If you go onto some online quotes database like AZQuotes.com, you’ll find a decent 75 sayings attributed to Babe Ruth. And boy, are there some good ones.
Consider this advice on how to hit home runs:
“I swing as hard as I can, and I try to swing right through the ball… The harder you grip the bat, the more you can swing through the ball and the farther the ball will go. I swing big, with everything I’ve got. I hit big or I miss big. I like to live as big as I can.”
Or this one about what would go through his brain when he struck out:
“I think about hitting home runs.”
It might seem odd to associate a baseball legend like Babe Ruth with striking out. Why would anyone even ask him something like that?
But truth be told, Babe Ruth’s bat didn’t always connect the way he wanted it to. And yes, sometimes that happened three times in a row.
Here’s what Bleacher Report says on the subject:
“Ruth never struck out 100 times in a season. He led the league in strikeouts five times, but he never struck out more than 93 times. During Ruth’s era, to strike out was disgraceful, at least according to the ‘experts’ of the day. Fans, who are the real experts, didn’t care as long as the home runs kept on coming.”
They knew their favorites would be back to play again.
Past Successes, Present Mindsets, and Future Home Runs
Bleacher Report continued, saying:
“Ruth hit 714 home runs and struck out 1,330 times. He walked 2,062 times. When he hit 60 home runs, Ruth struck out 89 times, which calculates to one home run for every 1.48 strikeouts.”
Weighed as a sheer number (apart from larger baseball stats), 1,330 strikeouts is a lot. But that’s the beauty of someone like the Bambino. He recognized his flaws and always sought to improve on them.
Hence that “I think about hitting home runs” quote. That statement is one we can all learn from, since, like him, we’re never going to be perfect either. (Which puts us in impressive company!)
Ruth had other quotes along those lines, such as “A part of control is learning to correct your weaknesses.” Perhaps I’ll write another article someday that focuses on that concept. It’s a worthwhile one, to be sure.
Yet, it’s a quote about winning that I really want to zero in on today. The equally – or perhaps even more – famous one that goes like this:
“Yesterday’s home runs don’t win today’s games.”
You can translate that sentiment into any sport whatsoever and it would still apply. Basketball legend Michael Jordan was no doubt thinking along those lines when he said:
“Winners don’t just learn the fundamentals; they master them. You have to monitor your fundamentals constantly because the only thing that changes will be your attention to them.”
To paraphrase: Don’t get cocky because you’ve proven yourself to be good. Keep going back to become even better.
And over in (American) football, former 49ers’ wide receiver Jerry Rice is quoted as declaring, “The enemy of the best is the good. If you’re always settling with what’s good, you’ll never be the best.”
That same mentality applies to investing as well.
To Be the Best, You Have to Stay the Best
Here at iREIT, we’ve done great in the past. Really, really great, in fact.
For proof of that, here are just some of our winners so far this year:
- Hannon Armstrong Sustainable Infrastructure Capital (HASI) +96.9% since March 29th
- Ladder Capital Corp. (LADR) +96.5% since March 19th
- Four Corners Property Trust (FCPT) +88.7% since March 23rd
- Arbor Realty Trust (ABR) +74.7% since May 19th
- Ventas, Inc. (VTR) +63.1% since April 7th
[Author’s Note: These five aren’t guaranteed current “Buy” recommendations. They have all run up in price since we originally wrote about them, making them less attractive for new shareholders to own. For updated portfolio information, join iREIT on Alpha – for free – today.]
Again, that’s awesome. And you’d better believe we’re going to brag about that record from time to time.
But don’t think we’re satisfied with it. We’re not even close to being done building up our successful buys. As such, we’re not going to spend too much space patting ourselves on the back.
Not when there are so many other companies to check out and success stories to write.
As always, in this search, we want to see stocks that are fairly valued, at the very least. If we’re going to best ourselves, we can’t stray away from our commitment to margins of safety.
That’s why we’re stepping up to the plate with the following picks.
Here, Batter, Batter, Batter
A Strong Buy Healthcare Pick
“Our operators especially have performed very well during COVID… the government stepped in – in a major way – and frankly, way beyond our wildest dreams, in terms of the support that they lent, not only in Medicare advances to operators that need them, but also just in the form of grants – that do not need to be paid back.”
Like most REITs, MPW has not be immune to COVID-19 effects, as shares traded off by as much as 45% ($24.15 to $13.01), but have since recovered by around 30% (trading now at $18.57). Since hospitals are an essential part of the healthcare universe, we have been closely monitoring MPW in hopes of allocating more capital, as Babin explains:
“… our top U.S. operators – we’re proud to report, didn’t even use the Medicare advances – and therefore owe nothing back. But the grant money was exceptionally helpful in filling that hole in the second quarter. But we’re happy to report that today, utilization levels at the facilities are back in the mid to upper 90% range, and some Hospitals over 100%.”
At iREIT, we have been closely monitoring MPW’s dividend, focusing on its safety. We recently launched our own quality scoring model called ‘iREIT IQ” in which we score each REIT in our coverage spectrum based on a variety of important metrics, and dividend safety is one of them. As you can see below, MPW scores well, with an iREIT IQ score of 82.3:
One of the other factors we used to determine the iREIT IQ is FFO per share growth. As you can see below, MPW has done an excellent job at growing its earnings – forecasted to grow by 18% in 2020 (in the year of a pandemic, I might add), and analysts are forecasting growth of 7% in 2021.
In terms of dividend safety, Babin told me:
“If you look at consensus AFFO estimates for 2021 – that represents a payout in the high 70’s… And so, as our AFFO estimates increase – as our guidance increases – we like where we are, from a coverage ratio right now- and believe that the dividend should move, relatively in tandem, with our earnings growth.”
I really liked his closing remarks:
“… And something I’ve always observed – as a buy side analyst, as a sell side analyst – is: great REITs that perform well over time, are the ones that grow their dividends. And we believe – we know – that we will be a dividend growth story. That’s our expectation.”
That’s music to my ears!
Now, in terms of valuation, we are upgrading to a Strong Buy, recognizing that MPW (and its operators) has performed well during these darkest hours. We believe that there’s value at the current price that reflects a P/FFO multiple of 12.7x and dividend yield of 5.8%. Debt appears to be manageable and rent collections have been very strong (98% on an annualized basis).
(Source: F.A.S.T. Graphs)
Spirit Doesn’t Spook Me
“I think one thing that’s interesting is for us, the other headline is that we raised $1.2 billion of capital since the start of COVID in April, and that’s in the form of a bank term loans, 10-year unsecured bonds, of course we’re a BBB rated unsecured credit, and also equity. So, our balance sheet is in the best shape it’s ever been.”
Keep in mind, I have been covering SRC since 2012, and over the years, I have witnessed the transformation from an IPO portfolio of “junk” credits like Shopko, 84 Lumber, and Carmike into a very high-quality business model that includes Home Depot (HD), Walgreens (WBA), Circle K (ANCUF), and CVS Health Corp. (CVS).
I just finished an article called “Nothing But Net Lease” that included the following investment grade rated tenancy comparison:
Keep in mind, the Net Lease REITs with higher investment grade exposure have performed the best during COVID-19, for obvious reasons, these REITs are collecting more rent than the REITs with lower investment grade rated tenancy. Here’s another chart we included in the “Nothing But Net Lease” article:
As you can see, SRC has done a very good job of collecting rent in the last 30-60 days, and here’s what the CEO had to say about that:
“… if you look at our last month, we’re just at 85% rent collection. What we said in our second quarter call is that every month is going to get better as it relates to rent collection, so if you looked at 85% in July, August will be better. September will be higher. That’s our expectation, because most of these deferrals are coming off.”
“I feel like the restaurants are recovering… Restaurants, casual dining, gyms are all doing better than we expected. The movie theaters are the TBD. We own a collection of movie theaters that I guess is about just under 6% of our total rent. We’ve had to take more care and put more attention with structured deferral agreements with that group.
Fortunately, we have over seven operators, so we’re not concentrated with just two of the big international operators. And candidly, our regional credits are better than the national international companies, from a balance sheet perspective. But to me that’s the one where it’s a little bit trickier because you’re waiting on content to come out from the studios.”
As I alluded to earlier, Four Corners Properties was a fat pitch, and when we saw that ball coming down the plate, we took a big swing… I’ll just brag one last time:
Seemingly, we’re seeing more clarity with SRC, and we like the fact that the company is now playing offense. The company’s CEO explained to me:
“… we spun off about $3.5 billion of assets. That was the size, the aggregate size of properties that we spun off to our shareholders and sold the company. We haven’t touched our G&A. Our corporate overhead hasn’t changed.
So I would tell you as an objective, I’d like to replace that $3.5 billion in the not so distant future. So, from an organizational standpoint, the answer is yes. We are structured to be much larger. That’s a goal for us. At investor day I talked about trying to get to $600 million in rents by the end of 2022. So we have to do something large in order to do that.”
Now you can see why these interviews I conduct are so valuable – because they provide terrific insight into the folks running the business. I also asked Hsieh about the dividend and he said:
“I would say that from a break even standpoint, at the current rent collections, we can cover dividend, interest payments, G&A, capex, all out of cashflow. We’re not borrowing to pay a dividend at the current rate. Look, in April, May, it was really a pretty scary time…
we’d like to see our long-term payout ratio trend towards 75%. That’s really long-term where we’d like it to go. I don’t expect we’ll be increasing dividends necessarily, but I don’t expect us to be reducing dividends either.”
As referenced above, we recently launched the iREIT IQ scoring model, and this automated tool (using various indicators) scored SRC at 63.4.
That tells us that SRC has some work before it can achieve the status of Realty Income (O) or W.P. Carey (WPC), but I like the direction that the company is going, and it appears to be primed for growth, as evidenced by the latest balance sheet enhancements.
As viewed below, SRC’s spin (as Hsieh referenced) forced a “reset” for FFO per share, but the analyst forecast for 2020-2023 looks attractive:
And given the current valuation (P/AFFO is 11.9x and dividend yield is 6.9%) and improved rent collection clarity, we are upgrading shares to a Strong Buy. Our 12-month Total Return forecast is 30%.
(Source: F.A.S.T. Graphs)
Waiting on the Fat Pitch
Today is Warren Buffett’s 90th birthday, so I decided to close out this article with an inspiring baseball analogy regarding “waiting for the next fat pitch.”
“I call investing the greatest business in the world…because you never have to swing. You stand at the plate, the pitcher throws you General Motors at 47! U.S. Steel at 39! and nobody calls a strike on you. There’s no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it.”
So, as the legendary investor said:
“Wait for a fat pitch and then swing for the fences.”
Our Cash is King Portfolio has returned 36.3% since inception (mid-March 2020), and I recognize that investing is a long-term game. With that in mind, and by practicing the very same principles (as outlined in this article), the Durable Income Portfolio (commenced in August 2013) has returned an average of 16.8% annually.
Sure, we swing too fast and too hard for several pitches, but we were able to maintain patience and discipline along the way. By practicing time-tested value investing principles, we know that…
“You are neither right nor wrong because the crowd disagrees with you. You are right because the data and reasoning are right.” Ben Graham
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.
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Disclosure: I am/we are long MPW, SRC. 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.