The world recently lost the wisdom of Charlie Munger, a legendary figure who was a partner to none other than Warren Buffett. Throughout his nearly 100-year life, Munger was known for his sharp insights on a wide range of topics, from life and investing to capitalism, government, and taxes.
Interestingly, among his many thought-provoking quotes, one particular topic stood out: cash. Munger had a firm belief that cash was paramount, and his wisdom on this matter remains as poignant today as ever.
- “It takes character to sit with all that cash and do nothing. I didn’t get to be where I am by going after mediocre opportunities.”
- “Live within your income and save so that you can invest. Learn what you need to learn.”
- “You want to fish where the bargains are. [It’s] that simple.”
In essence, all three of these statements echo the same sentiment: Cash is king. By not squandering money on unnecessary expenses, one can capitalize on valuable money-making opportunities later on.
One shining example of this principle is Munger’s own story. He amassed a colossal fortune totaling $2.6 billion simply by adhering to this philosophy.
Even at his passing, Munger was named the 1,182nd richest person in the world by Forbes. While his wealth pales in comparison to Warren Buffett’s $118.9 billion, it still stands head and shoulders above the average person’s financial standing.
So, what’s the key takeaway here? The answer lies in Munger’s own words:
“The way to get rich is to keep $10 million in your checking account in case a good deal comes along.”
I’ll admit, I’m a living testament to the truth of this concept, although on a much smaller scale.
A Stroke of Luck
My own journey reflects the sheer power of having cash at your disposal. I vividly recall stumbling upon a foreclosure notice in Gaffney, South Carolina, a region where I already owned a few properties. It was a stroke of fortune that set off a series of massive opportunities.
Despite not being my usual investment avenue, I decided to explore the foreclosure out of sheer curiosity sparked by the deeply discounted price. I learnt about the auction just days before it was due, and with some quick arrangements, I was ready with a $100,000 check.
In a serendipitous turn of events, the auction room was almost empty when I arrived. In fact, the sole presence in the room was the foreclosure Judge, and he raised an eyebrow at my promptness. Little did I know that this unassuming setting was about to change my life.
In an almost surreal turn of events, I ended up purchasing Cherokee Plaza, a 100,000 square-foot shopping center, for a mere $500,000. To put it in perspective, that’s a jaw-dropping $5 per square foot, an almost inconceivable bargain in the real estate world.
Following the purchase, the real work began. I wasted no time in securing tenants such as Big Lots, Dollar General, and even Pizza Hut, transforming the once neglected property into a bustling commercial hub. I even managed to sell an outparcel property to Kentucky Fried Chicken, a move that swiftly recouped my initial investment and then some.
I share this not to boast, but to emphasize a critical truth: the ability to seize opportunities hinges on having the cash ready. The classic adage rings true: Cash is king. To truly thrive, one must possess the foresight to recognize and capitalize on valuable opportunities.
In today’s fast-paced market, the significance of cash readiness cannot be overstated. It’s the vital ingredient that can turn a seemingly mundane auction into a life-altering opportunity. So, embrace the wisdom of Charlie Munger, and make sure the king is always ready to claim the throne.
What are similar opportunities lurking in the market today? Only time will tell.
Investment Trusts with Fortress Balance Sheets: Opportunity Knocks!
In 2010, Warren Buffett, in his annual letter to Berkshire Hathaway shareholders, emphasized the need for “major” acquisitions to ensure the company’s growth. He aptly commented about having the financial firepower for such opportunities, something he metaphorically referred to as the “elephant gun” and described his readiness to make a move.
With the discussion about the need for massive acquisitions firmly in mind, it’s worth diving into real estate investment trusts (REITs) such as Realty Income (O) and Mid-America Apartment Communities (MAA) to amplify the adage, “Fortune favors the prepared.” These two REITs don’t merely talk the talk; they possess hardcore balance sheets that are armed to the teeth with cash, ready to pounce on lucrative investment opportunities in the market.
Realty Income (O)
Realty Income has emerged as a major player in the REIT arena, with its acquisition moves, creditworthiness, and strategic partnerships setting it apart. This net lease REIT has been turning heads with its cash reserves totalling a whopping $344 million, along with a staggering net availability on the credit facility of $3.4 billion, giving it a grand total of $4.5 billion in liquidity.
The company’s balance sheet paints a picture of financial robustness, marked by a stellar A3/A- credit rating, a debt to annualized pro forma adjusted EBITDA of 5.2x, and fixed charge coverage of 4.5x. These figures showcase the company’s financial stability, assuring investors that they are in a safe harbor.
Not resting on its laurels, Realty Income raised eyebrows with its acquisition endeavors in Q3-23, bringing in net lease deals worth over $2 billion, all leased at an impressive 6.9% initial cash yield. The mega Spirit Realty deal valued at $9.8 billion is poised to further elevate the company’s standing, with an expected addition of over 2.5% to annualized FFO, without the need for external capital.
Realty’s collaboration with Digital Realty in a joint venture, encapsulating a $200 million investment in two data centers, demonstrates its forward-thinking approach. These properties are projected to yield a 6.9% initial cash lease upon commencement, a testament to the company’s strategic foresight and commitment to growth.
CEO Sumit Roy’s reassurance on the company’s performance during the latest Q3-23 earnings call, with an annualized total operational return of approximately 9%, further solidifies the trust in Realty Income’s resilience and capability to navigate challenging market conditions.
Despite market turbulence, Realty Income has displayed its agility and prowess, pulling off lucrative investments worth $6.8 billion through Q3, with investment spreads realizing over 100 basis points when computed on a leverage-neutral basis. This exemplifies the company’s remarkable capability to capitalize on market opportunities relentlessly.
The illustration below starkly portrays the impact of the Fed’s decisions on Realty Income’s stock performance, showcasing the undeniable correlation between rate movements and the market perception of this net lease REIT.
Invariably, Realty Income’s resilience shines through even as REIT cost of capital rises in tandem with the steep rate increases, a testament to the company’s unwavering determination to transact and drive earnings and dividends growth. The company’s ability to thrive amidst adversities speaks volumes about its preparedness for any storm the market brings.
Closing in on the financial fine print, Realty Income’s current trading dynamics come into focus, with shares at $54.60 sporting a P/AFFO multiple of 13.7x and a tempting dividend yield of 5.6%. This impressive performance has led to an overweight allocation recommendation, with a forecasted eye-popping annual return of 25%.
Mid-America Apartment Communities (MAA)
The spotlight now shifts to Mid-America Apartment Communities, a potent force in the REIT realm. With $1.4 billion in cash and ample borrowing capacity under its credit facility at the close of Q3-23, Mid-America is certainly not one to be underestimated.
Boasting an A-rating and maintaining historically low leverage, reflected in its 3.4x debt-to-EBITDA and a commendable average interest rate of 3.4%, Mid-America is in a prime position to leverage its strong balance sheet and propel itself to new heights.
The judicious employment of its fortress balance sheet, coupled with a weighted average cost of capital of about 5.5%, places Mid-America in an advantageous position to engineer earnings and dividend growth, ensuring a profitable future for its investors.
What distinguishes Mid-America from its peers is its consistent outperformance, backed by disciplined capital market strategies and an innovative business model that harnesses the power of technology. This unique combination has positioned Mid-America as a standout player, weathering downturns and emerging unscathed, exemplifying its remarkable resilience.
The stability and reliability of Mid-America’s performance resonate in the fact that the company has never faltered in disbursing or reducing its dividend, reinforcing the trust investors have in its unwavering commitment to deliver results.
Examining its trading history, one can see the rare windows of opportunity to capitalize on this “wide moat” REIT, with a record of trading at 9x in 2008, 14x in 2020, and currently at 15.4x. The current dividend yield stands at a respectable 4.4%, reflecting the company’s steadfastness and value proposition for investors, leading to a recommendation for accumulating shares with a projected annualized return of 20%.
Good Deals and Rainy Day Funds
Charlie Munger’s poignant view on maintaining a “rainy day” fund to seize opportune deals strikes a resonant chord. In the financial arena, having ample dry powder at the ready to snag lucrative investment opportunities is nothing short of a trump card, a strategic move that sets astute investors apart from the pack.
The onus on conducting thorough due diligence cannot be overemphasized, as it lays the groundwork for shrewd investment decisions. The foresight and conviction showcased in seizing opportunities, akin to the acumen displayed in real estate acquisitions, serve as a guiding light for investors navigating the volatile waters of financial markets.
In conclusion, being prepared to pounce on lucrative opportunities in the market, armed with fortress balance sheets and cash reserves, is akin to having a hefty sum stashed away in a checking account. It’s an asset that speaks volumes about an investor’s astuteness and readiness to capitalize on the right deals. As always, happy SWAN investing!