2023-12-13 07:00:00 ET
Summary
- Behavioral scientists Dan Ariely and Francesca Gino are facing questions about the integrity of their research on honesty, with allegations of fabricated data.
- Dishonesty is prevalent in various aspects of life, from personal relationships to business practices, and it is often easy to justify dishonest behavior.
- I believe that transparency provides trust and it's important for me to share my biggest losers with my readers and followers.
Here’s an interesting headline to mull over: “Fabricated data in research about honesty. You can’t make this stuff up. Or can you?”
Published by NPR back in July, it explained how:
“Dan Ariely and Francesca Gino are two of the biggest stars in behavioral science. Both have conducted blockbuster research into how to make people more honest, research we’ve highlighted on Planet Money.
The two worked together on a paper about how to ‘nudge’ people to be more honest on things like forms or tax returns. Their trick: move the location where people attest that they have filled in a form honestly from the bottom of the form to the top.
“But recently, questions have arisen about whether the data Ariely and Gino relied on in their famous paper about honesty were fabricated – whether their research into honesty was itself built on lies.”
The article isn’t nearly as detailed as I’d prefer, especially from a reputable source like NPR. But it does include this (emphasis added):
“The Hartford, an insurance company that collaborated with Ariely on one implicated study, told NPR this week… ‘ It is clear that the data was manipulated inappropriately and supplemented by synthesized or fabricated data .”
Naturally, Ariely denied culpability.
Who knows the real ins and outs of the story.
But it’s an interesting angle into honesty, nonetheless.
It’s Too Easy to Be Dishonest
On the one hand, most people in most situations appreciate others’ honesty toward them.
Maybe not the classic wife question of, “Do these pants make me look fat?”
But definitely when it comes to such things as fidelity, finances, history, science, sales, and so forth.
I’d even say most of us value the idea of being honest with others. It’s just that it’s so very, very easy to come up with excuses not to be when under pressure.
Let’s consider arriving late to work.
You wake up to your alarm, only to hit snooze four times.
By the time you do get up, there’s no way you can be there on time.
You rush to get ready and speed on your way in, but sure enough, you’re 17 minutes late.
And when your all-seeing boss says something about it, you fabricate some story about traffic.
Because why not?
It’s not like anyone gets hurt by it.
Or how about advertising?
You might start out in that notoriously deceptive industry with the highest ideals.
But then you start seeing how much money everyone else is making by cutting corners and fudging numbers.
The questions easily start rolling in after that.
Don’t you deserve to make money too?
Isn’t it just the way “the biz” is?
Will a little white lie hurt?
The product is so good, they’ll benefit in the end regardless, right?
Self-justification can come far too easily.
Maybe you stick with “little white lies” and other moral shortcuts after that.
Maybe you let it escalate.
Either way, you’ve compromised, which does something to your character.
Perhaps just in a little way. But it’s still a piece of you missing that should be there.
Dishonesty Doesn’t Pay
Late last year, Forbes published a piece titled “The Role of Honesty in Success (and Why Cutting Corners Is a Bad Idea).”
Author Kate Vitasek, senior contributor, writes that (emphasis added):
“When it comes to the attributes that are needed to succeed in the business world, we tend to focus on traits like critical thinking, resilience or problem-solving abilities – but often at the expense of another key attribute: honesty.
“Unfortunately, many in the business world have long ago determined that honesty doesn’t pay, even though the reality is quite the opposite.
Honesty (or a lack thereof) can define everything about an organization , including its long-term prospects for success. In reality, honesty does pay – and cutting corners is never worth it.”
She uses her own examples to illustrate that point.
But I have a few of my own, starting with Bernie Madoff.
It may have looked like he was an immense success story for a while.
Yet that didn’t save him from eventually being caught, convicted, and sent to prison.
Moreover, I think the stress of living out his lie affected him well before his house of cards came crashing down.
And much more recently, you had Sam Bankman-Fried.
His alleged schemes caught up with him far more quickly, and he’s in jail now, too.
Those are intense and extreme cases, it’s true.
But do you really think they went from completely honest creatures to career criminals overnight?
They probably compromised in a pile of small ways first.
That’s why I like to keep things as aboveboard as possible whenever I can… including admitting my less flattering recommendations.
This is something I do every year: publishing one article about my worst picks and another about my best…
Starting with the negatives. Because that just seems like the honest thing to do.
Medical Properties Trust, Inc. ( MPW )
Medical Properties Trust is a healthcare real estate investment trust (“REIT”) that primarily invests in net-leased general acute care hospitals, but the company also invests in other healthcare-related properties such as behavioral health facilities, rehabilitation facilities, long-term care hospitals, and freestanding urgent care facilities.
MPW’s primary asset type is general acute care hospitals which made up almost 64% of their total assets and approximately 72% of their third quarter revenues, followed by behavioral health facilities which represent roughly 13% of their total asset base and made up approximately 16% of their third quarter revenues.
At the end of the third quarter, MPW’s portfolio was comprised of 441 properties containing roughly 44,000 licensed beds across the globe with properties located across 9 countries and on 3 continents.
Medical Properties has been one of my worst picks of 2023...I'll show you:
Charles Schwab
Shareholders of MPW have suffered greatly since the beginning of 2023, with shares falling by almost 60% year-to-date (“YTD”).
To make matters worse, shares of MPW have fallen by more than 80% since the beginning of 2022, with the company being hit on several fronts including the recent macroeconomic environment (inflation/interest rates), significant tenant concentration, high levels of debt, and, of course, the nearly 50% cut made to its dividend earlier this year.
High inflation and interest rates have hit the entire REIT sector, but MPW has been hit especially hard due to the amount of leverage the company employees and the fact that it does not have an investment-grade balance sheet with a current credit rating of BB (junk-rated) by S&P Global.
Rising interest rates have made it tough for MPW to make accretive acquisitions using debt capital and the fall in their share price has made it practically impossible to make accretive acquisitions using equity capital.
Bottom line is that their overall cost of capital has risen faster than cap rates have adjusted, making external growth very challenging for MPW over the last several years. In the company’s third quarter earnings release , MPW’s CEO Edward K. Aldag, Jr. stated:
“Our business model remains strong and stable. Looking forward, we have launched a capital allocation strategy to increase liquidity, effectively address our debt maturities and solidify through a right-sized cash dividend our business for sustained long-term shareholder creation and growth when our cost of capital inevitably begins to normalize.”
Recently MPW has been selling assets to reduce leverage and address its near-term debt maturities, but the company has taken other steps to improve liquidity, namely the nearly 50% dividend cut it made earlier this year when the quarterly dividend was cut from $0.29 per share to $0.15 per share.
Another issue facing the company is its tenant concentration.
Steward Health Care System is MPW’s largest tenant and made up nearly 20% of MPW’s third quarter revenues, followed by Circle Health, which made up approximately 13.8% of their 3Q revenues.
Over the past decade, MPW has had a blended average adjusted funds from operations (“AFFO”) growth rate of 1.85%. Analysts expect AFFO per share to fall by -11% in 2023 and then fall by -12% in 2024.
Even after the significant dividend cut, MPW pays a 12.79% dividend yield that is currently covered by its AFFO and trades at a P/AFFO of 3.67x, compared to its 10-year average AFFO multiple of 13.57x.
While shares of MPW are trading at historically low valuations, we recognize that there are real headwinds facing the company (and industry) and that some of the discount is warranted.
However, we feel the selloff has gone too far and that hospitals are necessary to maintain a functioning society.
For an investor with a high risk tolerance, we feel the stock is currently trading at an attractive entry point, but we emphasize that we rate MPW a speculative buy due to the uncertainties surrounding the company.
We rate Medical Properties Trust a Spec Buy.
Highwoods Properties, Inc. ( HIW )
Highwoods Properties is an office REIT that develops, acquires, and owns office properties that are primarily located in the Sunbelt region of the U.S.
Highwoods looks to develop and acquire office properties that are located in the best business districts (“BBDs”) of high-growth markets including Atlanta, Dallas, Tampa, Charlotte, Raleigh, and Richmond.
HIW’s largest markets are Raleigh which made up approximately 22% of their net operating income (“NOI”), Nashville which made up roughly 21%, and Atlanta which made up 16% of their NOI.
In total, Highwoods receives around 95% of its NOI from Sunbelt markets.
HIW’s portfolio totals approximately 28.5 million square feet and has a weighted average age of around 20 years, a weighted average lease term of roughly 6 years, and an in-service occupancy rate of 88.7%.
Additionally, the office REIT has approximately 1.6 million square feet in its development pipeline which was 25% pre-leased as of their latest update.
Highwoods Properties is one of my worst picks of 2023 with the stock falling approximately 25% YTD...from my account:
Charles Schwab
Unlike Medical Properties Trust, the issues impacting HIW are not necessarily company-specific, but instead are impacting the entire office sector, with many office REITs selling off significantly over the last 2 years.
Like all other REITs, the office sector is facing macroeconomic headwinds, but unlike other property sectors, the office sector has an additional threat from the work-from-home movement.
Since the lockdowns ended, many employers are finding it difficult to bring their employees back to the office.
This is a real challenge and should not be dismissed, but as I’ve written several times before, I still believe in the Golden Rule:
“He who owns the gold makes the rules.”
I still believe this.
It's no secret that employers want their workers back in the office, at least more frequently than what is currently happening, and the reason is simple – people work harder when they are in the office surrounded by peers and management than they do at home.
At least, that’s my general impression of how employers feel.
Now some employees may be more productive at home, but from my experience in the corporate world, managers have always been hesitant to give out remote access out of fear that the privilege would be abused.
Due to the many government benefits that came out of the pandemic such as extended unemployment benefits and stimulus checks, employees have recently enjoyed a certain amount of leverage in dictating the terms of their employment.
At some point, I believe the pendulum will swing the other way, and employers will regain their leverage.
At some point, if someone needs money, they will work where they need to work in order to get it.
Nonetheless, the work-from-home threat is real and there is no crystal ball showing exactly how all of this will play out.
In all honesty, I'm more concerned about how artificial intelligence and other improved efficiencies will impact demand for office space than I am over the work-from-home movement.
While the entire office sector is under pressure, I think HIW is insulated from the work-from-home movement to some degree due to the Sunbelt markets in which they operate.
Put another way, I’d rather own an office property in a fast-growing market like Atlanta or Dallas than in New York given the current environment.
Over the last decade, HIW has had a blended average AFFO growth rate of 1.70% and an average dividend growth rate of 3.05%.
The stock pays a 9.29% dividend yield that is well covered with a 2022 year-end AFFO payout ratio of 76.74% and is currently trading at a massive discount compared to their average multiple.
Currently, HIW is trading at a P/AFFO of 9.06x, which is a significant discount compared to their 10-year average AFFO multiple of 21.69x.
(Keep in mind, HIW is the only office REIT that did not cut its dividend during the GFC).
We rate Highwoods Properties a Strong Buy.
Safehold Inc. ( SAFE )
SAFE is the only pure-play publicly listed REIT with an exclusive focus on ground leases, and with a $6.3 billion portfolio, Safehold has the largest portfolio of ground leases in the country.
The internally managed REIT’s ground leases provide cost-efficient capital on a long-term basis to commercial building owners and developers, enabling them to drive better returns with a bifurcated ownership model.
Additionally, ground leases can reduce the required upfront equity, reduce refinancing risk, and lower owners' & developers' overall risk profiles.
Ground leases essentially split the commercial building from the ground upon which it sits.
Owners of commercial properties can access capital by selling their land to SAFE and then entering into a ground lease. While ground leases have many similarities with other triple-net lease structures, they differ in a few material ways.
For one, they have extremely long lease terms that can range from 30 to 99 years.
Another significant difference is that SAFE’s ground leases contain residual rights, which transfer ownership of the commercial building to SAFE upon the expiration of the ground lease or upon tenant default of the ground lease.
SAFE provides capital for multiple property types including office, multifamily, hotel, and life science properties.
When measured by gross book value (“GBV”), office properties are SAFE’s largest property type at 43% of their portfolio’s GBV, followed by multifamily properties which made up 37% of their portfolio’s GBV.
SAFE’s total ground lease portfolio totals 33.2 million square feet across 30 markets within the U.S. and has 3.7x rent coverage, a ground-lease-to-value (“GLTV”) of 42%, and a weighted average extended lease term of 92 years.
I believe it is this last point, SAFE’s extremely long-weighted average lease term (“WALT”), that has played a large role in the negative price action the stock has experienced YTD.
As of today’s writing, SAFE is down almost 25% YTD.
Charles Schwab
As I just mentioned, I think a big part of the fall is due to the inflationary and high interest rate environment we’ve been in over the past year or so.
Many investors mistakenly look at REITs like bonds due to the nature of their long-term, consistent, and steady cash flows. This is especially true of REITs that tend to have long-term leases like net-lease REITs.
Basically, a dollar in rent 20 years from now is worth less than a dollar today, especially if annual rent escalations are not pegged to inflation, at least to some extent.
Take this example to the extreme with lease terms up to 99 years and it helps explain why investors were selling SAFE in the face of high inflation.
But as shown below, the stock gained approximately 30% over the last month, correlating with investors' improved sentiment regarding slowing inflation and future rate hikes.
The point I’m trying to make is that in my opinion, SAFE’s stock has suffered significantly over the past year due to macroeconomic factors and not issues specific to the company.
The business is fundamentally performing well, with earnings per share increasing each year since its IPO in mid-2017.
The chart below shows earnings per share (“EPS”) excluding extraordinary items. SAFE has grown its EPS from $0.64 per share in 2018 to $2.21 per share in 2022, more than tripling its earnings over the last five years.
SAFE pays a dividend yield of approximately 3.26% and trades at a P/E of 9.84x.
This has been one of my worst picks of 2023, but I still have high conviction in the company. I believe the selloff over the last year or so is due to macroeconomic factors which presents a compelling entry point for value investors.
Once inflation is in check and interest rates have normalized, I believe SAFE is set to rally, but so far this year, SAFE has been one of my worst picks.
We rate Safehold a Strong Buy.
The Ultimate SWAN Strategy
So, there you are.
I just showed the world that I don't bat 1000, which means I'm far from perfect.
The good news is that I have far more winners than losers, and that allows me to sleep well at night.
In fact, I recently sold out of several positions including Toll Brothers ( TOL ) where I racked up returns of over 100%, and OneMain Holdings ( OMF ) where I cashed out with a 45% profit .
I'm also sitting on solid gains with Digital Realty ( DLR ) +40%, Blackstone ( BX ) +42%, and Allianz (ALIZF) +46%. I also have a decent-sized position in Tesla ( TSLA ) that has returned over 100%.
Although I'm heavy in REITs right now, I've purposely diversified my investment portfolios to avoid catastrophic losses. These three losers that I mentioned account for less than 5% of my combined portfolios.
I would not recommend it to the average reader holding 50% in REITs (like me).
It's only because of my unusual experience with REITs (30 years in commercial real estate investing) that gives me a demonstrated edge in selecting REITs, which is why the ("REIT") sector deserves a larger share of my invested capital.
Most importantly, I have a strategic blueprint with asset allocation targets, and I encourage all readers to do the same. I suggest utilizing a custom-tailored portfolio that's designed for your unique risk tolerance level.
Finally, don't be too cocky, overconfidence produces greater risks and generates lower returns. As Frank J. Williams wrote ( If You Must Speculate, Learn The Rules ), the creed of the new speculator is:
“I want to make a lot of money on little capital in a short time without working for it.”
This is just as impossible in Wall Street as it is in any other place. He adds (emphasis added):
"There is only one narrow trail leading to permanent success in the stock-market. Unless traders are prepared to climb that steep path with cautious steps , it would be better for them to stay out of Wall Street and to keep their money in the savings-bank."
For further details see:
My Biggest Losers Of 2023