Many of my readers and followers know that I like sharing my iTunes favorites with my iREIT members. I have over 200 beats in my song library ranging from hip hop, to 70s greatest (Elton John and The Eagles), to DJs like Nora En Pure.
Also, some of you may be aware of my musical talents – I used to play saxophone in middle school, and I wrote the Rap Review column for my high school newspaper.
Anyway, I like music because it inspires me at the gym and also because it gives me ideas for articles like this one.
A few days ago, I was listening to a song titled “Scared Money Don’t Make No Money” by YG, J. Cole and Moneybagg in which they speak out about wealth and various luxuries, ranging from designer clothes to excessive spending habits.
I’ll warn you, the music is lined with profanity, so I have no intention of quoting lyrics here. However, I did want to credit the rappers for the inspiration (and title) to my article today. According to New Trader U,
“Even if a person wants to invest or trade their money, they can be very afraid of losing it. A person has to be able to put their money on the line for their beliefs in a company or a trading position to even have a chance to make any money.”
New Trader U lists 10 reasons why ‘Scared money don’t make money’:
The first time I heard the phrase “scared money don’t make money” was when I was around 21 years old and headed to Las Vegas for the first time. I knew that I wanted to experiment at blackjack, but I was also scared that I could lose everything.
To combat the fear, I decided to go to the bank and get $1,000 in cashier’s checks. I knew that by doing this, I would not be tempted to hit the ATM for more cash and most importantly that I would not be fearful of losing. I’m sure you’ve heard the phrase,
“Only gamble what you can afford to lose.”
My first trip to Vegas was fun, as I enjoyed the conference (ReCon), the food, the golf, and even the gambling.
But I learned a valuable lesson…
I came back home with $1,000 less than I started with, and I knew that one day I wanted to profit from the billions of dollars made in Sin City…
And now – thanks to my stake in VICI Properties (VICI) – I am profiting from the scared money.
Today I want to provide you with three of my highest conviction picks. Although these are not the absolute safest picks, we see value in the wide margin of safety that exists with the trio.
It’s important to recognize that the most beneficial time to be a value investor is when the market is falling and to buy shares it requires a steady hand, that is, a true test of an investment philosophy. In his book, Security Analysis, Ben Graham wrote,
“In security analysis the prime stress is laid upon protection against untoward (unfortunate) events.”
Graham experienced acute financial hardships in his youth and having witnessed all manner of financial recklessness, he grasped the danger of risking capital that one already had for the potential of additional capital.
As Graham wrote in The Intelligent Investor, the value investor’s purpose is to capitalize upon “a favorable difference between price on the one hand and indicated or appraised value on the other.”
As you can see (above) IIPR, scared money pick #1, has dropped by over 40% YTD, compared with VNQ that declined 5.4% during the same period. More recently, the cannabis-focused REIT has been the subject of a “short” attack by Blue Orca Capital in which the short seller claimed that IIPR is a "cannabis REIT masquerading as a REIT”.
You can read my debunking article here and rest assured the short thesis is highly flawed on all counts. In this article I will instead focus on the fundamentals that should drive IIPR’s price higher in the coming months.
IIPR has one of the best balance sheets in the REIT sector, as debt-to-gross assets is just 15% (at the end of 2021). This means the capitalization is mostly funded with equity (modest preferred) with an equity multiple of around 4.7% (based on AFFO).
As viewed below, IIPR has generated highly attractive AFFO per share growth, a telltale sign that the business model is working. In 2021 the company grew earnings (AFFO per share) by 33% and analysts are forecasting growth of 31% in 2022.
Of course, the dividend is also advancing rapidly, in March the company declared its quarterly dividend of $1.75 per share which was a 16.7% increase (from the previous $1.50 per share). We suspect the company will boost it to $2.00 per quarter in 2022.
Although there’s chatter on the political front with regard to Federal legislation, it appears to be deadlocked in the Senate, thus more of the status quo. Meanwhile, more states are opening up for business and IIPR’s pipeline is growing like a weed. A week or so ago the company said it had closed on a $25 million deal in Maryland.
I’ll be meeting with the CEO and CFO later this week and I will be discussing some ideas such as a proposed 4:1 stock split and monthly dividend. In my view, both of these initiatives could open up the market for more retail investors to purchase shares in the first-mover (in cannabis REITs).
IIPR shares are now trading at $155.00 per share with a P/AFFO multiple of 21.3x This is ridiculously cheap, especially when you compare it to industrial REITs like Prologis (PLD) – that trades at 46x – or Duke Realty (DRE) – that trades at 38x. IIPR’s dividend yield is 4.5% with a payout ratio of around 82%.
Our base case (most likely) total return target is that IIPR returns 50% over the next 12 months and our more aggressive total return target is 75% (over 12 months). At this price, I’m not scared whatsoever!
As you can see (above) SAFE, scared money pick #2, has also dropped by over 40% YTD, compared with VNQ that declined 5.4% during the same period. The company just announced that its Q1-22 earnings grew substantially, and the company has a very strong pipeline of new investments. It crossed the $5 billion mark in terms of its portfolio size and the company recently obtained 3-year unsecured debt for the very first time.
Much of the selloff related to SAFE is market sentiment, related to rising rates, however SAFE’s ground leases include some form of inflation protection with the majority of lease contracts including a periodic upward rent adjustment in the form of cap CPI lookbacks when inflation stays above 2% for extended periods of time.
It's important to calculate inflation adjusted yields for SAFE’s portfolio when inflation kicks up, given ground lease economics are in some respects, more like TIP securities than straight fixed income investments.
During Q1-22, SAFE originated 10 new ground leases totaling $677 million, marking this the best quarter ever, and for these new originations SAFE funded $519 million, with the remaining $158 million expected to be funded in the near term. These 10 new originations span 9 different markets and 7 new customers.
SAFE has seen 16x growth since the IPO nearly 5 years, and we see no signs of slowing down as the ground lease sector is highly fragmented and makes up as much as $500 billion of the $7 trillion institutional quality commercial real estate market in the U.S.
It’s a fraction of that size today, primarily because the historical ground lease structure has never been modernized. In many cases, these old-fashioned ground leases harm the financing and value of the building. The combination of repeat customer business and SAFE’s increased outreach is helping build momentum and should lead to significant portfolio growth.
Also, in Q1-22, SAFE generated revenues of $60.4 million, a 39% increase from $43.5 million in Q1-21. Net income was $24.9 million, a 47% increase from the $16.9 million generated in the prior year period. Earnings per share (‘EPS’) was $0.43, 35% above the $0.32 generated in Q1-21.
The estimated value of SAFE’s unrealized capital appreciation (‘UCA’) grew to an estimated $9.4 billion, a $1.3 billion increase (or 16% since SAFE’s last update last quarter) and significant growth since the company negotiated the initial sale of the Caret units at $1.75 billion valuation.
Although SAFE is externally managed by iStar (STAR), we believe the REITs will soon merge, as I informed iREIT on Alpha members, “it’s no longer a matter of “if” the merger will take place but “when”.
As you can see below, SAFE has generated very impressive earnings growth: 39% in 2019, 31% in 2020, and 16% in 2021. Also, analysts forecast 29% growth in 2022.
Shares are now trading at $46.76 with a P/E of 31.5x (shares traded at 73x in August 2021). The dividend yield is modest, just 1.5%, but we’re most attracted to the growth prospects – analysts are forecasting growth of 29% in 2022, 14% in 2023, and 19% in 2024.
Our base case (most likely) total return target is that SAFE returns 40% over the next 12 months and our more aggressive total return target is 60% (over 12 months). Ground lease don’t scare me whatsoever… this one is easy peasy!
As you can see (above), MPW, scared money pick #3, has also dropped by over 20% YTD, compared with VNQ that declined 5.4% during the same period. However, shares were clipped another 7% on Friday as I posted on Twitter:
The spark for the Friday selloff was most likely the disappointing forecast from HCA Healthcare (HCA) that spilled over to the overall hospital sector, sending many of HCA's peers sharply lower in sympathy. As Seeking Alpha reports,
“The Nashville-based operator of health care facilities reported a disappointing profit figure for its latest quarter. At the same time, the company lowered its forecast for the year, saying it now expects 2022 revenue of $59.5B-$61.5B. HCA had previously predicted a figure between $60B and $62B.”
The sell-off carried over to other hospital stocks: Community Health Systems (CYH) dropped almost 18%, while Tenet Healthcare (THC) staged a nearly 16% retreat. Universal Health Services (UHS) fell 14%.
I didn’t always like MPW, as I was on the sidelines waiting on the management team to prove itself. As seen below, the dividend was a flatliner from 2009 – 2012, even after it cut its dividend during the Great Recession.
However, since 2014, MPW has stepped up its game, delivering solid earnings and dividend growth. Over the past 10 full years, MPW has delivered normalized FFO and AFFO per share at compound annual growth rates in the mid-9s and mid-6s, respectively. The company recently boosted the dividend by around 4% (from $.28 per quarter to $.29 per quarter).
For Q4-21, MPW reported normalized FFO per diluted share and AFFO of $0.36, that continues the extraordinary double-digit year-over-year quarterly growth. On a full year basis, MPW’s normalized FFO was $1.75 and AFFO was $1.37, also representing the continuation of double-digit growth, a record virtually unmatched
Also, the balance sheet has improved over the last decade, the credit rating is a notch below investment grade – or BB+ - by S&P and the company has 6.4x debt to EBITDA (goal is 5x to 6x). Around 96% of MPW's $11.28 billion debt is fixed, with interest rates between 2.5% and 5.25%.
MPW also utilizes JVs to diversify its portfolio and take advantage of attractive and flexible capital. Pro forma for MPW’s expected JV proceeds is $1.3 billion that will repay the outstanding interim credit facilities with liquidity exceeding $1 billion in cash and revolver resources.
MPW has become a highly diversified REIT with over 400 properties consisting of:
MPW’s portfolio is also geographically diversified:
Media headlines (and a very weak short hand) have inspired much of the selloff, as MPW is trading as if its largest tenant were filing BK. Give the mission-critical components to the business model, we see no sign of that, which of course represents a buying opportunity for value investors like us.
MPW shares are now trading at $18.76 with a P/AFFO multiple of 13.4x (was 17.4x in January 2022). The dividend yield is now 6.2%. Analysts are forecasting AFFO per share growth of 7% in 2022.
Our base case (most likely) total return target is that MPW returns 20% over the next 12 months and our more aggressive total return target is 30% (over 12 months). I ain't scared of this REIT!
For Benjamin Graham, what was paramount was that all investments are logically sound from a business owner’s perspective. The legendary value investor explained (Security Analysis):
“It must never be forgotten that a stockholder is an owner of the business and an employer of its officers.”
That is precisely why we spend considerable time at iREIT on Alpha conducting interviews with management teams. Later this week I will be meeting (in person) with CEOs at Realty Income (O) and Innovative Industrial.
Our stock selection is rooted in understanding each business “from the ground up” and of course one of the great things about REITs is that you are not actually a physical landlord, but a pass-through owner in which rent checks become dividends.
Another value investor, Sir John Templeton, explained that.
“To buy when others are despondently selling and sell when others are greedily buying requires the greatest fortitude and pays the greatest ultimate rewards.”
Or said another way,
“Scared Money Don’t Make No Money”
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This article was written by
Brad Thomas is the CEO of Wide Moat Research ("WMR"), a subscription-based publisher of financial information, serving over 6,000 investors around the world. WMR has a team of experienced multi-disciplined analysts covering all dividend categories, including REITs, MLPs, BDCs, and traditional C-Corps.
The WMR brands include: (1) The Intelligent REIT Investor (newsletter), (2) The Intelligent Dividend Investor (newsletter), (3) iREIT on Alpha (Seeking Alpha), and (4) The Dividend Kings (Seeking Alpha). Thomas is also the editor of The Forbes Real Estate Investor and the Property Chronicle North America.
Thomas has also been featured in Forbes Magazine, Kiplinger’s, US News & World Report, Money, NPR, Institutional Investor, GlobeStreet, CNN, Newsmax, and Fox. He is the #1 contributing analyst on Seeking Alpha in 2014, 2015, 2016, 2017, 2018, and 2019 (based on page views) and has over 102,000 followers (on Seeking Alpha). Thomas is also the author of The Intelligent REIT Investor Guide (Wiley).Thomas received a Bachelor of Science degree in Business/Economics from Presbyterian College and he is married with 5 wonderful kids. He has over 30 years of real estate investing experience and is one of the most prolific writers on Seeking Alpha (2,800+ articles since 2010). To learn more about Brad visit HERE.
Disclosure: I/we have a beneficial long position in the shares of IIPR, MPW, O, SAFE, STAR, VICI either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Author's note: Brad Thomas is a Wall Street writer, which means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: written and distributed only to assist in research while providing a forum for second-level thinking.