Today seemed like groundhog day, at least in the banking sector.
Back in 2008 when I was a practicing real estate developer, I witnessed bank after bank closing as a result of the Great Recession.
Around 13,400 bank branches have closed since then, representing a loss of over 14% of all bank branches in the U.S.
So when I woke up today and read the news, I felt as though we were entering into yet another banking meltdown…
Silicon Valley Bank (SVB), the 16th-largest bank in the U.S. with around $209 billion in assets (as of December 31, 2022), shut down as regulators stepped in to take control of bank deposits.
The California Department of Financial Protection and Innovation closed the bank Friday within hours and put it under the control of the FDIC.
And unsurprisingly, the market was flung into volatility.
Here at Intelligent Income Daily, we’re focused on protecting your wealth and bringing you the safest investment options by staying up to date on the latest news. So no matter what goes on in the markets, you can sleep well at night.
Today, I’ll share how this bank collapse affected me personally, why Intelligent Income Daily readers have less to be worried about than others may be, and answer two recent subscriber questions about some of the safest investments we cover.
Silicon Valley Bank (SVB) Closure
Although I live on the East Coast, this West Coast bank closure hits home.
I recently joined the advisory board for an AI startup known as nRoads, an intelligence solutions provider that uses AI to solve specific business and data problems.
Like many other tech startups, nRoads received a loan and opened a deposit account with Silicon Valley Bank because of its reputation for providing favorable terms for technology and venture-backed investments.
But now, nRoads and many other startups will have to seek other alternatives after customers were scrambling earlier this week to withdraw over $2 billion in deposits.
Given the collapse of FTX, the tech crash of 2022, and the recent failure of another crypto bank, Silvergate Capital, earlier this week… It’s no surprise that wind of SVB’s need to cover nearly $2 billion created a run on the bank.
The bank hoped to recapitalize with a $2.25 billion share sale earlier today. But regulators forced its hand, which led to the rapid meltdown.
It’s the biggest bank failure we’ve seen since the 2008-2009 Financial Crisis.
This breaking news, alongside rising rates and inflation, has put the stock market on edge.
As the CEO of Longbow Asset Management, Jake Dollarhide, put it, “[t]here are obvious cracks in the system, and the worry is if the Fed raises rates (50 basis points) in two weeks, will that break something in the banking system. That’s why the banks are selling off and the market is nervous.”
Now, thankfully, nRoads will be just fine as its funds are insured by the FDIC. But others aren’t so lucky.
As I told my team of analysts today, this bank closure is a reminder that tech investments are risky, which is the reason we only treat them as speculations. We don’t rely on them to protect our capital.
That’s where the safe dividend-paying investments we target at Wide Moat Research come in…
Right now, there are major shifts taking place across many different sectors of the economy. And we want you to be prepared for them.
We’ll be writing more to you about them in the coming days.
In the meantime, let’s launch into our Friday mailbag questions. The first touches on another one of these major shifts…
What is your assessment of Global Medical (GMRE)? I’ve had it on my watchlist for some time and just noticed the current yield hit 8%.
Being healthcare related as well as a REIT [real estate investment trust] seems to make them attractive. Would you consider them in the category of “essential purpose”?
You recently had an excellent article about companies in the danger zone with excessively high yields.
How would you rate GMRE with their enticing 8% yield? – Samuel H.
Brad’s Response: As luck has it, I’ve been doing some digging on Global Medical REIT (GMRE) this week. The company owns 189 buildings in 35 states that consists of medical office buildings (68%), inpatient rehab facilities (17%) surgical hospitals (6%) and the remaining 9% is described as “other.”
GMRE is a health care REIT, so I would consider it an “essential purpose” company.
But that categorization no longer carries the same significance as it did in 2020 or even 2022. As I mentioned on Monday, the U.S.’ federal Public Health Emergency for COVID-19 will officially expire on May 11. This marks another major shift.
A surge of Omicron cases in early 2022 – plus the rapid increases in drug prices and labor costs due to inflation – pushed many hospital operators into the red. And with the national public health emergency about to expire, the same federal funding will no longer be available to GMRE.
Since 2018, GMRE has generated a blended average funds from operation (FFO) growth rate of 9%. This is significant, but it does not make up for its disappointing dividend growth rate.
Over the last five years, GMRE has an average dividend growth rate of under 1%. Very unattractive.
Currently, GMRE is trading at a P/FFO (price per FFO) multiple of 10.9x, which compares very favorably to its normal 16.1x. It currently pays an 8.41% dividend yield that’s covered by a 2022 AFFO payout ratio of 85.71%.
I would consider GMRE a speculative buy even with its attractive yield, which means keep your exposure to it small if you choose to buy shares.
Now onto the next question.
Although I am 66, I’m still working as a Retirement Wealth Advisor & Strategist. After all, what the hell else would I do?
Anyway, I have long owned both E [equity] REITs and over the last year dipped my toes in M [mortgage] REITS. I seem to remember that you mentioned holding about 90% in E and 10% in mREITs.
For the retiree, might the mortgage REITs deserve a higher weighting due to their generous dividends? – Rodger F.
Brad’s Response: mREITs or mortgage REITs are more volatile given the fact that they loan money instead of owning real estate.
Similar to banks, mREITs generate lump earnings and of course, that also means that dividends are more volatile. And considering the news today, the caution is warranted.
The mREIT sector has grown considerably since the Great Recession and there are now several specialty mREITs that invest in cannabis, homebuilding, and apartments.
I do like owning mREITs for higher yield, and as a means to enhance the overall yield of a REIT portfolio. But a safer way to play the space is owning several of the larger mREITs like Blackstone Mortgage (BXMT) and Starwood Property Trust (STWD), which are more stable. They’re also currently trading at a discount.
At the end of the day, it’s more of a risk tolerance question and determining whether you’re comfortable with taking on added volatility for higher yield.
No Need to Hit The Panic Button
As I said earlier, I’ve lived through one of the worst stock market crashes (2008) in history and have witnessed many bank failures…
And one of the biggest lessons that I’ve learned is that you should always stay calm and insist on buying high-quality stocks.
Exotic investments are like shiny new toys that are often financed with high-risk capital. Alternatively, our team at Wide Moat Research seeks to research and recommend stocks differentiated by durable sources of income that are sustainable over time.
And we’ll continue writing to you about them – through all kinds of market upheavals.
If today’s piece sparked any questions you’d like me to address, please write to us here.
Happy SWAN (sleep well at night) investing,
Editor, Intelligent Income Daily