Who needs the headache when more stable dividend paying companies are out there. Tax loss, offset some gain = why not? I think your money is better invested elsewhere. Thanks for sharing.

  5. Hi DM,,

    I haven’t sold a share yet, but I can imagine how sad it is for an investor with a long-term mindset, to have to sell a company that at one point looked like a possible income source for decades to come, especially when coming with such a big loss. I am glad we are close to year end, that loss will probably offset a nice chunk of your Sysco proceeds.

    I am of the opinion that accounting problems like this are unpredictable, so I don’t think there was much you could have done to prevent this, I definitely would not consider a mistake for these reasons. It might influence you to want to reduce your exposure to less established companies, but definitely not a mistake.

    Any plans for where you will deploy that proceeds of this sale? Looking for another high yielder?

    Best Wishes,
    DividendVenture

  6. I disagree. I sold ARCP the moment I found out about the accounting fraud for like $8.6. The reason I sold is something DM only wrote 1 line about in this whole article, but that one line, in my opinion, is more important than everything else. A REITs ability to produce better cap rates than their competition depends on their ability to get attractive financing. All a REIT is, is a highly leveraged vehicle that hopes to produce a spread between its cost of capital and lease rates. They were just downgraded the junk status. I was about 90% sure this was going to happen back in October. Their cost of capital is going to go up dramatically, badly hurting their cap rates. Those real properties you say they still have is true, its just going to cost them a lot more to refinance them, as well as any additional purchase. Bad news for a REIT, nail in the coffin in my opinion.

  7. Tawcan,

    Indeed. Usually there’s a fir where there’s smoke. Not sure if that’s the case here or not, but I’ll watch from the sidelines for now. I’ll take the loss and reevaluate in a month after the results are released.

    Thanks for dropping by!

    Cheers.

  8. DivHut,

    Yeah, it’s been far more of a roller coaster than I signed up for. I don’t mind volatility at all, but this is quite another story. ARCP could very well be on the road to redemption, but I’d rather not stake any more capital on that. I can always initiate a position later if they do indeed turn it around.

    Thanks for stopping by. Appreciate the support!

    Best regards.

  9. DGI,

    I hear you. The value of the property itself is the reason why I’ve been holding. But who’s to say what they’ll get for those properties if liquidity becomes a problem? The downgrades will lead to a higher cost of capital, which could further constrain their resources. I have no idea where this one is going, which is precisely why I’m out now.

    I certainly do hope they turn it around, as I think the portfolio of properties is fantastic. If they become what I thought they were, I wouldn’t mind investing at a later date. But there’s far more risk than I bargained for right now.

    Thanks for sharing. I wish you the best of luck with this one!

    Cheers.

  10. “Where I believe I made a mistake, however, was not requiring a lengthier track record before investing here with ARCP.”

    I hope this experience doesn’t cause you to limit future stock purchases to companies that only have a dividend record of 10 years or more. I own many quality companies which have paid and increased dividends for less than 10 years, but have stellar management, high S&P quality ratings and M* credit ratings, solid cash flow/balance sheets, growing earnings, etc. I didn’t own ARCP, but I doubt it received high marks in all of those categories.

  11. That group has some problems for sure Jason. I know you’re a buy/hold guy, but when the thesis changes….so should your actions. Sorry this one didn’t pan out. On the positive side, the market is FINALLY giving us some volatility. Cheers!
    -Bryan

  12. Dm one bad apple in the bunch happens, you otherwise have a good portfolio.

    For my part I never invested in ARCP due to the red flags. The most prominent was that their long term debt was selling for a lower yield than common shares. This inversion isnt typical, though during the financial crisis this was common for many companies.

    Though I think that same debt is a good opportunity now. The company merely needs to remain solvent for you to get paid (likely).

    At the right price the common is worth buying. If new mgmt can clean it up, it can recover.

  13. Tough situation which I can relate to myself, all 192 shares worth. While I think long-term the underlying assets will prevail, the mass exodus and credit rating drop are the big issues. Certainly it makes you wonder who knew what and when. A company like this will not thrive with external management taking big chunks of fees off the top as they are not incentivized in the same manner a direct owner might be. While I will continue to sit tight for now (classified as a sunk cost for the moment), I view this as a learning experiment.

    I will say I did sell a couple of positions this week and reshuffled the portfolio a bit. Other than ARCP, I’ve gotten things more towards the traditional DG side, and will continue focusing new investments in that direction. I hope to put away some serious cash into this particular portfolio over the next couple of years, so doing some quick housekeeping right off the bat allows me to sleep better.

  14. I think you made the right call on this.. I think you will be able to sleep better at night.

    Every investor or trader has some battle scars. I once invested in a junior mining company at they stock doing reporting on the company . The CEO kept buying shares for a while after this. The company was then de-listed from its stock exchange.

  15. Sorry to hear of this profit loss, but I’m sure your bottom line will not be hurt as bad thanks to capital losses. I applaud you though for having the courage to reanalyze your thinking and your position and knowing when to get out. If the underlying foundation has shifted then so too has the value of the company. I’m sure you’ll find somewhere more productive to park your capital. Have a great holiday season!

    – HMB

  16. DM,

    Can’t blame anyone from selling this one. Management really turned it into a mess. Seems Kay may have been forced out since he has said recently on a couple occasions that he would be staying for the long haul. Shareholders have wanted Scorsch out for awhile now with all those conflicts of interest he has and the incentive plans.

    With all that said I’m with DGI and think I am going to hold on longer. I don’t know who wants to take over this mess, but would love to see someone who can run it more like Realty Income like Tom Lewis was at O over the years before he retired.

  17. Jason, totally understandable decision. I’m still keeping them till next month to have a better visibility, note that downbeat securities get hammered even more during tax harvest season, only to be purchased next year. ARCP may also be a victim of on-going market selling and of-course the genuine issues that you elucidated. I do not know if this is going to be a Cigar butt, and me puffing its last peg or a long term hold, but, I’ll sell it if dividends are either suspended or if there is a significant reduction. In this panicked market when oil already sliding, its probably best to let the storm pass and re-evaluate positions when calm returns. Cheers!

  18. DM,
    Guess I should have been patient and waited for post lol. I think you made the right decision, and it def helps me to not second guess mine. Depending on what’s happens in January I think new management and decreased div will put them in the right direction. but if the board of directors start leaving/distancing theirselves before then I think things will get far worse for ARCP. good luck with your newly freed up capital!
    Thanks again

  19. Hi DM,

    I think you made the right move – I don’t think there’s anything wrong with a reasoned rationale for selling a stock as a buy/hold investor. Given the loss of integrity, confidence, management and credit rating, I’d think another company is likely to be a better choice even if ARCP can recover in the longer term.

    To hold onto the stock to avoid “unrealized loss” can be misleading too – the fact is that the shares are worth less right now, whether sold or not sold. You could either hold on and hope they recover or take that same capital and find another company that will generate income and growth.

    The only defense against company fraud of that level (including Enron, Tesco etc) is diversification and you have that covered too. Though if I had been writing an article about this company, I probably would have rearranged the 4 letters in ARCP to make another 4 letter word!

    Best wishes,
    -DL

  20. I agree with your sale. Hard to judge whats going to happen with the dividend. If it gets cut I could see the stock crumbling kinda like how small oil stocks are getting crushed right now. Better to put that capital in a more solid investment. Best of luck. Good day and grind on!

  21. I’ve never invested in a REIT, they just always seemed too good to be true I guess. ARCP is proving to be no exception. It was a good decision to get out; better to cut out one rotten branch before it starts to affect more of your tree. And the great news is, there are plenty of other fruits out there we can graft onto our investment trees.

    Besides, you’re great at the dividend growth investing model. Does ARCP really for into that?

  22. I’m right there with you. Haven’t sold yet, but that will more than likely happen in a few days. I think I made two mistakes. I have confidence in O and I let their track record affect by research with respect to ARCP and wanted to get in on the next “O” prior to it maturing and growing it’s dividend more slowly. Plus, at the time I bought it I was probably reaching for yield. I haven’t made that mistake since buying some shipping stocks in 2008 prior to the Market crash.

    A few mistakes, take the lessons and learn =) Requiring a longer track record of raises and sticking to less Opaque investments are my take-aways.

    Take care!

  23. DV,

    Yeah, it’s a huge disappointment. I go into every investment with a holding period of decades in mind. So it’s not fun for me to sell out after a bit over a year. It’s a shame, but I can only react to events as they come my way.

    As far as deployment goes, I’m not quite positive yet. Some stocks on my mind right now are BBL, UL, and NOV. I’ll have to eventually replace this hole with another REIT at some point in time to keep my allocation up there. Should be fun! 🙂

    Thanks for the support. Just one of those things.

    Best wishes!

  24. took2summit,

    Right. Good point. A REIT lives and dies by its cost of capital. The junk status is certainly not helping. Not sure where things are going, but it appears to be getting worse by the day. They say the night is darkest before dawn, so I guess we’ll see what the audit reveals in January. Seems to be worse than the ($0.04) adjustment we’re being led to believe, however.

    Thanks for sharing!

    Best wishes.

  25. FFF,

    I know you bought in not too long ago, so that’s probably disappointing for you. Obviously buying in after the accounting fraud was announced is a spec play, so you just have to be open to it going either way. Definitely high-risk, high-reward right now.

    Take care!

  26. Sorry for the loss, but you have to do what you feel is right! The good news is that you can put that money from the sale to work and recoup your loss with some quality companies that are trading at some decent levels now. Good luck!

  27. kolpin,

    Good point. There are many solid companies out there with dividend growth records of less than 10 years. I typically like to see at least five, however. ARCP really only had a couple of years under its belt when I initiated my position. I was trying to get in early on what I perceived to be a potential competitor to O. Getting in early doesn’t always work out, though I still contend this could have been a rather satisfactory investment had management not ruined things. It’s a shame.

    But I just recently invested in NOV, which is a company with less than 10 years. I will probably avoid companies with just one or two years of dividend raises in the future, however. I’d prefer a more substantial track record.

    Thanks for dropping in!

    Best regards.

  28. Bryan,

    Can’t win them all, right? 🙂

    I’m definitely enjoying the volatility. I’m sure you are too! I hope this continues throughout 2015.

    Thanks for dropping by.

    Best regards.

  29. sfi,

    I felt okay taking the risk on, as I felt it was priced right. I still contend that was the case. Obviously, that was notwithstanding accounting fraud. Tough to really model that in as a risk, other than just a broad risk of investing in general.

    I agree that the common is worth buying at the right price, and that price could very well be as it stands. However, that’s as a spec play right now. Until news comes out on the audit, the company, and management, it’s just all speculation. And I’d probably even want to see things moving along before getting back in here. That could take time.

    Thanks for sharing. You did well by avoiding this one. 🙂

    Cheers!

  30. Thanks for the post. Good move dropping ARCP. I sold my stake the minute the news came out. I always felt uneasy about this stock and it turns out my gut was right; funny how that works. I was chasing a monthly DRIP and ignored my fundamentals. A good lesson though. I too added to my KO position and put the rest into KMI.

  31. management is definitely a wild card, though hopefully the business you invest in can thrive even in spite of the CEO. case in point, MCD. i really hope the CEO gets fired for MCD’s dismal performance, but I have no doubt that MCD will still exist, even if he’s been very slow to react to competition and consumers’ changing preferences.

    DIS, which we both recently bought, and V have been increasing divvies for less than 10 years too. i own MA, and feel pretty confident about riding both DIS and MA into the sunset of my life…

  32. W2R,

    Agreed. The loss of pretty much the entire top management team all in one fell swoop combined with the credit rating drop are the big issues. That’s what’s changed for me over the last day or so.

    You made a great point there in regards to sleeping at night. ARCP was the lone position keeping me up a bit. Just keeping up with the announcements and conference calls was starting to become burdensome and increasingly troubling. I hope for your sake and all other shareholders that they get it together. I certainly wouldn’t mind a chance to revisit this stock at some point in the future, but I’m also perfectly content with moving on.

    Keep up the great work over there!

    Best wishes.

  33. IP,

    I’m with you all the way. There’s definitely a sleep-at-night factor going on here. And I miss my beauty sleep. 🙂

    I guess we all have our battle scars. Sorry to hear about yours there. I know I’ve got a fresh one after this. Think I’ll need to wear a Band-Aid for a while. Good thing I’m a JNJ shareholder!

    Thanks for dropping by.

    Cheers.

  34. SWAN,

    My assumption is Kay was forced out. Not sure of the implications of that, as to whether he knew of anything or whether the BOD felt he was too closely aligned with Nick. Either way, more questions than answers.

    I certainly hope they turn it around. I hate seeing people lose money, myself most of all. They’ve got plenty of great assets there, but I think it’s going to take someone very special to turn this around anytime soon. Further downgrades will continue sinking this ship. If the AFFO adjustment is minor and they turn things around, I wouldn’t mind revisiting this name at some point. We’ll see!

    Take care.

  35. Dan,

    Definitely shady accounting. I probably should have gotten out right away, but I didn’t want to emotionally react. I was hoping to give it some time to sort out, as I have a lot of patience. But this continued to get worse and the clock was ticking away on the tax-loss.

    Thanks for dropping by!

    Cheers.

  36. PIM,

    I suspect it’s a lot more than general selling going on with ARCP as it was down some 17% over the last five days. That’s far beyond general volatility. Of course, this time period corresponded with the upper management team exiting the company and a credit downgrade. May get worse before it gets better, if it does get better. I very much hope they turn it around, though. Would love to collect a chunk of all those rent checks!

    Best of luck with the holding. 🙂

    Take care.

  37. Pat,

    Very difficult to say where this one is going. A lot of moving parts and we still don’t know what the audit is going to reveal. Very speculative right now. I hope they turn it around, but I wouldn’t be willing to bet any money on it either way.

    Best of luck with your newly free capital as well. 🙂

    Best regards.

  38. DL,

    Haha. What an appropriate stock ticker, huh? 🙂

    Right. I’m not against selling at all if the company has severely deteriorated. And this is the most severe deterioration I’ve run across in my young career. I hope to never have to sell again, but I won’t be opposed to it if I run across another rotting branch. The tree is more important than any single branch.

    Diversification is definitely the only defense someone has against something like this. It’s simply not something that can be modeled or predicted. And it can happen with any company, as some major companies (you touched on some) have had issues like this. Some have survived, some have not. I’m not willing to bet on ARCP either way here, as I’m just not a speculator.

    Thanks for the support. Appreciate it!

    Best wishes.

  39. A-G,

    Impossible to say where this one is going. It’s all speculation until more information comes out. A dividend cut may actually help them firm up their capital, but I think they have bigger issues at hand than that. I wish ARCP shareholders the best of luck and I do hope they turn it around. It’s such a shame that management couldn’t just milk this cash cow and leave well enough alone.

    Cheers!

  40. Dave,

    The litigation against ARCP is all over the place. I wonder how many lawsuits are actually going on right now. Just a mess…

    Thanks for dropping by!

    Take care.

  41. M,

    Well, I wouldn’t say REITs are too good to be true or should be generally avoided. Many REITs have far outpaced the S&P 500 index while also producing far more income along the way over long periods of time. Real estate is real and so are the rent checks. Obviously, that has to be managed correctly. But avoiding REITs due to ARCP’s mess would be akin to avoiding telecoms like T or VZ because of WorldCom’s mess back in the day.

    There are quite a few REITs that have lengthy dividend growth streaks. O, OHI, HCP, DLR, and WPC are just a few.

    Best regards!

  42. DM,

    Great post DM. As a former fellow shareholder of ARCP, I appreciate hearing others opinions on their decision to either continue to hold, sell, or re-up their position in the stock. Similar to your mindset before the recent developments, I have been in the lets wait and see mode for this company. For all the reasons you have pointed out, it is just getting harder and harder to justifying holding this company. We are in the game to build a strong, reliable dividend stream that will continue to grow and produce income for decades. ARCP may or may not have that going forward, but as you said, it is all sspeculation. I want to believe that the company’s mangement will turn it around and I think they can with the assets the company has amassed over the years. But I face myself asking myself this: Is my belief that the company will turn the company around filled with bias because I am hoping I can recover my loss or do I really think ARCP is a fundamentally strong company capable of recovering? I think we both know the answer to that.

    As I type this comment, I have an idea of a transaction that will be coming down the pipeline the next couple of days. At this point, I would rather hitch my wagon to an oil company with a strong business model, balance sheet, and room to continue to grow their dividend for many decades.

    Nobody ever wants to take a loss on an investment, especially one that is over 30% (Sadly, my loss owuld be larger than yours). But you made a very smart investing decision today cutting your losses and using the funds to purchase a stronger stock. I am very impressed how you were able to take emotion out of the equation while making the decision. It was a business move and your Freedom Fund is stronger now because of it.

    As always, great work. I am excited to read about which stock you purchase next.

    Bert

  43. HMB,

    Thanks. It’s tough to lock in a loss, but luckily I don’t have much experience with it. I took a risk with this one and it just didn’t pan out. Thankfully, I don’t do that too often. Just a bad investment.

    But sometimes we need to reevaluate our thesis when the facts change. I hope I don’t run into a situation like this again for a long time!

    Appreciate the kind words and support. It’s shopping time now. 🙂

    Hope all is well with your investments!

    Best regards.

  44. ILG,

    I made the same mistake there in trying to find the next Realty Income. I really thought this was it. And when you compare the portfolios, geography, diversification, industries, and size, it was easy to make that comparison. Unfortunately, ARCP lacked O’s management team. And that was it. It was so easy just to let this thing make a lot of money for a lot of people. Such a shame.

    I wasn’t reaching for yield, however. I could easily reach for yield with stocks that offer way more than ARCP (even now). I honestly thought this was going to be a fantastic investment over the long haul. I was clearly wrong.

    But I hear you on the lessons learned. I’ll also be sticking to companies with lengthier track records of success in the future. I hope this makes us both better investors over the long haul. 🙂

    Cheers!

  45. Agent,

    Can’t win them all, that’s for sure. The good thing is that we don’t need to with this strategy. The occasional strikeout is more than made up for with the eventual rounding of the bases over and over again. 🙂

    It’ll be nice to go shopping one more time before the end of the year, as it was unexpected.

    Hope all is well with your investments!

    Cheers.

  46. Nathan,

    I thought about selling the day of the initial accounting fraud announcement, but held on in case it was really just the minor adjustment to AFFO. But my doubts that it’s really just a minor adjustment continue to mount. Time to move on and watch from afar.

    Glad you were able to put that capital into some better plays. KO and KMI may not yield as much, but the quality is far higher. And that’s really what we’re after as long-term investors.

    Thanks for dropping by!

    Best wishes.

  47. Bert,

    Thanks for sharing!

    It’s all business for me. I simply assessed their fundamental foundation as a businessman and concluded that the foundation is no longer solid. Certainly could change at some point, and I hope it does. But it doesn’t appear to be in my best interest to stay invested here. I think you have to ask yourself if you’d invest today, knowing all you know? And my answer would be a clear no. I wouldn’t touch this stock with a 10-foot pole with new capital, so it makes no sense to abandon my existing capital there either. Just my view on it. Not a call on their future, just a call on my personal situation.

    Appreciate the support. The most we can take away from this is a lesson. It’ll be an expensive lesson, but they almost always are! 🙂

    Wish you the best of luck with making the right choices for your portfolio as well.

    Cheers!

  48. DM,

    Good move. I am sure that you will quickly find another company more worthy of your investment dollars. I am anxiously waiting to see what you do with the cash …

    Roger H

  49. I don’t blame you DM. . . I have had some doozies in my time of investing and always try to learn from my mistakes, but there is nothing wrong with taking a step back and truly re-evaluating why you are in a position. I like to think of it with a mindgame of role playing as a completely new investor and ask myself “If this was the first 1000 bucks I had to invest ever in my life, would I still buy this company for the long term?” that takes a lot of emotion out of the equation. Some times we get too caught up in the idea/story of a stock and the good looking numbers (albeit maybe not accurate or at a cyclical top) at first and don’t realize it might be a bad investment. A wise investor knows that the market always has something to teach you!

    I have had my lessons over the years with BAC and GE during the subprime meltdown, BP during the Macondo Disaster, and more recently Ensco with the recent oil drop and RYN that had an accounting issue of it’s own by giving incorrect inventory of their resources and income over the last few years. Stuff happens, but it’s good to know you still have a diversified portfolio of 50 other companies paying constant dividends to rely on when one blows up.

    I personally would never buy back into a company that has had such issues as the whole executive committee resign and accounting fraud. There are much better prospects out there with great long-term track records and no such issues. ARCP isn’t a value play at this point, it’s a crapshoot.

  50. Roger H,

    Thanks! It seems prudent here. And I can always revisit the stock later down the road if operations dramatically improve.

    Yeah, I’m excited to go shopping one last time. Just in time for the holidays. 🙂

    Hope all is well with you!

    Best regards.

  51. Daniel,

    Agreed. It’s definitely no value play here. It’s impossible to even contend that it’s a value play without knowing the full scope of what’s going on. It’s a complete speculation here.

    I’m with you on always trying to learn a lesson. It’s a shame here, as management could have done the right thing and just allowed everyone to make a lot of money. It appears this may have come down to simple greed. The one lesson I learned is to try and stick to quality as much as possible. Money can be made on companies that fall on temporary hard times (like GE after the crisis), but it’s generally better to avoid these issues and stick to those companies that survive the worst and keep on ticking.

    Thanks for dropping by and sharing. Always something to learn, right? 🙂

    Best wishes.

  52. DM,
    For me it was simple. After the initial announcement, the future was uncertain. Not necessarily bad, but unknown. I didn’t want to rely on hope, so I sold.

    REITs can fall hard because of their reliance on borrowing money. Borrowing costs rise, plus legal costs rise in these kinds of situations. Class action lawsuits, extra accounting costs, audits, and many unknowns. Now they need to find some new execs… Yuck.

    It’s all about the rearview mirror now!
    -RBD

  53. RBD,

    You made the right call there. I was hoping that this would clear up pretty quickly, but I was obviously wrong. It’s continued to get worse and worse, and I’ve tried to remain stoic about it. But the departure of pretty much the entire executive staff is nothing short of mind-boggling.

    Agreed on the cost of capital. The downgrade was the last straw for me, as that could really constrain their options for the foreseeable future. Perhaps they release a fairly clean audit in a few weeks and things clear up. But I wouldn’t want to bet another dollar on it. I hate to take the loss, but I’d hate to throw good money after bad even more.

    Appreciate the thoughts. We’re on the same page.

    Cheers!

  54. Hey Jason,
    I too would take the money and run. Get out and buy something of quality. It was impossible to forecast the behavior of this company. Once announced, why stay in? I’m sure I will be hearing from you when you reinvest that money. Best, Dan

  55. One of the last chapters in the fantastic ‘Creating wealth with dividend growth’-book by Lowell Miller tells about when to sell a stock. One of the reasons he lists is when your stock is undergoing federal investigation..

  56. Hi DM,

    I think you made a good call. It sucks that you have to take a loss, but it could have been worse.
    Hopefully you learned from the investment.

    But think positive, you have some capital to make a new investment.

    Cheers,

  57. DGI, I’m with you. I’m gonna hold my 200 shares. I’ll admit it’s more because of stubbornness and not fundamentals, but I’m glad I’m not the only one…

  58. Some of the best lessons I have learned investing happened when I sold companies that I had lost money on. Sometimes losing some of the “skin in the game” leaves you with a scar you can always look at to remember what not to do ever again. If you don’t have any scars than you haven’t been investing very long 😉

  59. I thought you would sooner or later. I”m sorry you took such a large loss on the position; I hope the value of what we as investors can take from this far exceeds that. Hope you find a good company to invest the proceeds in. DOV, AET, BBL, BLK, and WLK all look appealing around now.

  60. DM,

    Tough choice, but I totally understand your decision and I understand those who figure to hold onto the stock. That being said I am kind of glad I am not long on ARCP (yet or in general) because of all the drama. However, I believe all people in some deeper psychological sense love a good train wreck. As my friends and I all believe: “Since the dawn of train, man has loved train wrecks.” ARCP in terms of disaster is giving the Washington Redskins a run for their money… straight into a brick wall.

    I hope you can turn that capital around into something that works more towards your needs.

    – Dividend Gremlin

  61. Hi Jason,

    Nothing wrong mate with changing your mind when the “Story” changes around a particular stock, myself I love REITS the present bunch (UK focused) I picked up in 09 have been good to me, this week I have sold them back a little, not because I have any worries but to realise some profits and pick up stocks that have equal or higher dividends in the Commodity arena….Oil and miners are really starting to look very attractive, I havent seen capitulation yet in either sector just degrees of panic selling thus far 🙂

    Stay lucky,

    Dave…

  62. Hi DM

    I noticed you have a lot of holdings in Gas/Oil. Do you have any long term concerns about their supply and demand being diminished in the long term?

  63. I understand the debt concern. The problem is that not all debt is due at once – the maturities are staggered. In addition, once the financials are updated, it is possible that the rating is changed… for better or worse. As for interest rates – they are low even on “junk bonds” these days. Mortgage rates are low as well, plus there are assets to sell if push comes to shovel. A company always has options. Whether it uses them is another thing. Also I am always hesitant to project recent weakness onto the future and demise of a company. Not saying it can’t happen, I am saying just focusing on the negative could be dangerous ( as is dangerous just focusing on the positive).

  64. DM- stock is up 8% right now…your sale must of triggered some buying! Just kidding 🙂 as for me I hold the ARCPP and will continue to drip it into the ground or start taking the divies and buy m some more oks/oke/wmb. Best wishes!

  65. Dan,

    Right. It’s not only impossible to forecast the future behavior, but it’s also extremely difficult/impossible to really value the business here. I have no idea what the cash flow looks like over the next year, let alone the next decade or longer.

    I probably should have exited right away, as an accounting scandal isn’t something to take lightly. Though I wasn’t taking it lightly, I thought the company would swiftly announce the results of the audit and they could slowly get back to doing business. But there’s that old saying about cockroaches…

    I’m looking forward to reinvesting the cash. Was hoping to perhaps go shopping today and I see most everything I was looking at is up huge today. My luck is just horrible lately. First world problems. 🙂

    Thanks for dropping by.

    Cheers!

  66. swedendividend,

    Been a long, long time since I read that book. May have to revisit it.

    That’s a solid rule. I don’t know what the averages are there, as I know many companies have moved through an investigation and done just fine. But you certainly have a case to be made that things are far from normal and it may be better to exit and let things play out where your money isn’t at stake. I suppose it depends on the situation and why they’re being investigated, however. An accounting fraud would be, in my view, much more serious than an investigation. Though, the former leads to the latter anyhow.

    Cheers!

  67. Jason,

    I think you dodged a huge bullet here. ARCP is a sinking ship in my mind. The nail in the coffin is basically the whole upper management team stepping down. I would not have wasted another second holding this stock. Your loss could have been much worse. No one could have foreseen the accounting issue. The only thing i would take away from this experience is perspective. I think if i were in your shoes, this would force me to rely more upon aristocrats in the future. I think your portfolio is very solid, and if anything, i would take your capital from the sale and invest it into an existing position that is on sale right now like XOM, or CVX.

    Cheers,

    Josh

  68. Geblin,

    Yeah, it was a tough call. I’ve been back and forth on it for weeks. I didn’t want to sell, but there has been little communication from the company whatsoever. The sole manager (Kay) who’s been communicating is now gone. And there’s just little to be known. I’ll take the tax benefit now and reevaluate later.

    I didn’t plan on doing any more stock shopping this year, so it feels weird. I wasn’t even really watching much of anything for a buy. I decided to get in gear today and now everything I like is up double digits. Go figure. We’ll see how it goes. 🙂

    Thanks for stopping by!

    Cheers.

  69. MGM,

    Haha. Someone else mentioned the battle scars. I suppose I have a fresh one now.

    I agree that one has to look at something like this as an opportunity. I certainly won’t be dipping into stocks with minimal history behind them again. I was okay with the risk as I knew it, but the accounting fraud definitely wasn’t anticipated. Just one of those things. Can’t predict it.

    Thanks for the support!

    Best regards.

  70. DD,

    It’s a shame. This could have made a lot of people a lot of money for a long time if left alone and run correctly. I’m guessing that greed got the best of some people involved. Almost always seems to work out that way.

    I didn’t want to sell. But the clock being moved forward put me in a position to where the tax-loss became more attractive. Throw in most of the executive team being lost and a credit downgrade and it was time to move on.

    I agree that there are some attractive names out there. I’m 50/50 on BBL. I like it a lot at this level, but I also didn’t want to go too crazy with it. It’s not a stock that I’d like a heavy weighting on. 1% or 2% exposure is really all I planned on. But I may have to average down just one more time here. AET is interesting. I wish I could go back in time and start looking at the healthcare benefits providers at the beginning of the year. UNH is in there.

    Thanks for dropping by!

    Take care.

  71. Gremlin,

    I must be one of the few that doesn’t enjoy a train wreck, whether my money is involved or not. I like volatility, but from an emotional standpoint, not actual problems with businesses. I prefer business ran as usual every single day for years on end. 🙂

    We’ll see where the capital is going to go. I’m not much for timing the market, though it’s disappointing to see almost everything I like extremely in the green today. I just can’t win lately!

    Hope all is well over there.

    Cheers.

  72. DM, I have to say this is very uncharacteristic. This seems like a very speculative play and emotional, which I’m glad you admitted. In the end, However in the end it won’t really matter but if it does 😛 : O ye’ll tak’ the high road, and Ah’ll tak’ the low road And Ah’ll be in Retiremen’ afore ye.

  73. Dave,

    Right. The story definitely changed here, so one’s thesis needs to be revisited. Tough to value a business when the numbers can’t be trusted. And that’s just one of their many problems right now. Money could be made, but it’s pure speculation now. Not my cup of tea.

    I’m also a fan of REITs in general to a degree. I’ll have to replace the hole in the portfolio now there, so I’ll be looking at REITs over the coming months. Agreed that there is some strong value in miners. Oil will likely remain volatile for a while, but I wouldn’t mind slowly averaging down there. Unfortunately, most of my holdings in oil haven’t dropped to a level at which I can average down. We’ll see how it goes.

    Happy shopping! 🙂

    Best regards.

  74. Mike,

    Long-term concerns? No. Short-term? Yes. Supply and demand works itself out over the long haul, but there are always short-term issues where the market has to correct. But those corrections serve as opportunities, in my view.

    Best wishes!

  75. Josh,

    Thanks!

    Yeah, it’s tough to say. I think, as a bystander now, ARCP can turn it around. They need qualified managers, they need to communicate often and clearly, and the numbers have to work out okay. If the numbers are way, way off and they continue to bobble the message, that could lead to a painful death. Perception sometimes becomes reality with these things, so you just never know. I’d rather not speculate either way on it with my actual money, however.

    I think my biggest lesson here was really just that the company didn’t have a lengthy history. It had this explosive growth, but there was no track record to speak of. So I don’t think companies with 25+ years of dividend growth are the only ones out there with track records, but ARCP was way on the other side of the scale. I’ll likely be staying away from companies with less than five years of dividend raises in the future. For the most part, at least. I may make an exception for what I perceive to be a high-quality company, but ARCP just didn’t have the corporate history to really make that call. I thought they could have been the next Realty Income. I still think that. But they just weren’t up to the task.

    Thanks for the thoughts!

    Best regards.

  76. Wise move. It’s impossible to predict this sort of thing, you could never have known about ARCPs accounting issues. You are doing the right thing by selling and rolling with the punches. Now you can look forward to allocating that capital in new opportunitites!

  77. Joe,

    Right. I think hindsight is 20/20. It turned out to be a speculative play. But if they had not had accounting problems, I’d still be invested (as would many others) and that would be that. I think it was a high-risk investment before, but not really a spec play. They do have a rather large portfolio of high-grade real estate. Unfortunately, accounting fraud can turn even the best investment into a spec play in a hurry.

    But I’ll be shying away from companies with less than five years of dividend raises (and certainly less than five years of corporate history) in the future. I’m the type of person that doesn’t often get burned twice. I lost some money on this one, but I won’t lose the lesson.

    Thanks for dropping by!

    Take care.

  78. Spoonman,

    Thanks, bud.

    Yeah, impossible to predict this sort of thing. Just one of those broader risks you take on when investing in stocks. I lost some money, but there are plenty of other fish in the sea. 🙂

    Hope all is well in the PNW!

    Cheers.

  79. DM,

    Don’t you hate to see the stock shoot up today right after you just sold? Naah, no one can time the market. I think you made the brave and wise choice here. Loss aversion is a very powerful emotions, and most investors fail by selling their winners too soon and holding onto losers too long, even to the bankruptcy court. So I admire your ability to overcome this common mistake. “Always sell into accounting fraud” is a good rule of thumb. Another good one is “don’t chase yields”. Take care.

    JTF

  80. Looks to be a little jump as some buyers are finally thinking a bottom is in sight (not necessarily now).

    I still think some names need to go lower, namely integrated majors, but we shall see.

  81. I just picked up 11 more shares of BP. I am starting my first XOM purchase on Tuesday with 1000 bucks invested.

  82. DM,

    Tax loss selling,why not! Bargains were to be had the last few days, and that money was simply re-invested in the names that were taken out to the wood shed. Even after the big move today there’s still great bargains to be had. (BBL,PM,BP,MCD,NOV.)

    Keep up the great work,

  83. mike,

    Ha! I think this blog could be 100 times its current size and I still wouldn’t have any impact on the stock market. 🙂

    I wish you much luck with ARCP. I truly hope it turns around. There will be no hard feelings on my end. I simply approach this all as a businessman. And this just isn’t the type of business that I really want to be associated with right now. But if the business dramatically improves, I wouldn’t be completely opposed to reassessing ARCP in the future. But the turnaround would have to be fairly spectacular and it’ll likely be a while before I even consider it.

    Cheers!

  84. JTF,

    Indeed. If I could time the market, I’d be living on my own private island. 🙂

    ARCP could very well turn it around. Just as likely, it could fall to pieces. The potential of either outcome is purely speculation, in my view. I’d rather not bet my own personal money either way on it.

    I lost some money, which happens in business from time to time. On the whole, I’ll make way more (and have) than I’ll lose. And that’s what matters most over the long haul. I think the key is to learn a lesson and avoid getting burned a second time.

    Cheers!

  85. Ravi,

    I agree. I’m surprised to see some of the supermajors holding up so well. But I have a 15%+ weighting to energy, so I’m not in a huge hurry to add more here anyway. If they continue to hold here, that’s okay by me. If they drop quite a bit, then I’ll look forward to adding selectively. I’m okay either way. It’s a win-win. 🙂

    Cheers!

  86. Must stink to feel it maybe be necessary to sell, but I can follow the logic there.

    Personally, I intend to hold, as of what I know today. First and foremost, it’s a relatively small holding with basis ~2k so I can afford the risk of it going away. The biggest benefit of equity REITs is that the assets are relatively liquid to transfer ownership. Day-to-day onsite management services are generally outsourced, or can be renegotiated fairly easily by a new owner, if necessary.

    It’s tough to value most companies from the balance sheet, but RE is different. Can you discern value in use for JNJ, MCD, or even DIS from the balance sheet? Sort of, but it’s very difficult. There’s a lot of execution and expertise it takes to derive value from those assets. RE is much more transferable and a new owner could get all, or most, of the same value in a purchase/takeover.

    Unlike most companies, and assets, RE is highly transferable and there’s little value differential among reasonably competent owners. When goodwill and intangible assets are low relative to the total asset base, this implies a relatively high “distressed” value as compared to other industries/asset types. Book value becomes a reasonable barometer of downside risk, since potential buyers would naturally be able to buy ARCP properties at discounted (higher) cap rates. In any case, it’s not wrong necessarily to sell, but I think it’s possible that some sellers have overestimated the downside risk.

    In any case, there are almost certainly lower risk plays out there in other industries.

  87. Ravi,

    Hmm, I follow what you’re saying there. But I’m not sure if financial theory will turn out to be reality here, if we’re talking a worst-case scenario. And selling off the company like that would probably be such.

    “Book value becomes a reasonable barometer of downside risk, since potential buyers would naturally be able to buy ARCP properties at discounted (higher) cap rates.”

    I wonder if that’s part of the problem. What should book value be? How reliable is it? If the real estate is discounted at a sale, how much? What’s the difference between that and the NAV as the company has recorded it? Furthermore, you have to rely on buyers. Will there be buyers? What will the buyers want to pay? Is it in their best interest to give ARCP a fair shake, if it comes to that? If this all materializes (selling RE), why not just let ARCP go down and become insolvent? If you’re looking for discounted real estate, I would think patience would serve you well if you smell blood in the water.

    Do you have any real-life cases where assets were transferred en masse? What was the book value and what did the assets go for?

    I’m just not sure you can really mathematically determine the complete downside, especially when we don’t really know what’s true and what’s not. The one person who was communicating any type of numbers is now gone and there has been no other news relating to the company’s numbers. Furthermore, if their cost of capital goes too high, it’ll be difficult for them to continue doing business profitably. And when we’re talking about balance sheets and real estate values, it’s what the market will pay. And I just don’t think we can accurately ascertain a value of all that real estate in a stressed environment. Just my take on it.

    Cheers!

  88. Its a shame that you had to sell another stock, but I completely understand why. I myself will hang onto my ARCP a little while longer since I have an extremely small amount of shares that even if they were to go to $0 it wouldn’t really make much of a difference.

    I look forward to seeing what you do with the fresh capital! I myself just initiated a position in T the other day with the market pullback allowing me to get in at a fair price.

  89. Jason, some interesting ideas that were still down today with the big bounce going on include NSRGY, DEO, and RTN. All on either your watch list or portfolio list. I wanted to buy more KMI below 37, but my funds took a day to transfer. Oh well, I would be happy to add more diversity in consumer goods and beverage stocks here instead of more energy if they keep dropping. I think both DEO and NSRGY both offer fair value for great global companies here.

  90. Dan,

    I’d love to own NSRGY at some point. Last time I looked at the P/E ratio, it was something like 25 or 26. I may have to take another look at it here. DEO is another great company. Probably more or less fairly valued right now.

    But I hear you on energy. I’m maybe not as excited about others in regards to going crazy there as I’m pretty heavily invested already at fairly low prices. So I can kind of stay patient here.

    Thanks for dropping by!

    Best regards.

  91. FreeIn15,

    Thanks for dropping by!

    If ARCP is inconsequential to you and your goals, then it doesn’t really matter either way. Though it was a small position for me, I still had over $2k invested there. Money is money. I’d rather have $2k than $1k or $0. 🙂

    ARCP could very well turn it around. I have no idea which way it will go. But it’s precisely because I have no idea that it was time for me to exit. I do hope it turns out well. I hate to see people losing money, myself most of all.

    Take care.

  92. I have been following this blog for a while and like what I see. I too embarked on dividend investing back about 7 years ago as a way to get financial independence.

    However, I feel that lately you have been reaching for yield at the expense of quality, which many not be a good thing for the long term. Here are 5 of Charlie Munger’s relevant quotes, which I believe tie into this topic. I hope you find them helpful:

    The difference between a good business and a bad business is that good businesses throw up one easy decision after another. The bad businesses throw up painful decisions time after time.

    Part of what you must learn is how to handle mistakes and new facts that change the odds. Life, in part, is like a poker game, wherein you have to learn to quit sometimes when holding a much –loved hand.

    We’re partial to putting out large amounts of money where we won’t have to make another decision. If you buy something because it’s undervalued, then you have to think about selling it when it approaches your calculation of it’s intrinsic value. That’s hard. But, if you can buy a few great companies, then you can sit on your ass. That’s a good thing.

    You have to figure out where you’ve got an edge. And you’ve got to play within your own circle of competence.

    A great business at a fair price is superior to a fair business at a great price.

    Best Wishes

    Mike

  93. Hey Mantra!
    I think that the board “fired” the management team to gain trust among investors. And now searching for more “trustworthy” and stable management team. There was an article on seeking alpha, it says that the ARCP shareholders saves roughly $20 million, because of these management changes.
    http://seekingalpha.com/article/2758575-american-realty-schorsch-falls-affo-rises
    Don’t know how good and trustworthy that info is. But it can be true.

    Anyway i’m still owner of ARCP, will see how that goes.
    cheers!

  94. Pingback: Recent Buy
  95. Mike,

    Great points there. I would agree that I overlooked the quality of the business for the quality of the underlying real estate portfolio. I put my faith in management’s ability to execute and collect the checks. It seems that was a task that they weren’t up to.

    However, I disagree that I was chasing yield. My portfolio’s yield is somewhere near 3.5%. If I wanted to chase yield, you’d see me routinely investing in BDCs, MLPs, and REITs with yields above 7%. My largest position is in a company with a yield well below 3%. I find it particularly strange you say “I feel that lately you have been reaching for yield at the expense of quality” when my purchase just earlier this month was in Disney, which sports a yield not far north of 1%.

    But I appreciate the thoughts. Thanks for stopping by! 🙂

    Best regards.

  96. AnhaInvesting,

    Interesting article. Although, it’s complete speculation. Difficult to say what’s going on or why. And it’s very possible that anyone they bring on will demand a hefty paycheck to help turn things around. Not sure how much savings that will really result in. My guess is that the BOD felt those still involved were too close to Schorsch or perhaps not aligned with the new direction. Not really sure. It’s all purely speculation at this point.

    But I do wish you the best with your position. I have no idea where they’re going, but I hope that they do the right thing and turn it around. 🙂

    Cheers!

  97. DLee,

    It’s not for me.

    I guess you have to ask yourself if you’d feel comfortable with $200k of your money with Robinhood? And if the answer is no, why would you feel comfortable with $5k or $10k?

    Sleeping well at night is important to me. I prefer to have my money with trusted institutions that have been around a while.

    Cheers!

  98. DM, I meant your sale is speculative, not the purchase. I would say the purchase was risky but not speculative. This sale is purely speculative as there has to date been no significant change in the financial fundamentals of the company. All that aside, it’s 1%, 1% is 1% and luckily it seems you went into BBL which I also opened a position on myself, hard to go wrong there.

  99. I own 125 shares of ARCP and down 35% and still not sure what to do with those. I own it in an IRA, so there is no need to sell by the end of the year for tax purposes. But like you mentioned, the company is going through several issues right now and not sure how their results are going to be. The stock has been up by about 10% in the last couple of days. Might wait and see how much it can go and then sell

  100. DGJ,

    I wish you the best of luck either way there. I was happy to at least lock in the tax-loss benefit. Unfortunately, the IRA doesn’t allow you that. But it may work out to your benefit. Maybe you’ll just hold on and the company will be fine. But because I really can’t say with any confidence that will happen, I had to exit.

    Best regards!

  101. I don’t know if it is because I have only been investing for a year, or because I am only 19 ( and therefore open to extreme amounts of volatility), but I am willing to hold onto this stock. I only have ten shares, but I still think, with my time frame, it could pull out of this mess. I can understand your selling as you do rely on this income right now. I am just trying to build. I was actually considering buying more shares, due to the potential with the new management, but have since decided to send the money to Motif Investing. They have a motif with many dividend champions and only require $9.95 to buy each. However, I may still buy more depending on the audit results.

  102. Kat,

    Congrats on being 19 and investing. That puts you far ahead of almost everyone else out there. I wish I had a time machine so that I could go back in time and start investing at 19. I’d likely be financially independent by now, even if I didn’t know what was going to happen with stocks.

    10 shares in ARCP won’t really matter either way for you. I’d just probably keep them and see how it turns out. Even if goes really sideways on you, you’re not going to lose much money. It’ll be an interesting lesson, either way. Well worth the price of admission (for you). 🙂

    Thanks for dropping by. Keep up the great work over there!

    Best wishes.

  103. As an ARCP shareholder, I don’t really blame you for selling, Jason. I can’t believe this company took such a dark turn. I was hoping to make a lot of money with it, and now I’m not so sure.

    That said, I’m planning to hold, at least until the audit. Mainly for three reasons:

    1) As DGI and yourself said, they have real properties with real tenants paying real rents. And not just a couple of little storefronts, but a portfolio of properties that could have allowed them to rival Realty Income within a relatively short amount of time. This isn’t grasping at straws for someone too stubborn to part with ARCP; this is a major strength that they have. Their core business is strong.

    2) There is a good chance I am misunderstanding how REITs or commercial lending works, but I am assuming that ARCP purchased its properties with fixed rate commercial mortgages. I hope at least. Because if that’s so, then the reduction to junk status and the increase of interest on future loans/mortgages might not be as problematic as one would think. Sure, that means that they would have to put all future acquisitions on hold, stagnating revenues (unless they increase rents), but at least they’d be able to hold steady for now. Just collect those rents and pay those mortgages at the locked in rates. I’m hoping that’s how it works, at least, and if so, then I’m hoping that’s what this company does. But if that is the case, then the increased cost of capital wouldn’t be quite as problematic as everyone thinks.

    3) Call me crazy, but the clean sweep of management actually brings me comfort. I’d rather the people at the top who created this whole mess get the boot and a new team brought in that doesn’t have a history of accounting fraud. If management was the issue, then why should we be shaken and spooked when they are let go? I’d be more likely to sell if there WASN’T a clean sweep of management.

    Ultimately and unfortunately, ARCP is a speculation play at this point. Unless you never had any shares in the first place, you are speculating whether you like it or not. Holding it like I am? Speculating. Selling or sold like you did? Speculating. We’re the types who generally choose not to engage in speculation, but this is an instance where we’ve been thrown into the speculation arena and told to fight. Hopefully we’re all making the right choice, regardless of the decision to hold or sell (I certainly am not buying any more at this point). Like you’ve said, Jason, we’ll just have to wait for the audit results to come out until we know for sure what the right decision is. Hopefully I’m not making the wrong choice by holding.

  104. Joey,

    Well, I hope it works out for you and all others holding it. As far as the cost of capital goes, that’s extremely important for a REIT due the fact that they distribute most of their net income to shareholders. So there’s really not much left for the company. Imagine a company that had a 95% payout ratio and no viable access to capital.

    Hopefully, the audit comes back fairly clean and ARCP can go back to business as usual at some point in the future. But it’s a speculation either way. As such, it just isn’t really a play for me. But I can also see why some, like yourself, would rather hold on and see what happens. Wish you the best of luck with it. 🙂

    Cheers!

  105. Just read that they suspended their dividend. Sold my entire stake immediately. Thank God my stake in this company was so small. My losses were less than $150.

  106. Joey,

    Yeah, I mentioned the elimination of the dividend in the article. Rather unfortunate. I have no idea where this firm is going, but one has to believe that we’re talking about more than a slight adjustment to AFFO. Not something I’m going to pay a lot of attention to moving forward, however. I much prefer my boring investments. 🙂

    Sorry to hear about the loss. You’re definitely not alone. But it’s nice it was a small amount. $150 is obviously a very small sum of money over the arc of one’s investment career. The lesson learned was probably worth the price of admission.

    Best wishes!

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