Developed in partnership with Treading Softly
There is a saying:
You exchange your health for wealth, and you give your wealth for health.
Sounds like a mystery, right?
In fact, many people work indefinitely hours, pouring out their heart and soul, draining their health, neglecting relationships to get rich.
One famous rapper – 50 Cent – famously quotes about this:
Get rich or die trying”
It’s the same concept. As young people, we have health and life waiting for us – or so we think – and we are often willing to trade it in for our work to get rich.
However, when we acquire this wealth, we need to start spending it as soon as possible to cover lifetime health costs. We accumulate a variety of ailments and problems—in part because of our lifestyles of trying to get rich.
The average age of a millionaire is 57. For many, this means several decades of sacrificing health on the altar of wealth. It’s quite a sacrifice. Giving up on relationships, spending time on your hobbies and even giving up on your dreams. All to achieve this vague idea of being rich.
This is where I disagreed for a long time. I don’t see being rich as a life goal. I don’t think the 5 year goal of “being alive” is a realistic goal either. Both are states of being.
I see being rich as a means to an end. What will you do with your wealth? Can you achieve it without being rich or less rich? Maybe you don’t need to be infinitely rich! While it’s great to have billions, what most of us really want is financial security. Knowing that we can maintain a comfortable lifestyle indefinitely.
What do I do? I buy income generating assets. Basically, I buy income. I buy the income I need to pay for my goals and pay my bills. My goal now is to have at least 25% extra that I can reinvest to grow my income even further. As such, I have a real purpose beyond “being” and the market is just a tool to help me achieve it. I know how much is needed and can measure how close I am to it.
Today I want to give you two options to help you do just that. They focus on health and entertainment. We give up two things in our pursuit of “wealth”. Instead, own them and profit from everyone else who ignores both.
Let’s dive in.
Pick #1: HQH – Yield 9.2%
Closed-end funds tend to amplify market movements. This may be a concern for some investors, but for income investors it is an opportunity. Let’s take a look Tekla Healthcare investors (HQH). HQH invests in healthcare. Biotechnology and pharmaceuticals are the largest, but HQH affects every part of the healthcare industry.
Like any other sector, healthcare has gone through ups and downs, but over the long term, HQH has significantly outperformed the S&P 500.
It’s easy to see why. Over the past 40 years, healthcare has undergone incredible changes. Advances in medicine have created many drugs and procedures for previously untreatable diseases.
As the population ages, the demand for all types of healthcare is increasing. For both life-prolonging treatments like heart surgeries and elective quality-of-life treatments like knee replacements. The Baby Boomer generation is older, wealthier, and needs more and more healthcare.
The healthcare sector will continue to decline, and it will always have to deal with a higher-than-average amount of government regulation, but the long-term outlook is a secular growth trend.
HQH is a proven sector exposure option for investors. Right now, HQH is trading at a 10% discount to NAV. One reason why closed-end funds (“CEFs”) can be volatile is that the market price can be disconnected from the NAV. He can fall quickly and is often in a hurry to catch up with the rebounds. The current 11% discount is the biggest discount we’ve seen since the start of 2021.
HQH has a variable dividend policy for income investors. It distributes 2% of NAV every quarter. This means that our income varies from quarter to quarter. This policy ensures that the fund is never over- or under-allocated. It always pays a reasonable amount relative to its NAV.
This type of policy creates a very robust CEF that can stand the test of time. However, investors should be prepared for some inconsistencies. Last year, this policy caused a decrease in the dividend. When the share price falls and the NAV rises again, this leads to an increase in the dividend.
The long-term drivers of the healthcare sector are structural and will persist for decades. This is a sector we always want to maintain exposure to and HQH is a great sustainable option to gain this exposure with over 30+ years of experience.
Choice #2: EPR – Yield 9%
EPR properties (EPR) has seen its price drop sharply from recent highs. In August, it was essentially flat for the year, and since then, like most of the market, it’s down 25% year-to-date. While macro forces are at work across all stocks, Cineworld Group’s (OTCPK: CNNWQ ) bankruptcy filing could play a big role for EPR. Cineworld owns Regal Cinemas in the US, one of EPR’s largest tenants.
Looking at Cineworld’s Q2 earnings, it’s clear where the problem lies. Revenue of $1.5 billion, EBITDA of $364 million and a small operating profit, but all of that was wiped out by financial charges of $409 million.
Regal is Cineworld’s biggest source of revenue and Canada-based Cineplex is exploring a merger with Regal. Cineworld previously agreed to buy Cineplex but pulled out of the deal in the early days of COVID. The move led to litigation and a $1 billion award to Cineplex in the case, which is being appealed.
Such a merger could be positive for EPR because it would result in Cineplex taking over all of Regal’s leases. The lease with EPR is one of the assets Cineplex wants to buy; A movie theater company without a movie theater isn’t worth much.
For its part, Cineworld is trying to resolve the bankruptcy quickly. Here is the current recommended schedule:
This is great news for EPR. Uncertainty about what will happen is worse than any news in the first place. So far, Cineworld has “turned down” 20 leases. However, they were all defunct locations and based on our survey, none of them were owned by EPR. This is not surprising, as EPR has long focused on high-end locations that generate above-average returns. Cineworld is trying to get out of lettings in below average locations.
Cineworld may have started negotiations with EPR. It is unclear how willing EPR is to negotiate with Cineworld. In March, CEO Greg Silvers predicted some locations would close.
I’m sure there will be closures, just a few points to show our portfolio so everyone can understand. In fact, 70% to 75% of our theaters are in the top third in gross in the country, and 99% are in the top half. So, if we have closure, we feel really good. I think there’s been a lot of debate about repurposing theater assets, and there’s a lot of debate about what do you do with a theater building, which I think throws off the idea of where the real value is, which is most of our land. It is 15-20 hectares.
So how do you repurpose a theater building?
We’ve done a good job and I think people are thinking about how we can change this building. I think people should understand that we sold the theater at the end of last year for industrial conversion and that people asked us. So, how they converted the building, they use a bulldozer and convert it. But on a cash flow basis, we sold below six in terms of cash flow, which we like.
Of course, the world has changed since March 2022, with higher interest rates. However, there is no doubt that EPR could sell some of the Regal seats for a profit far greater than the current rental value. EPR is not afraid to take back these places empty and rent them to one of the other landlords or sell it to someone with a bulldozer.
EPR is not hopeless. It has more than $168 million in cash and enough liquidity to redeploy any assets that don’t have a balance in its $1 billion revolver. EPR’s dividend is well covered by cash flow, providing ample cushion for any reduction in FFO (funds from operations). If the AFFO payout ratio is below 70%, the EPR dividend is not at risk. These realities make EPR a priority in any negotiations. Maybe it makes sense for EPR to forgive deferred rent. Maybe it makes sense to reduce the rent for EPR in some places. Maybe not. EPR enters these negotiations with flexibility and cash to support any decision made by management. It’s powerful at the negotiating table, and that’s a luxury Cineworld doesn’t have.
Given the schedule, we can expect Q3 earnings to look pretty good to management. It is unclear whether they will be free to disclose it or whether the talks will be covered by non-disclosure agreements. At the very least, management issues should be clearly defined. After 3-4 months, there will be confidence in how all this will change. We expect the market to be very favorable to any certainty.
EPR is trading at a very attractive price today, with a dividend we can be very confident about. We can pay while we wait for the bankruptcy process to end and hold when the market comes back in. If you’re a more conservative investor, consider EPR’s convertible preferred stock.
With HQH and EPR, we can get unusually large returns from two sources that most people ignore in their pursuit of wealth. I have long tried to teach others that worshiping the “almighty dollar” is a terrible religion. Instead, the dollar should be used as a means to an end. Take your dollar off their pedestal and put it to work. I’ve learned one simple truth over the years in banking and investing: nothing makes money like money.
When you retire, will you be able to achieve your goals and maintain your health and relationships? I hope your goal is bigger and bigger than just “becoming” like being rich, being rich, or being famous. Move from “being” to “doing” or achieving goals. Use your dollars and your income to be the means to that end.
Retirement can be a relaxing time, I hope so! I also hope that you will use your retirement to devote more time to achieving your goals in life. Traveling the world, helping the less fortunate, or being closer to your family. Money can make it easier, but it can’t do it for you.
You need your health for that, so stop giving it away for a few more shekels. Buy the income and let it pay your way.