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Summary

  • To make sense of Health Care REIT valuations and year to date performance, you have to see and sense their components - and there are seven potential components.
  • Few REITs are pure plays. Most contain multiple components.
  • But even with that complexity, there are some rules that are universal.

It is my theory that in order for a retail investor to invest with confidence in a sector, that investor should be able to (1) explain year to date price changes, (2) explain current valuations, and (3) be able to use those valuations along with current growth projections to choose investments that have a reasonable chance to outperform the sector. This article seeks to do the first of those tasks. And that is not an easy task.

Earning release season sometimes gives me a 60s flashback. I can hear the lyrics of Buffalo Springfield's "For What It's Worth":

There's something happening here. What it is ain't exactly clear.

That's the song I am hearing when I first look at the year to date Health Care REIT stats. (FYI: Buffalo Springfield contained the second and fourth members of Crosby, Stills, Nash & Young and the song was written by Stephen Stills.) The sector has been performing well - so I should be hearing Herman's Hermits singing "I'm into something good". But the performance is uneven. And at first look - some of the gains do not make sense, while others have gains that do. For example, there are two REITs in this coverage universe with price gains over 20%. One has had 8.70% LTM (last twelve month) dividend growth in a sector where the adjusted average is 4.65%. That makes sense. The other has had zero LTM dividend growth. The two REITs with price/FFOs over 16 have had zero LTM dividend growth. Both of the REITs with price/FFOs under 13 have had LTM dividend growth that has beaten the sector average. The lack of correlation between "yields and growth" and "earnings multiples and growth" is atypical. But that lack of correlation is a constant in this sector.

Here are the year to date stats and the price/FFO numbers:

Health Care Update for Q2-14

Yields are calculated on Q2-14 dividends. The Dividend/FFO ratio uses the 2014 FFO projection. AVIV started trading on 3-21-13 and DOC on 7-19-13. The percent change columns measures the changes since the beginning of the year. LTM (last twelve month) dividend growth uses Q2-14 minus Q2-13 normalized dividend/share divided by Q2-13 dividend. LTM FFO growth uses Q1-14 minus Q1-13 normalized FFO/share divided by Q1-13 normalized FFO. The sector average LTM dividend change omits AVIV and DOC from that calculation. NHI, OHI and SBRA announced dividend increases in Q2-14. UHT has yet to announce its Q2-14 dividend - and this is the quarter when its small yearly increases happen.


 Share Price2014 FFO Estimate Div/Percent ChangeLTM Growth
Company_name_and_ticker1-0105-211-0105-21YieldFFOPricePr+Div14 FFOTargetDivFFO

Aviv REIT, Inc.(NYSE:AVIV)23.7027.211.851.895.2976.1914.8117.852.164.230.00%0.0%
Physicians Realty Trust(NYSE:DOC)12.2412.760.980.897.05101.124.257.92-9.182.190.00%300.0%
Health Care REIT, Inc.(NYSE:HCN)53.5763.974.004.074.9778.1319.4122.381.751.163.92%9.9%
Health Care Properties(NYSE:HCP)36.3241.853.063.035.2171.9515.2316.73-0.98-2.823.81%1.4%
Healthcare Realty Trust Incorporated(NYSE:HR)21.3124.431.411.464.9182.1914.6416.053.55-0.410.00%9.4%
Healthcare Trust of America, Inc.(NYSE:HTA)9.8411.830.690.734.8678.7720.2223.155.805.350.00%12.5%
LTC Properties Inc.(NYSE:LTC)35.3938.792.652.605.2678.469.6111.53-1.896.319.68%3.3%
Medical Properties Trust Inc.(NYSE:MPW)12.2213.321.121.106.3176.369.0012.44-1.790.235.00%4.0%
National Health Investors(NYSE:NHI)56.1060.594.134.205.0873.338.0010.621.692.454.76%23.5%
Omega Healthcare Investors Inc.(NYSE:OHI)29.8036.062.732.775.5572.2021.0124.301.47-1.548.70%7.9%
Sabra Health Care REIT, Inc.(NASDAQ:SBRA)26.1428.702.202.275.3066.969.7911.173.180.5611.76%19.6%
Senior Housing Properties Trust(NYSE:SNH)22.2323.411.741.766.6688.645.318.821.15-2.950.00%0.0%
Universal Health Realty Income Trust(NYSE:UHT)40.0642.572.802.835.8788.346.277.831.070.000.00%-1.4%
Ventas, Inc.(NYSE:VTR)57.2867.324.364.384.3166.2117.5318.790.46-1.748.21%5.8%

Average     5.4777.9012.5114.990.600.934.65% 

Dividend dates are:

AVIV: 04-11-14DOC: 04-24-14HCN: 05-19-14HCP: 05-26-14HR : 05-29-14HTA: 07-02-14LTC: monthly
MPW: 04-10-14NHI: 05-08-14OHI: 05-14-14SBRA: 05-29-14SNH: 05-20-14UHT: 03-30-14VTR: 03-27-14

Historical yields for the sector:

Mar 2005: 6.99%June: 6.09%Sept: 6.22%Dec: 6.73%
Mar 2006: 6.18%June: 6.79%Sept: 5.85%Dec: 5.28%
Mar 2007: 5.33%June: 6.24%Sept: 5.90%Dec: 5.77%
Mar 2008: 5.84%June: 6.33%Sept: 5.25%Dec: 6.89%
Mar 2009: 9.11%June: 7.88%Sept: 6.67%Dec: 6.31%
Mar 2010: 6.67%June: 6.09%Sept: 5.62%Dec: 5.75%
Mar 2011: 5.48%June: 5.64%Sept: 6.02%Dec: 5.34%
Mar 2012: 5.16%June: 4.84%Sept: 4.89%Dec: 4.69%
Mar 2013: 4.66%June: 5.09%Sept: 5.49%Dec: 6.02%
Mar 2014: 5.63%June:Sept:Dec:
Health Care Price/FFO Ratios 05-21

The analyst projected FFO stats for UTH that I find at Yahoo Finance look bad to me. Those projections are not in line with what UHT is reporting. This date uses a 2014 FFO projection that is a run rate based on current trends. HTA IPOed in June of 2012. 'Normalized FFO' stats for the pre-IPO years came from its 2011 10-K. When AVIV and DOC were added to the sector on 11-19-13, the sector average 2013 price/FFO ratio rose from 14.94 to 15.79. The DOC FFO projection fell 50%, distorting the 2013 sector ratio. 2012 FFO growth was 10.77% and 2013 growth was 7.65% before the addition of the newbies. AVIV and DOC do not distort the 2014 and 2015 sector average ratios.


 FFO / Share% FFO GrowthPrice/FFO14 FFO Range
Co.20102011201220132014201512-1313-1414-15201320142015HighLowRange

AVIV0.000.000.001.261.892.10na50.0011.1121.6014.4012.961951845.82%
DOC0.000.000.000.260.891.17na242.3131.4649.0814.3410.911067040.45%
HCN3.133.413.513.364.074.27-4.2721.134.9119.0415.7214.984143944.91%
HCP2.192.692.763.013.033.139.060.663.3013.9013.8113.373112993.96%
HR1.291.151.311.321.461.560.7610.616.8518.5116.7315.661471432.74%
HTA0.380.510.610.640.730.794.9214.068.2218.4816.2114.9777718.22%
LTC1.882.152.262.372.602.804.879.707.6916.3714.9213.852672564.23%
MPW0.660.710.900.961.101.186.6714.587.2713.8812.1111.291139714.55%
NHI2.762.883.183.554.204.3811.6418.314.2917.0714.4313.834374086.90%
OHI1.611.892.192.532.772.8315.539.492.1714.2513.0212.742872706.14%
SBRA0.001.311.411.842.272.4030.5023.375.7315.6012.6411.9623216131.28%
SNH1.701.731.751.691.761.85-3.434.145.1113.8513.3012.651801686.82%
UHT2.612.572.842.772.832.89-2.462.172.1215.3715.0414.732832830.00%
VTR2.853.373.804.144.384.578.955.804.3416.2615.3714.734474303.88%

Average     6.8930.457.4718.8014.4313.47

Historical Price/FFO ratios for the sector:

Mar 2007: 15.23June: 13.19Sept: 14.18Dec: 14.55
Mar 2008: 14.17June: 13.27Sept: 15.95Dec: 12.38
Mar 2009: 9.42June: 10.84Sept: 12.61Dec: 13.90
Mar 2010: 12.61June: 14.10Sept: 15.45Dec: 15.41
Mar 2011: 15.07June: 14.62Sept: 12.91Dec: 14.95
Mar 2012: 14.21June: 15.25Sept: 15.05Dec: 15.82
Mar 2013: 17.18June: 15.84Sept: 15.21Dec: 16.67
Mar 2014: 13.92June:Sept:Dec:

Here is the one break-down or parsing of the data that explains year to date price changes best:

The relationship between property type and year to date returns:

The following had over 49% in skilled nursing facilities: AVIV, LTC, OHI and SBRA. Their average YTD price change is 13.80%.
The following had over 45% in senior housing using the prior quarter's numbers that did not exclude NNNs: HCN, NHI, SNH and VTR. Their average YTD price change 12.56%.
The following had over 25% in RIDE-A senior housing using this quarter's numbers: HCN and VTR. Their average YTD price change 14.53%.
The following had over 85% in medical office buildings: HR and HTA. Their average YTD price change is 17.43%.
The following had over 40% in hospitals: MPW and UHT. Their average YTD price change is 7.63%.

Here is the Q1-14 ending stats I am using for investments by property type:

Property Type Weightings


CompanyHospitalsSkilled NursingRIDE-A Sen HouAssisted LivingMOBsLife ScienceDebtMy RRRs
Aviv REIT, Inc.AVIV3%84%0%10%0%0%3%10.50
Physicians Realty TrustDOC13%21%0%0%66%0%0%9.00
Health Care REIT, Inc.HCN4%14%39%25%15%2%1%9.20
Health Care PropertiesHCP5%28%4%33%13%15%3%9.20
Healthcare Realty Trust IncorporatedHR9%0%0%0%87%0%3%7.60
Healthcare Trust of America, Inc.HTA5%0%0%4%90%0%1%7.40
LTC Properties Inc.LTC0%50%0%40%0%0%10%9.60
Medical Properties Trust Inc.MPW86%0%0%0%1%0%13%11.50
National Health InvestorsNHI4%33%12%41%1%4%6%9.60
Omega Healthcare Investors Inc.OHI2%89%0%2%0%0%8%10.50
Sabra Health Care REIT, Inc.SBRA12%67%0%9%0%0%12%10.50
Senior Housing Properties TrustSNH3%3%14%34%44%0%0%8.70
Universal Health Realty Income TrustUHT43%0%0%0%55%0%2%9.50
Ventas, Inc.VTR7%3%27%47%16%0%2%9.50

Here are the break-downs that usually explain performance:

High Distribution Increases:
The following companies had dividend increases of more than 5% when comparing Q2-14 to Q2-13: LTC, OHI, SBRA and VTR. Their mean price gain for the year is 14.48%. Their mean total return for the year is 16.48% - and 2 of the 4 beat the sector median yearly price gain of 12.51%.
The following companies had distribution increases between 2% and 5% when comparing Q2-14 to Q2-13: HCN, HCP, MPW and NHI. Their mean price gain for the year is 12.91%. Their mean total return for the year is 15.57% - and 2 of the 4 beat the sector average yearly price gain.
The following companies did not have distribution increases - or had increases of less than 2%: HR, HTA, SNH and UHT. Their mean price gain for the year is 11.61%. Their mean total return for the year is 13.96% - and 2 of the 4 beat the sector average yearly price gain.


High CAGRs and Year to Date Returns:
The following companies had CAGRs (projected Compound Annual Growth Rate of the dividend) equal to or more than of 5%: AVIV, NHI, OHI, SBRA and VTR. Their mean price gain for the year is 14.23%. Their mean total return for the year is 16.60% - and 3 of the 5 beat the sector average yearly price gain.
The following companies had CAGRs between 5.0% and 3.5%: HCN, HCP, LTC and MPW. Their mean price gain for the year is 13.31%. Their mean total return for the year is 15.77% - and 2 of the 4 beat the sector average yearly price gain.
The following companies had CAGR estimates under 3.0%: HR, HTA, SNH and UHT. Their mean price gain for the year is 11.61%. Their mean total return for the year is 13.96% - and 2 of the 4 beat the sector average yearly price gain.


Dividend/FFO ratios and Year to Date Returns: REITs that retain more FFO should out-perform, but have they in 2014?
The following companies had dividend/FFO ratios below 85%: AVIV, HCN, HCP, HR, HTA, LTC, MPW, NHI, OHI, SBRA and VTR. Their mean price gain for the year is 14.48%. Their mean total return for the year is 16.84% - and 7 of the 11 beat the sector average yearly price gain.
The following companies had dividend/FFO ratios over 85%: DOC, SNH and UHT. Their mean price gain for the year is 5.27%. Their mean total return for the year is 8.19% - and 0 of the 3 beat the sector average yearly price gain.


Intra-year FFO Estimate Increases and Year to Date Returns: Did REITs with improving 2014 FFO estimates since the beginning of the year out-perform this year?
The following companies had 2014 FFO estimate increases since the beginning of 2014: AVIV, HCN, HR, HTA, NHI, OHI, SBRA, SNH, UHT and VTR. Their mean price gain for the year is 13.70%. Their mean total return for the year is 16.12% - and 6 of the 10 beat the sector median yearly price gain.
The following companies had 2014 FFO estimate decreases since the beginning of the year: DOC, HCP, LTC and MPW. Their mean price gain for the year is 9.52%. Their mean total return for the year is 12.15% - and 1 of the 4 beat the sector median yearly price gain.


Intra-year price target increases and Year to Date Returns:

The following companies had 2014 price target increases since the beginning of 2014: AVIV, DOC, HCN, HTA, LTC, MPW, NHI and SBRA. Their mean price gain for the year is 11.89%. Their mean total return for the year is 14.66% - and 3 of the 8 beat the sector median yearly price gain.
The following companies had 2014 price target decreases since the beginning of the year: HCP, HR, OHI, SNH and VTR. Their mean price gain for the year is 14.74%. Their mean total return for the year is 16.95% - and 4 of the 5 beat the sector median yearly price gain.


FFO dollar increases and Year to Date Returns: REITs making acquisitions and growing FFO dollars should be doing that while growing FFO/share the most. Did REITs with growing 2014 total FFO dollars out-perform this year?
The following companies had year over year FFO dollar increases over 15%: DOC, HCN, HR, HTA, LTC, MPW, NHI, OHI and SBRA. Their mean price gain for the year is 12.88%. Their mean total return for the year is 15.54% - and 4 of the 9 beat the sector median yearly price gain.
The following companies had 2014 normalized FFO dollars increases since Q1-13 under 15%: AVIV, HCP, SNH, UHT and VTR. Their mean price gain for the year is 11.83%. Their mean total return for the year is 14.00% - and 3 of the 5 beat the sector median yearly price gain.

One has to parse the numbers with component awareness for the parsing to work. For example, weed out zero dividend growth Healthcare Realty Trust Incorporated and Healthcare Trust of America, Inc. from the REITs with the lowest LTM dividend growth - and that grouping has a year to date average price gain of 7.085% - which is well below sector average. The same thing happens when weeding out HR and HTA from the lowest dividend CAGR (Compound Annual Growth Rate of the dividend) projections. Year to date changes in the price targets normally shows a strong correlation to year to date price changes. But not this year. Why? MOB owning HR and RIDEA owning HCP and VTR were part of the target falling group.

Why are high valuation MOB REITs up even more in 2014? It is a "risk off year" - and you can see this from the relative returns on other investments. Ten year treasuries are up. The Russell 2000 is down. And MOBs are the low risk Health Care properties. You can tell that from the cap rates at which those properties current trade - which is around 6.5%. And you can tell that from the quality of their customers. HTA has investment grade rated tenants as a percent of annualized base rent of approximately 41%. HR has investment grade rated tenants leasing 78.9% of its total square feet. None of the other fellow Health Care REITs disclose these qualitative metrics. Why? You disclose what makes you look good. This lower risk attribute explains the lower cap rates. And it also explains valuations. This is the reason MOB intensive REITs have lower "yield + CAGRs" and higher price/FFO multiples.

Why are RIDEA property REITs up? Both Health Care REIT, Inc. and Ventas, Inc. have strong SSNOI (Same Store - cash based - Net Operating Income) growth stories for their RIDEA or "operating" Senior Housing properties. (Health Care REITs are limited to having triple-net leases on most other property types.) This story was also evident in the stats for the two REITs with lighter weightings in operating properties - Health Care Properties and Senior Housing Properties . HCN had total portfolio 4.4% cash SSNOI growth in Q1-14 - but its Senior Housing operating portfolio had an 8.1% increase. HCP had year-over-year adjusted SSNOI increased by 4.2% for Q1-14. Same-property performance increased 4.7% for senior housing in total. In the RIDEA portfolio, SSNOI rose 7.8%. SNH's managed senior living portfolio SSNOI had growth of 4.8% compared to a 1.5% decrease for its same store MOBs. VTR had total portfolio SSNOI increase of 3.7%. For the Seniors Housing Operating Portfolio, SSNOI increased 4.5%.

Why did HCP and VTR having falling targets? My best guess is that the analysts were finally putting into their pricing models some "old news". HCP and VTR were the two REITs with the biggest shifts towards operating properties in 2013. Both underperformed the sector average in 2013. This property shift is a two edged sword. There will be more volatility in earnings caused by a shift towards operating properties. More volatile earnings would result in higher required rates of return. Price targets are partially constructed by using the dividend discount model. Higher required rates of return lowers the price targets. The market reacted to the bad side of the sword in 2013. The analysts reacted to the market's reaction with their 2014 price target changes. But in 2014, with the positive SSNOI news, the market is now reacting to the good side of the sword.

Summation: Understanding year to date price changes required an awareness of the different weightings of the different property types with this sector. It is apparent that the REITs with high allocations to MOBs out performed - and the most logical explanation is that lower risk out performed. It is apparent that the REITs with higher allocations to operating properties out performed - and the most logical explanation is that evidence of the growth story for that asset type has strongly emerged.

Source: Explaining Year-To-Date Health Care REIT Returns