My Biggest Losers On Full Display

On November 28, 2012, Forbes published an article titled “Zig Ziglar: 10 Quotes That Can Change Your Life.” It was an obituary, an homage, and a very worthwhile reminder of how much positive influence a single individual can have.

It began like this:

“Zig Ziglar died today at age 86. A World War II veteran, Zig Ziglar became the top sales person in several organizations before striking out on his own as a motivational speaker and trainer. With a Southern charm and lessons grounded in Christianity, Ziglar wrote over two dozen books and amassed a following of millions who were encouraged by his lessons for success.”

As it goes on to quote, some of those lessons included:

• “Remember that failure is an event, not a person.”
• “You will get all you want in life if you help enough other people get what they want.”
• “People often say motivation doesn’t last. Neither does bathing – that’s why we recommend it daily.”
• “There has never been a statue erected to honor a critic.”
• “People don’t buy for logical reasons. They buy for emotional reasons.”
• “Expect the best. Prepare for the worst. Capitalize on what comes.”
• “If you go looking for a friend, you’re going to find they’re scarce. If you go out to be a friend, you’ll find them everywhere.”
• “A goal properly set is halfway reached.”
• “Your attitude, not your aptitude, will determine your altitude.”
• “If you can dream it, you can achieve it.”

Those are some excellent quotes, to be sure. Though I would have added one more…

Humility (and REITs) Can Go a Long WAY

Really, Zig Ziglar had hundreds – even thousands – of lines I could quote here. That’s what happens when you write “over two dozen books” and amass “a following of millions.”

But the one I want to focus on today is this:

“Humility will open more doors than arrogance ever will.”

There has been some research to support that statement. For instance, as The Wall Street Journal noted several years ago (emphasis added):

“In a 2015 study of 326 employees working on 77 teams at a healthcare company, researchers asked team members to assess their managers’ humility based on a scale including their willingness to learn from others or admit when they don’t know how to do something. Team members also assessed their teams’ attitudes and performance.

“Teams with humble leaders performed better and did higher-quality work than teams whose leaders exhibited less humility, according to lead researcher Bradley P. Owens, an associate professor of business ethics at Brigham Young University.

“The performance gains held up independently of how much team leaders exhibited other positive leadership qualities unrelated to humility.”

In addition:

“… companies with humble chief executives are more likely than others to have upper-management teams that work smoothly together, help each other, and share decision-making, according to a study of 105 computer hardware and software firms published in the Journal of Management.”

I know that might seem counterintuitive in today’s me-me-me culture. Traditional celebrities do everything they can to stay in the public eye. Half the news is taken up daily by tales of what this or that “social influencer” did. And I’m sure we all have examples in our heads of arrogant people we actually know who seem to get away with everything.

So why even bother being humble? Doesn’t the nice guy always finish last?

Don’t Discount – or Misunderstand – Humility

I’m going to address that last question first and the first question after it. Because I want to make sure you read the rest of this article disabused of a very dangerous notion.

Nice guys don’t always finish last. Doormats do.

Sorry if that’s a bit on the blunt side, but it’s true. When you’re constantly putting others before yourself, it’s a recipe for disaster. Not only does it encourage the arrogant and unscrupulous to take advantage of you, it’s also a sure-fire way to burn yourself out.

Humility, on the other hand, recognizes and respects limits. Therefore, under its influence, people are able to admit when they’ve had enough.

As for why you should bother being humble in a world of seeming narcissists, I’m going to quote another expert source. This time, it’s UC Berkeley:

“… the benefits of humility do not extend to just our leaders. Nascent research suggests that this lovely quality is good for us individually and for our relationships. For example, humble people handle stress more effectively and report higher levels of physical and mental well-being. They also show greater generosity, helpfulness, and gratitude – all things that can only serve to draw us closer to others.”

I would imagine the physical well-being part is because you’re more likely to understand your limits and, therefore, not overexert yourself. You know your limitations and how, if you want to push them, you have to do so intelligently.

As for the mental well-being part, that should be pretty self-explanatory. When you’re not constantly trying to prove how strong, smart, rich, popular, connected, dependable, or whatever else you are, there are far fewer reasons to stress.

In that spirit, here are my biggest losers on display for all the world to see.

I’ve got nothing to hide.

Safehold Inc. (SAFE)

Safehold is one of my biggest losers with a -48.61% decline over the last year. While most stocks saw a decline in 2022, SAFE underperformed the broader market by a large margin, with the S&P down 8.57% over the last year.

Most seasoned investors are well aware that “Mr. Market” can go through periods of extreme euphoria and periods of extreme fear.

So, what do the fundamentals say, was the decline of almost 50% warranted?

Or did the market go too far and present a great opportunity to buy the stock at a 50% discount?

Let’s take a closer look.

SAFE is a real estate investment trust (“REIT”) that specializes in acquiring, managing and monetizing Ground Leases. SAFE is the first publicly traded company with this area of focus. Ground leases are long-term contracts between Safehold and the tenant who has real property built on the ground that they lease. SAFE owns the land underlying commercial real estate that is net leased to the owners of the property.

Under the terms of a Ground Lease, the leaseholder or tenant is typically responsible for all operating expenses associated with the property. This normally includes maintenance, development cost, real estate taxes and insurance and general capital expenditures.

Ground Leases are long-term in nature, with lease terms ranging from 30 to 99 years that have built-in rent escalators. The base rent increases are set at a specific percentage or tied to the consumer price index (“CPI”). Sometimes the lease is structured with both a base rent increase and an increase based on CPI. The CPI rent increases are normally capped between 3.0% to 3.5%.

In 2022 SAFE internalized its management by combining with iSTAR. Prior to the merger iSTAR spun off its legacy non-ground lease assets so the combined company is now a pure-play Ground Lease REIT.

Due to the merger, the improved scale and internalized management really improved the profile of the business. All things being equal, internal management is preferred over external management, so I see this as a positive catalyst that occurred in 2022.

Ground leases have some distinctive characteristics when compared to REITs that invest in commercial real estate. SAFE has extremely long leases, with 94% of their leases lasting over 60 years.

Additionally, their contracts are structured so that in the event of a default, SAFE gets to keep the land and any improvements made thereon. This gives the building owners extra incentive to make their lease payments. If they don’t, they lose whatever structure they owned on the land that they leased from SAFE.

SAFE owns the underlying land for 128 assets. Office buildings built on their land makes 45% of their holdings, multifamily makes up 35%, Hotels makes up 12%, life science makes up 5%, while mixed use properties makes up 3% of their holdings.

Safehold’s debt profile is somewhat mixed. They have a high amount of secured debt at ~$1.5 billion out of their total debt of $3.8 billion, which works out to approximately 39.4%. Their total debt to book equity is 1.8x and their total debt as a percentage of total market capitalization is 2.1x.

On the upside, they have a 24-year weighted average to maturity, a Baa1 / BBB+ credit rating from Moody’s and Fitch respectively, and ample liquidity with $756 million in cash and credit facility availability.

In terms of their revenue and earnings, SAFE had a significant improvement in 2022 over 2021. For the third quarter 2022 they had revenue of $71.7 million vs. $47.3 million for the same period in 2021 for a 52% year-over-year increase.

Excluding merger related cost and non-recurring gains they had earnings per share of $0.41 in 2022 vs. $0.34 for the same period in 2021 for a 20% year-over-year increase.

Since 2019 Safehold has generated positive earnings: 2019 (+39%), 2020 (+31%), 2021 (+16%), and in 2022 (+65%). However, analysts are forecasting negative EPS of 29% in 2023 (and +6% in 2024).

SAFE has a current dividend yield of 2.11% and even though earnings will decline in 2023 (as analysts forecast) the payout ratio will remain safe (45% based on 2023 estimates).

Safehold has a strong business model with long lease terms that include CPI escalators. Owners of real estate that lease from SAFE have a lot of incentive to make their lease payments as their buildings and any improvements can be taken in the event of a default.

SAFE also has shown strong growth over the last several years. The high AFFO payout ratio is a concern and something to watch closely. At iREIT we rate Safehold a Spec BUY.

Medical Properties Trust, Inc. (MPW)

Medical Properties Trust is another one of my biggest losers, with a -44.78% decline over the last year. MPW is an internally managed REIT that primarily invests in hospitals.

They have 434 properties, approximately 44,000 licensed beds, are in 10 countries, and lease properties to 54 operators. They have international exposure with properties located in the U.S., Portugal, Spain, Italy, Switzerland, and other regions around the world.

MPW had a rough year in 2022. It was hit on multiple fronts including the macro environment, negative press, and a tenant bankruptcy (Pipeline Health).

One particular accusation against MPW was that they overpaid Steward for properties in leaseback transactions and issued loans to their largest tenant in order to help Steward pay off their outstanding debt from their former private equity sponsor, basically saying that Steward would be become insolvent without MPW’s assistance.

But despite the various claims, things seem to be improving for MPW. In November 2022 Bank of America analyst Joshua Dennerlein upgraded his rating on MPW from Neutral to a Buy with a price target of $16.

He cited Steward in his analysis, saying their ABL loan would be extended through 2023 and that operators that lease from MPW should start seeing improving fundamentals with slowing inflation, payer rate hikes, and improving labor markets.

Another positive development for MPW is that Pipeline Heath will assume the existing terms of their master lease for its LA hospitals. As part of the agreement, the lease rate, annual escalator, and remaining lease term of approximately 18 years will remain unchanged.

In my opinion, I think MPW’s price suffered so much in 2022 due to real concerns, like labor conditions, inflation, tenant health and concentration. But I also think a large part of the drop was due to the overall environment in 2022 and specifically the short campaigns waged against them. More importantly, I think some of the fears were overblown and the market went too far with the selloff.

I do wish MPW would improve its tenant concentration, particularly with Steward which makes up 29.5% of MPW’s revenue as of the 3rd quarter in 2022. But MPW makes the point that they invest in the real estate, not the operator. So long as their hospitals are able to consistently produce income, they can replace an operator if necessary.

There is validity to some of the concerns, but is the company really worth 45% less than it was a year ago? Let’s see what their earnings say.

MPW has grown its funds from operations (“FFO”) by 6.62% on average since 2012 and they are expected to have positive FFO growth of 3% in 2022. If analyst projections are right, MPW will have small declines in FFO over the next few years, but currently it’s trading at a P/FFO of just 6.83x which equates to an FFO yield of 14.64%. Additionally, MPW pays a dividend yield of 9.41% that is well covered with an adjusted FFO (“AFFO”) payout ratio of 82.27%.

MPW is set to report earnings on February 23, 2023, so we will get an update on its condition, but given the fundamentals we currently have, the selloff appears to have been overdone.

Medical Properties Trust is just under investment grade with an S&P credit rating of BB+. They have an adjusted net debt to annualized EBITDAre of 5.8x and 91% of their debt is fixed rate. Their weighted average cost of debt is 3.463% and as of November 2022 they had approximately 1.2 billion in liquidity.

As previously mentioned, there are some real concerns along with some promoted fears, but at this valuation and well-covered dividend yield, plus the critical nature of MPW’s real estate, we rate Medical Properties Trust a STRONG BUY.

Innovative Industrial Properties, Inc. (IIPR)

Over the last year, IIPR has lost 54.04%, making it one of my biggest losers. Innovative Industrial Properties is a real estate investment trust that specializes in cannabis-related industrial properties leased to state-licensed operators. The company was founded in 2016 and was the first cannabis-related REIT to trade on the New York Stock Exchange.

Due to federal laws that prohibit national banks from lending in the space, IIPR offers an alternative for cannabis operators that have limited access to capital from more traditional sources. This is a good thing in that IIPR has leverage and can charge higher lease rates, but at the same time the high rates increase the likelihood of tenant default.

As of 9/30/22 They have 111 properties with a weighted average lease term of 15.5 years and no leases expire until 2029. They target triple net lease structures and pay no reoccurring capital expenditures during the lease term. All property expenses are paid by the tenant, including repairs and replacements.

IIPR debt metrics are excellent, with a Debt to Gross Assets at ~12% and a Debt Service Coverage ratio of ~15.6x. They have no secured debt, and they have no debt maturing until 2024 with no major maturities until 2026.

Innovative Industrial Properties has collected 100% of their rent in most years since their inception, but recently they have experienced a string of defaults. IIPR recently announced that its tenant Parallel was in default at one of their properties in Pennsylvania.

They also announced that Skymint was in default on one of their Michigan properties and that Vertical was in default on their California properties. This is on top of the Kings Garden default in 2022. The Kings Garden situation has largely been resolved with Kings Garden paying rent on four properties they continue to occupy and IIPR regaining possession of two properties that are under development.

The cannabis industry is still in its infancy which leaves a lot of room for growth but also a lot of room for growing pains. The uncertainty surrounding federal legalization, and what impacts it would have, along with the recent defaults has been a real headwind for IIPR and will likely continue to be at least until there is some clarity on what the federal laws will look like.

At its current valuation, and with the overall industry prospects there is potential for outsized returns, but at this stage, cannabis related stocks are not for the faint of heart.

IIPR has delivered excellent growth in its Funds from Operations. Since 2018 IIPR’s blended FFO growth rate has been 65.10%, although that is skewed to the upside with growth rates of 653% in 2018 and 155% in 2019.

When excluding 2018 and 2019, IIPR’s average FFO growth rate has been 39.08% from 2020 to the present. That level of growth probably won’t continue for the long term, but there is no doubt that IIPR is a high-growth REIT in a high growth industry.

IIPR pays a dividend yield of 8.18% that is covered with an expected AFFO payout ratio of 85.03 in 2022 and IIPR has an average dividend growth rate of 36.68% since 2020.

The dividend growth along with the FFO growth should eventually normalize to levels more in line with other REIT sectors, but again there is no doubt that IIPR has a lot of potential and room to grow in the future for those that can stomach the volatility.

IIPR has a lot to like, in particular the growth rate it has delivered in both its funds from operations and its dividend. Additionally, IIPR has very little debt relative to other REITs, so it should be well positioned to weather any future storms.

But there are a lot of uncertainties in the space which will cause continued volatility. Currently IIPR is trading at a P/FFO of 11.31x which compares very favorably with its normal P/FFO multiple of 36.98x. At iREIT, we rate Innovative Industrial Properties a Spec BUY.

The Secret to My Success…

I just finished reading Unconventional Success by David Swensen (emphasis added):

“Diversification and equity orientation represent important objective principles for long-term investors. Diversification provides the free lunch of improved return and risk characteristics, while equity orientation promises the possibility of greater wealth accumulation.

Personal preferences play a critical subjective role in portfolio decision making. Unless an investor embraces wholeheartedly a particular portfolio structure, failure awaits.”

These words sum up the secret to my success…

I always practice responsible diversification which simply means I NEVER put all of my eggs in one basket. I’ve already done that (put all of my eggs on one basket) in a previous life and I will never rely on one or two stocks to generate my SWAN-lifestyle. Also, understanding your own risk profile is a key to success,

“By adopting asset-allocation targets that dovetail with personal risk tolerances, investors vastly increase the odds of investment success.”

Over the last 12 years as a writer on Seeking Alpha I have had many more winners than losers, but as I point out in this article, not all of my picks have been winners… this is perhaps the best advice I can provide you with:

“Overconfidence contributes to a litany of investor errors, including inadequate diversification, overzealous security selection, and counterproductive market timing.”

As always, thank you for reading and I look forward to your comments and/or questions.

Happy SWAN Investing!