2024-01-12 07:00:00 ET
Summary
- The people we associate with have a significant influence on our lives and decisions.
- It is important to be cautious and selective when choosing business partners or investing in companies.
- Medical Properties Trust, Annaly Capital Management, and AFC Gamma are examples of REITs with poor management and performance.
"Birds of a feather flock together," the old adage says, meaning that - for better or worse - people tend to hang out with those they find common ground with.
You'll be hard-pressed to find a ballerina hanging out with a motorcycle gang, for example. Or a cool kid associating with a nerdy one.
I'm not saying it can't happen, just that it isn't the norm.
I'll acknowledge that opposites can attract. But in the case of humans, those opposites usually end up influencing each other. Unlike with magnets, they don't stay at polar odds.
In which case, let's also consider these sayings:
- "Tell me who you walk with, and I'll tell you who you are." - Esmeralda Santiago.
- "You are who you are by virtue of the company you keep." - T. B. Joshua.
- "The key is to keep company only with people who uplift you: whose presence calls forth your best." - Epictetus.
- "It is better to be alone than in bad company." - Unknown.
It's true that we all make mistakes in who we associate with sometimes. Maybe we're a little on the naïve side and trust the wrong person. Maybe a friend changed without us knowing. Or maybe the other party is a natural con artist.
But it unfortunately doesn't matter much in the end. The influence is still there, and so are the consequences.
When you lay down with dogs, you're still going to wake up with fleas.
So do everything you can not to lay down with dogs.
Business Gone Bad
I'm sorry to say I've learned this lesson the hard way.
That's normal to some degree. It's part of growing up - and we're never completely grown. Hopefully smarter every year. Hopefully wiser.
But always growing nonetheless. There are always new people and new data to interact with, all of which needs to be processed.
I'm not trying to make any excuses here for the enormous mistake I made over a decade ago. Just trying to explain it, including how running your own business can present a very unique set of opportunities to "grow up."
I've been thinking about this a lot lately, which is probably why I've been writing a lot about it. So for anyone who's read about this already in the last month or so, I apologize.
Feel free to skip ahead.
For those of you who have no idea what I'm talking about, let me be blunt: I ended up in business bed with a "bad apple."
We were running a commercial development business together, when he began making "decisions" behind my back… which led to him being unable to pay back loans…
Which he also didn't tell me about.
I had to find all of this out on my own, making for a very rude awakening. And it took me quite a while to get my finances and reputation back after that.
That's why I'm so focused on who manages the companies I invest in. I know firsthand what can happen when management runs awry.
Great executives do exist. But so do good ones, poor ones, and even incompetent and unethical ones.
Which brings that Epictetus quote to mind - with a twist. "The" investing "key is to keep company only with" businesses that "uplift you, whose presence calls forth your" portfolio's "best."
Rotten REITs to Run With
Having fleas is most definitely not your best. Keep that in mind.
Also keep in mind that as management goes, so does the company. That's why I write in REITs for Dummies :
"… any publicly traded company is exceptionally reliant on capital markets. That's where success or failure is largely determined and shareholder returns are largely realized. Companies thrive when they create real economic value for their investors, which happens when their rates of return exceed their cost of capital. And that happens under ethical, experienced, in-the-know management."
I go on to detail one specific example of a REIT years ago that fell far, far from that ideal. But I do want to stress another section before we get into more modern-day dirty details:
"There will always be a few bad apples here and there in REIT-dom [the kingdom of real estate investment trusts]. So as I keep saying over and over again, you never want to put your full faith in any one entity. With that said, most REIT executives are well-respected leaders with decades of experience in their respective sectors. A big reason I own REITs is because of skilled management and their ability to manage risk. Those elements are what separate the best from the rest; and there are a strong number of REITs that work hard to keep those elements first and foremost in their business dealings."
That's another thing to keep in mind: that the larger sector is well worth investing in under the right price conditions.
Unfortunately, the REITs below are exceptions to this rule. They don't qualify as "best." Not even close.
And you're not going to do your best if you invest in them.
Don't flock with these birds. Your feathers will get ruffled in all the wrong ways.
Medical Properties Trust, Inc. ( MPW )
MPW is an internally managed real estate investment trust ("REIT") that was established in 2003 to develop and acquire net-leased healthcare properties, primarily hospital facilities. As I mentioned recently, MPW was my worst-performing holding in 2023.
This hospital REIT has a market cap of approximately $2.0 billion and a portfolio comprised of 437 healthcare properties that contain approximately 43,000 licensed beds across 9 countries on three continents.
Subsequent to the third quarter, MPW sold 4 healthcare facilities reducing its property count from 441 to 437 and its bed count from roughly 44,000 to approximately 43,000.
As of the end of the third quarter, MPW's portfolio primarily consisted of General Acute Care Hospitals which represented 63.7% of its total assets and made up 72.2% of its 3Q23 revenue.
Its next largest asset type is Behavioral Health Facilities, which represented 13.3% of its assets and made up 15.7% of its 3Q23 revenue.
MPW also invests in Rehab Facilities, Long-Term Care Hospitals, and Urgent Care Facilities which combined made up approximately 12% of its Q3 2023 revenues.
To say MPW shareholders have had a rough time over the last 2 years would be an enormous understatement. From January 14, 2022, to January 10, 2024, the stock price fell by 85.25% and has already lost almost 30% year-to-date.
Over the last several years, inflation and the rapid increase in interest rates hurt most REITs across the board, but MPW has had several other issues specific to the company including its high leverage, tenant concentration, and what some would consider a poor management team.
At the beginning of 2022, MPW was accused by certain media outlets of helping Steward Health Care pay off its loans to its former private equity sponsor (Cerberus Capital Management) by inflating asset values in sale-leaseback transactions and by issuing multiple loans to help Steward stay afloat.
Research firms like Hedgeye and Viceroy Research piled on with allegations of excessive spending on corporate jets, suspicious accounting practices, overpaying for properties in order to help tenants pay rent, and making ill-advised loans to its tenants. MPW has an active lawsuit against Viceroy .
As for its tenant concentration, there is no dispute that it's high, very high, and there is no dispute that some of its largest tenants are having financial difficulties. The tenant on most investor's radar is Steward Health Care, as it accounts for approximately 20% of MPW's total assets and made up roughly 20% of its Q3 2023 revenue.
During its third quarter conference call in October, MPW discussed some of the issues with Steward, particularly its ability to collect on its outstanding receivables. When asked if there was a concern about receivables on the books that won't be collected or collected at a lower rate, MPW's management replied:
"So there is no concern at this time that they will not be collected……so there is no concern that there will have to be write-offs surrounding the accounts receivable."
And when asked if they anticipated the need to issue additional loans to Steward, MPW's management team replied:
"…. That is not the anticipation, the plan, the desire, and we don't think it's necessary."
Days ago (on January 4, 2024), MPW released a statement disclosing that Steward recently informed them that its "liquidity has been negatively impacted" and that they will continue to make partial monthly rent payments.
MPW also disclosed that unpaid rent under Steward's master lease agreement totaled approximately $50 million as of the end of 2023.
In response, MPW hired advisors on its options to recover uncollected rent and outstanding loans and then issued Steward another loan for $60 million.
Yes… you read that right, in response to Steward's financial difficulties and in an attempt to "reduce its exposure to Steward," MPW issued a new $60 million bridge loan to Steward.
Lesson Learned: Always focus on your circle of competence (i.e., stop being both a landlord and tenant)
In 2023, MPW saw its adjusted funds from operations ("AFFO") fall by an expected -11% and analyst expect AFFO to fall by -17% in 2024. MPW was also forced to cut its dividend by almost 50% in 2023, from a quarterly payment of $0.29 to $0.15 per share.
A decade ago, MPW's AFFO came in at $1.00 per share and the REIT paid an annualized dividend of $0.84 per share.
In 2024, analysts expect full year AFFO to come in at $1.05 per share (5% higher than in 2014) and for the annualized dividend to amount to $0.60 per share, which represents a decrease of -28.5% when compared to the dividend paid in 2014.
Due to the massive selloff over the past 2 years, MPW is now trading at a P/AFFO of just 2.68x, compared to its average AFFO multiple of 13.58x.
MPW is quite possibly the ultimate risk / reward stock, as there have been several articles posted over the last few days ( here , here , here , here , here , here , and here ). Four of these are holds, 2 are strong buys, and one is a buy.
The upside could be huge if MPW can get back to its average multiple, but at the same time management has not been the most transparent at times, and the quality of MPW's earnings has been deteriorating over the last several years and is expected to do so in the future.
We rate Medical Properties Trust a Spec Buy (HIGH RISK).
Annaly Capital Management, Inc. ( NLY )
NLY is an internally managed mortgage REIT that specializes in mortgage financing with a portfolio that includes mortgage pass-through certificates, agency mortgage-backed securities ("Agency MBS"), collateralized mortgage obligations ("CMOs") and other securities backed by pools of residential mortgage loans.
NLY conducts its business through three main segments including Annaly Agency Group, Annaly Residential Credit, and Annaly Mortgage Servicing Rights.
Its Agency Group invests in Agency MBSs that are collateralized by residential mortgages and backed by government-sponsored enterprises ("GSEs") including notable agencies such as Freddie Mac and Fannie Mae.
Its Residential Credit segment invests in Non-Agency, residential mortgages through securitized instruments and whole loans, and its Mortgage Servicing Rights group invests in the right to service mortgage loans for a percentage of the interest payments made on the loans.
As of the end of the third quarter , NLY's investment portfolio totaled $76.2 billion with its Agency Group representing 64% of its capital allocation, followed by its Mortgage Servicing Rights and Residential Credit Groups which represented approximately 19% and 17% respectively.
Since 2014, NLY has had an adjusted operating earnings per share growth rate of negative -4.87%.
EPS fell by -6% in 2014, by -9% in 2016, by -2% in 2018, by -17% in 2019, and by -9% in 2022. What's worse is that analysts expect EPS to fall by -33% for the full year 2023, and then fall by -4% in 2024.
The mortgage REIT's dividend track record is even worse than its past earnings performance.
NLY maintained a dividend of $4.80 per share from 2014 through 2018, but then cut the dividend by -12.5% in 2019 and by -13.33% and -3.30% in the years 2020 and 2021 respectively.
Analysts estimate the 2023 dividend to come in at $2.60 per share, which would represent a decline of approximately -26% from the dividend paid in 2022.
Currently NLY pays a 13.32% dividend yield and trades at a P/E ratio of 6.90x, compared to its normal P/E ratio of 8.20x. While the yield is high and the stock is trading at a discount, we rate NLY a sell due to the poor execution management has displayed over at least the last decade.
We rate Annaly Capital Management a Sell.
AFC Gamma, Inc. ( AFCG )
AFC Gamma is an externally managed mortgage REIT that initially specialized in loan origination for cannabis related properties but has since expanded its investment guidelines to include originating loans for multiple types of commercial real estate including retail, industrial, office, multifamily, and hotel properties.
Prior to the overhaul of their business model, AFCG exclusively issued first lien mortgages to provide financing to state-licensed cannabis operators.
Since the change, AFCG now offers subordinate loans in addition to first lien mortgage loans and finances multiple types of properties outside of cannabis.
Now before I go on any further, AFCG was formed in 2020, went public in 2021, and has already had to make significant changes to its business model. This does not reflect well on management's planning, execution, and / or their original business strategy.
AFC Gamma is a relatively new company, so we don't have much history to look at. However, from the second quarter of 2022 to the third quarter of 2023, the company's distributable earnings fell from $0.69 to $0.48 per share.
From the third quarter of 2021 through the second quarter of 2022, AFCG generated more distributable earnings and increased its dividend per share each quarter.
However, from Q2 2022 to Q1 2023, the company maintained its quarterly dividend at $0.56 per share and then cut the dividend by approximately 14% in the second quarter of 2023 to $0.48 per share.
Analysts project AFCG's adjusted operating earnings per share to increase by 1% in 2024, but then to decrease by -4% in 2025.
This could spell trouble for the dividend, as their Q3 2023 dividend payout ratio is already high at approximately 98% of their distributable earnings.
AFCG pays a 16.81% dividend yield and trades at a P/E ratio of 5.80x, compared to their normal P/E ratio of 9.28x.
While the stock offers a high yield and is trading at a discount, we are cautious of the company as it had to shift its investment strategy just several years after going public. In addition, the track record was not so good prior to AFCG (we covered it in detail here ).
Additionally, if analyst earnings estimates are correct, and earnings fall in 2025, it would likely lead to another dividend cut as AFCG's distributable earnings barely cover the dividend at its current level.
We have no coverage on AFC Gamma, but recommend investors avoid the mortgage REIT.
Lesson Learned, Folks
As I said earlier, I had to learn my lesson the hard way - so always be careful of your business partnerships.
Whenever I buy a stock, I always look at the management team much like a business partnership, and if the interest of the parties is not aligned, I will not own the stock.
That means that high leverage and dividend cuts are not acceptable.
I've learned that lesson not only in my private life (cost me millions of dollars for the education) but also in the stock market (i.e., ARCP and WPC).
As I see it, the primary job of any REIT CEO is to generate growing profits and dividends, and if that doesn't happen, I have very little interest in being a stakeholder. Remember, what I said,
"when you lay down with dogs, you wake up with fleas."
Now, are you still itching right now?
For further details see:
When You Lay Down With Dogs, You Wake Up With Fleas