I started this series with The "Perfect Retirement Portfolios For Dummies." That article showed sample portfolios that generated close to a 4% yield and just over 6% annual dividend growth. I next wanted to show stats that justified the dividend CAGRs (Compound Annual Growth Rate) projections and the RRRs (Required Rates of Return) used in that article. I have already provided data that justified the RRR assessments and the CAGR projections for consumer stables, transportation stocks and health care/pharmaceutical stocks used in that portfolio.
In this article on the health care REIT (Real Estate Investment Trust) sector, I will show via historical earnings projection accuracy numbers which stocks have relatively and visible earnings. REITs are atypical in that their RRRs (Required Rates of Return) are not based on dependable earnings. REIT RRRs are based on cap rates for the property types they own. I have tracked this sector long enough to have a high level of certainty on that point. But even in cases where earnings visibility and reliability are not factors in valuation, I want to know those stats so I know which stocks to avoid. Due to this being another in a series "for dummies," I will not complicate the discussion by writing about FAD or Funds Available for Distributions. I will stick with the most widely available earnings metric and use normalized FFO or Funds From Operations.
I will then use the earnings growth trends, the dividend/FFO ratio, the price-implied CAGR (Compound Annual Growth Rate of the dividend) and CAGR projections from third parties to produce CAGR projections. I will then show the stocks that merit some inclusion in a diversified retirement portfolio that can produce income growth faster than inflation while producing a 4% annual yield. For my selection of one health care REIT, I will find a stock that assists with income growth and portfolio diversification while also having a better than average yield.
I want to start by showing the current yields on my Health Care REIT coverage universe, and how the sector has performed in 2014. The market treats REITs as bond like equities. REITs tend to have share price appreciation during periods of falling interest rates. 2014 has been a very good year for REITs.
Health Care Update for Q4-14
Yields are calculated on Q4-14 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 Q4-14 minus Q4-13 normalized dividend/share divided by Q4-13 dividend. LTM FFO growth uses Q3-14 minus Q3-13 normalized FFO/share divided by Q3-13 normalized FFO. LTM FAD growth does not use quarterly numbers, but the 2014 midpoint of the yearly guidance compared to the 2013 actual. The sector average LTM dividend change omits AVIV and DOC from that calculation. VTR has yet to announced its Q4-14 dividend, which should be an increase. I am temporarily using an "expected" Q4-14 dividend of $0.78 for VTR. On 10-31-14 AVIV and OHI announced their merger. AVIV ended Q3-14 up 11.18% vs. sector average 7.04% - and OHI was up 14.73%.
| Share Price | 2014 FFO Estimate | Div/ | Div/ | Percent Change | LTM Growth | ||||||||||
| Company_name_and_ticker | 1-01 | 12-05 | 1-01 | 12-05 | Yield | FFO | FAD | Price | Pr+Div | 14 FFO | Target | Div | FFO | FAD | |
| Aviv REIT, Inc. | (AVIV) | 23.70 | 33.86 | 1.85 | 1.75 | 4.25 | 82.29 | 75.39 | 42.87 | 48.95 | -5.41 | 18.08 | 0.00% | 18.4% | 11.0% |
| Physicians Realty Trust | (DOC) | 12.24 | 15.60 | 0.98 | 0.71 | 5.77 | 126.76 | 130.43 | 27.45 | 34.80 | -27.55 | 13.74 | 0.00% | 466.7% | 6.2% |
| Health Care REIT, Inc. | (HCN) | 53.57 | 73.99 | 4.00 | 4.11 | 4.30 | 77.37 | 87.12 | 38.12 | 44.05 | 2.75 | 14.28 | 3.92% | 7.2% | 8.6% |
| Health Care Properties | (HCP) | 36.32 | 44.30 | 3.06 | 2.97 | 4.92 | 73.40 | 85.83 | 21.97 | 27.97 | -2.94 | 5.19 | 3.81% | -5.1% | 0.8% |
| Healthcare Realty Trust Incorporated | (HR) | 21.31 | 26.31 | 1.41 | 1.46 | 4.56 | 82.19 | 81.08 | 23.46 | 29.09 | 3.55 | 4.67 | 0.00% | 15.6% | 11.3% |
| Healthcare Trust of America, Inc. | (HTA) | 9.84 | 12.91 | 0.69 | 0.74 | 4.49 | 78.38 | 90.62 | 31.20 | 37.09 | 7.25 | 10.54 | 0.87% | 18.8% | 10.3% |
| LTC Properties Inc. | (LTC) | 35.39 | 41.41 | 2.65 | 2.56 | 4.93 | 79.69 | 81.60 | 17.01 | 22.29 | -3.40 | 5.53 | 0.00% | 12.3% | 6.8% |
| Medical Properties Trust Inc. | (MPW) | 12.22 | 13.40 | 1.12 | 1.07 | 6.27 | 78.50 | 82.35 | 9.66 | 16.53 | -4.46 | 3.78 | 5.00% | 8.0% | 9.7% |
| National Health Investors | (NHI) | 56.10 | 65.78 | 4.13 | 4.17 | 4.68 | 73.86 | 82.35 | 17.25 | 22.75 | 0.97 | 7.99 | 4.76% | 11.7% | 6.9% |
| Omega Healthcare Investors Inc. | (OHI) | 29.80 | 37.93 | 2.73 | 2.85 | 5.48 | 72.98 | 80.00 | 27.28 | 34.26 | 4.40 | 6.15 | 8.33% | 17.7% | 15.6% |
| Sabra Health Care REIT, Inc. | (SBRA) | 26.14 | 27.79 | 2.20 | 2.25 | 5.61 | 69.33 | 72.90 | 6.31 | 12.28 | 2.27 | -2.64 | 14.71% | 8.5% | 21.6% |
| Senior Housing Properties Trust | (SNH) | 22.23 | 22.32 | 1.74 | 1.75 | 6.99 | 89.14 | 97.50 | 0.40 | 7.42 | 0.57 | -3.74 | 0.00% | 2.4% | 1.9% |
| Universal Health Realty Income Trust | (UHT) | 40.06 | 48.42 | 2.80 | 2.74 | 5.20 | 91.97 | 90.97 | 20.87 | 25.59 | -2.14 | 0.00 | 0.80% | -1.5% | 0.7% |
| Ventas, Inc. | (VTR) | 57.28 | 71.06 | 4.36 | 4.43 | 4.39 | 70.43 | 71.56 | 24.06 | 28.14 | 1.61 | 3.12 | 7.59% | 7.7% | 10.1% |
| Average | 5.13 | 81.88 | 84.94 | 21.99 | 27.94 | -1.61 | 6.19 | 4.15% | 49.0% | 10.1% | |||||
I will base several valuations based on the FFO/share earnings metric. There are sectors where earnings volatility is high - and in those sectors, a valuation based on an earnings metric is less relevant. REIT FFO projection volatility is relatively low. A valuation based on current earnings is a very relevant metric. Let me display that historical data.
FFO estimates projection accuracy by Year
This spreadsheet shows how my historical FFO accuracy ratings are assessed. Low numbers are the better ratings. REITs that have had no earning disappointments greater than a negative 5% over the last five years are assigned a 1 rating. One 5% disappointment adds half a point to the rating. One 10% disappointment adds a full point to a rating. For the REITs that I have followed less than 5 years, the best rating is a 1.5. The beginning projection is one that I gathered at the start of that year. The ending number is the actual normalized FFO/share for that year. The FFO spread is the high FFO projection minus the low projection, with that result divided by the average projection. High spread numbers also add points to my accuracy ratings -- something that is currently done for SBRA and SNH. My historical accuracy rating assessments are used to assign a required rate of return for each REIT. HTA, MPW, NHI and SBRA were not added to my coverage universe until 2013. The appearance of high earnings accuracy for this group is due to my failure to gather beginning of the year projections in years prior to 2013.
| 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | Acc | FFO | |||||||||||||
| comp | Chng | Chng | Chng | Begin | End | Chng | Begin | End | Chng | Begin | End | Chng | Begin | Cur | Chng | Rate | Sprd | ||||
| HCN | 2% | -11% | -2% | 3.30 | 3.41 | 3% | 3.77 | 3.51 | -7% | 3.91 | 3.36 | -14% | 4.00 | 4.11 | 3% | 3.50 | 6% | ||||
| HCP | -2% | -7% | 0% | 2.55 | 2.69 | 5% | 2.80 | 2.76 | -1% | 2.97 | 3.01 | 1% | 3.06 | 2.97 | -3% | 1.50 | 33% | ||||
| HR | 2% | 6% | -7% | 1.37 | 1.15 | -16% | 1.30 | 1.31 | 1% | 1.39 | 1.32 | -5% | 1.41 | 1.46 | 4% | 3.80 | 3% | ||||
| HTA | 0.51 | 0.51 | 0% | 0.60 | 0.61 | 2% | 0.66 | 0.64 | -3% | 0.69 | 0.74 | 7% | 1.50 | 4% | |||||||
| LTC | -4% | -4% | -6% | 2.06 | 2.15 | 4% | 2.29 | 2.26 | -1% | 2.43 | 2.37 | -2% | 2.65 | 2.56 | -3% | 1.50 | 1% | ||||
| MPW | 3% | 23% | 0.71 | 0.71 | 0% | 0.90 | 0.90 | 0% | 1.07 | 0.96 | -10% | 1.12 | 1.07 | -4% | 3.00 | 2% | |||||
| NHI | 0% | 2% | 2.88 | 2.88 | 0% | 3.00 | 3.18 | 6% | 3.39 | 3.55 | 5% | 4.13 | 4.17 | 1% | 1.20 | 3% | |||||
| OHI | -9% | -5% | -6% | 1.85 | 1.89 | 2% | 1.94 | 2.19 | 13% | 2.24 | 2.53 | 13% | 2.73 | 2.85 | 4% | 2.00 | 2% | ||||
| SBRA | 1.31 | 1.31 | 0% | 1.41 | 1.41 | 0% | 1.72 | 1.84 | 7% | 2.20 | 2.25 | 2% | 2.00 | 4% | |||||||
| SNH | -3% | -6% | -2% | 1.78 | 1.73 | -3% | 1.86 | 1.75 | -6% | 1.84 | 1.69 | -8% | 1.74 | 1.75 | 1% | 2.50 | 2% | ||||
| UHT | -3% | 11% | -7% | 2.60 | 2.57 | -1% | 2.57 | 2.84 | 11% | 3.01 | 2.77 | -8% | 2.80 | 2.74 | -2% | 3.50 | 0% | ||||
| VTR | -3% | -6% | 5% | 3.10 | 3.37 | 9% | 3.67 | 3.80 | 4% | 3.99 | 4.14 | 4% | 4.36 | 4.43 | 2% | 1.50 | 6% | ||||
| Average | 2.29 | 5.43 | |||||||||||||||||||
While there are REITs with less than perfect records, most of the significant earnings disappointments (shortcomings up more than 5%) are in well in the past. Investors can have an acceptable level of confidence that health care REIT earnings projections will turn into something that closely resembles the actual earnings at year end.
This sector has two relatively new components (one of which is already expected to be merged and no longer traded in 2015) where FFO projections may look atypically volatile -- and my coverage universe contains one small REIT where analyst coverage is not consistent. I want to set up a system where I have a way of double checking those projections. I want to show that data because it can give you a feel for what you (as a retail investor) can do when you come across stocks lacking earning projections. In most cases, "run rate" trends are a great substitute for analyst annual projections. In almost all cases, company guidance is a good substitute for analyst projections -- because analyst projections strongly echo company projections. This is a sub-sector where most of the components provide guidance.
Last Eight Quarters FFO/share and run rate Price/FFO Ratios
LTM = last twelve months, or the sum of the last four quarter's FFOs. The "Q3 only" price to FFO used the Q3-14 FFO times four. When a REIT offers guidance, the midpoint of that number is used as my run rate projection. In all other cases, "RnRt FFO" is my best guess at the 2014 "run rate" FFO/share. When there is no growth trend, I will take the Q3-14 FFO and multiply by four.
| Prior FFO/Qtr | FFO/Quarter | Sum | Price | LTM | Q3 only | 2014 | P/FFO | RnRt | RnRt | |||||||
| Co. | Q4-12 | Q1-13 | Q2-13 | Q3-13 | Q4-13 | Q1-14 | Q2-14 | Q3-14 | 12-05 | Pr/FFO | Pr/FFO | FFO | 12-05 | FFO | P/FFO | |
| AVIV | 0.00 | 0.43 | 0.43 | 0.38 | 0.41 | 0.43 | 0.40 | 0.45 | 1.69 | 33.86 | 20.04 | 18.81 | 1.75 | 19.35 | 1.76 | 19.24 |
| DOC | 0.00 | 0.03 | 0.03 | 0.03 | 0.14 | 0.12 | 0.17 | 0.17 | 0.60 | 15.60 | 26.00 | 22.94 | 0.71 | 21.97 | 0.67 | 23.28 |
| HCN | 0.85 | 0.91 | 0.93 | 0.97 | 0.99 | 1.00 | 1.06 | 1.04 | 4.09 | 73.99 | 18.09 | 17.79 | 4.11 | 18.00 | 4.10 | 18.05 |
| HCP | 0.72 | 0.74 | 0.72 | 0.79 | 0.76 | 0.75 | 0.75 | 0.75 | 3.01 | 44.30 | 14.72 | 14.77 | 2.97 | 14.92 | 3.01 | 14.72 |
| HR | 0.31 | 0.32 | 0.32 | 0.32 | 0.36 | 0.35 | 0.36 | 0.37 | 1.44 | 26.31 | 18.27 | 17.78 | 1.46 | 18.02 | 1.44 | 18.27 |
| HTA | 0.16 | 0.16 | 0.16 | 0.16 | 0.17 | 0.18 | 0.18 | 0.19 | 0.72 | 12.91 | 17.93 | 16.99 | 0.74 | 17.45 | 0.74 | 17.45 |
| LTC | 0.57 | 0.61 | 0.57 | 0.57 | 0.62 | 0.63 | 0.64 | 0.64 | 2.53 | 41.41 | 16.37 | 16.18 | 2.56 | 16.18 | 2.55 | 16.24 |
| MPW | 0.25 | 0.25 | 0.24 | 0.25 | 0.24 | 0.26 | 0.26 | 0.27 | 1.03 | 13.40 | 13.01 | 12.41 | 1.07 | 12.52 | 1.06 | 12.64 |
| NHI | 0.84 | 0.85 | 0.87 | 0.94 | 0.90 | 1.05 | 1.05 | 1.05 | 4.05 | 65.78 | 16.24 | 15.66 | 4.17 | 15.77 | 4.20 | 15.66 |
| OHI | 0.58 | 0.63 | 0.62 | 0.62 | 0.65 | 0.68 | 0.69 | 0.73 | 2.75 | 37.93 | 13.79 | 12.99 | 2.85 | 13.31 | 2.84 | 13.36 |
| SBRA | 0.38 | 0.46 | 0.41 | 0.47 | 0.49 | 0.55 | 0.57 | 0.51 | 2.12 | 27.79 | 13.11 | 13.62 | 2.25 | 12.35 | 2.18 | 12.75 |
| SNH | 0.43 | 0.43 | 0.42 | 0.42 | 0.43 | 0.43 | 0.43 | 0.43 | 1.72 | 22.32 | 12.98 | 12.98 | 1.75 | 12.75 | 1.72 | 12.98 |
| UHT | 0.70 | 0.70 | 0.66 | 0.68 | 0.70 | 0.69 | 0.68 | 0.67 | 2.74 | 48.42 | 17.67 | 18.07 | 2.74 | 17.67 | 2.72 | 17.80 |
| VTR | 0.89 | 1.03 | 1.01 | 1.04 | 1.06 | 1.09 | 1.12 | 1.12 | 4.39 | 71.06 | 16.19 | 15.86 | 4.43 | 16.04 | 4.46 | 15.93 |
The spreadsheet above provides evidence that analyst earnings projections are basically "run rate" earnings projections. This supporting data should provide investors with additional confidence in the analysts earnings projections. And when confidence is combined with a growing trend in earnings, investors should feel more confident in their dividend growth projections.
Let's next see the total return stats since the beginning of 2010.
Price Changes and Total Returns Since the Beginning of 2012, 2011 and 2010
Dividend growth takes the current or Q4-14 dividend minus the Q4-09 dividend divided by the Q4-09 dividend
| 12-05-14 | 12-31-11 | Change | 12-31-10 | Change | 12-31-09 | Change | Div Grth | |||||||
| Company and ticker | Price | Price | Price | Pr+Dist | Price | Price | Pr+Dist | Price | Price | Pr+Dist | Since 10 | |||
| Health Care REIT, Inc. | HCN | 73.99 | 54.53 | 35.69 | 52.56 | 47.64 | 55.31 | 80.63 | 44.32 | 66.94 | 100.34 | 16.91 | ||
| Health Care Properties | HCP | 44.30 | 41.43 | 6.93 | 22.09 | 36.79 | 20.41 | 42.70 | 30.54 | 45.06 | 78.00 | 18.48 | ||
| Healthcare Realty Trust Incorporated | HR | 26.31 | 18.59 | 41.53 | 60.89 | 21.17 | 24.28 | 46.95 | 21.46 | 22.60 | 50.56 | -22.08 | ||
| LTC Properties Inc. | LTC | 41.41 | 30.86 | 34.19 | 52.80 | 28.08 | 47.47 | 73.91 | 26.75 | 54.80 | 88.50 | 30.77 | ||
| Medical Properties Trust Inc. | MPW | 13.40 | 9.87 | 35.76 | 60.49 | 10.83 | 23.73 | 53.65 | 10.00 | 34.00 | 74.40 | 5.00 | ||
| National Health Investors | NHI | 65.78 | 43.18 | 52.34 | 72.16 | 45.14 | 45.72 | 70.21 | 36.99 | 77.83 | 114.10 | 40.00 | ||
| Omega Healthcare Investors Inc. | OHI | 37.93 | 19.35 | 96.02 | 124.75 | 22.44 | 69.03 | 100.71 | 19.45 | 95.01 | 138.61 | 73.33 | ||
| Senior Housing Properties Trust | SNH | 22.32 | 22.44 | -0.53 | 20.19 | 21.94 | 1.73 | 29.72 | 21.87 | 2.06 | 36.76 | 8.33 | ||
| Universal Health Realty Income Trust | UHT | 48.42 | 39.00 | 24.15 | 43.31 | 36.53 | 32.55 | 59.64 | 32.03 | 51.17 | 89.60 | 5.88 | ||
| Ventas, Inc. | VTR | 71.06 | 55.13 | 28.90 | 43.71 | 52.48 | 35.40 | 55.35 | 43.74 | 62.46 | 91.29 | 52.20 | ||
| 35.50 | 55.20 | 35.56 | 61.35 | 51.19 | 86.22 | |||||||||
| SPDR Dow Jones REIT ETF | RWR | 90.02 | 64.40 | 39.78 | 50.86 | 61.02 | 47.53 | 62.55 | 49.21 | 82.93 | 105.20 | |||
| SPDR S&P 500 ETF | SPY | 208.00 | 125.50 | 65.74 | 73.74 | 125.75 | 65.41 | 75.45 | 111.44 | 86.65 | 100.01 | |||
On average, this sub-sector has under performed the S&P 500 and the Dow Jones REIT ETF since 2010. This should not come as a surprise. This REIT sub-sector had less dividend cuts during the great recession. It had less of a price dip because of that. And with less of a dip, there was less of a recovery. One can see that there is a strong correlation between share price appreciation and dividend growth. Three of the four stocks with total returns over 90% had superior dividend growth over that period.
Dividend growth
Health Care REIT sub-sector average dividend growth has been in the mid single digits for five of the last six years. Growth has averaged 4.855% over those six years. Dividend growth was influenced (or decreased) by the credit crisis. Five of these 14 stocks are in the CCC list. Let's pause and take a look at that data.
Dividend Growth History based on Q4 Dividends
The dividends are displayed rounded to a tenth of a the penny while some have dividends encoded in the data at a hundredth of a penny. For the last two columns, "Av Growth Last 2Yrs" is for the average dividend growth over the last two years and "Av Growth Last 6 Yrs" is average growth over six years. The average is derived by calculating the dividend growth for each year, and dividing by the number of years. This is not a compounded growth rate.
| Dividends/Share/Quarter | Percentage Dividend Growth | Av Growth Last | |||||||||||||||
| Company and ticker | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 08-09 | 09-10 | 10-11 | 11-12 | 12-13 | 13-14 | 2Yrs | 6Yrs | ||
| Aviv REIT, Inc. | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 36.0 | 36.0 | na | na | na | na | na | 0.00 | na | na | ||
| Physicians Realty Trust | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 22.5 | 22.5 | na | na | na | na | na | 0.00 | na | na | ||
| Health Care REIT, Inc. | 68.0 | 68.0 | 69.0 | 71.5 | 74.0 | 76.5 | 79.5 | 0.00 | 1.47 | 3.62 | 3.50 | 3.38 | 3.92 | 3.65 | 2.65 | ||
| Health Care Properties | 45.5 | 46.0 | 46.5 | 48.0 | 50.0 | 52.5 | 54.5 | 1.10 | 1.09 | 3.23 | 4.17 | 5.00 | 3.81 | 4.40 | 3.06 | ||
| Healthcare Realty Trust Incorporated | 38.5 | 38.5 | 30.0 | 30.0 | 30.0 | 30.0 | 30.0 | 0.00 | -22.08 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | -3.68 | ||
| Healthcare Trust of America, Inc. | 0.0 | 0.0 | 0.0 | 0.0 | 14.4 | 14.4 | 14.5 | na | na | na | na | 0.00 | 0.87 | 0.43 | na | ||
| LTC Properties Inc. | 13.0 | 13.0 | 14.0 | 14.0 | 15.5 | 17.0 | 17.0 | 0.00 | 7.69 | 0.00 | 10.71 | 9.68 | 0.00 | 4.84 | 4.68 | ||
| Medical Properties Trust Inc. | 20.0 | 20.0 | 20.0 | 20.0 | 20.0 | 20.0 | 21.0 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 5.00 | 2.50 | 0.83 | ||
| National Health Investors | 55.0 | 55.0 | 60.5 | 65.0 | 67.0 | 73.5 | 77.0 | 0.00 | 10.00 | 7.44 | 3.08 | 9.70 | 4.76 | 7.23 | 5.83 | ||
| Omega Healthcare Investors Inc. | 30.0 | 30.0 | 37.0 | 40.0 | 44.0 | 48.0 | 52.0 | 0.00 | 23.33 | 8.11 | 10.00 | 9.09 | 8.33 | 8.71 | 9.81 | ||
| Sabra Health Care REIT, Inc. | 0.0 | 0.0 | 0.0 | 32.0 | 33.0 | 34.0 | 39.0 | na | na | na | 3.13 | 3.03 | 14.71 | 8.87 | na | ||
| Senior Housing Properties Trust | 35.0 | 36.0 | 37.0 | 38.0 | 39.0 | 39.0 | 39.0 | 2.86 | 2.78 | 2.70 | 2.63 | 0.00 | 0.00 | 0.00 | 1.83 | ||
| Universal Health Realty Income Trust | 59.0 | 59.5 | 60.5 | 61.0 | 62.0 | 62.5 | 63.0 | 0.85 | 1.68 | 0.83 | 1.64 | 0.81 | 0.80 | 0.80 | 1.10 | ||
| Ventas, Inc. | 51.2 | 51.2 | 53.5 | 57.5 | 62.0 | 72.5 | 78.0 | 0.00 | 4.39 | 7.48 | 7.83 | 16.94 | 7.59 | 12.26 | 7.37 | ||
| Average | 0.48 | 3.79 | 4.77 | 6.67 | 7.20 | 6.22 | |||||||||||
I want to move on to three spreadsheets that will inform us on the current valuations: The historical Price/FFO ratios, Dividend/FFOs and yields spreadsheet.
Historical yields for the sector:
| March 2005: 6.99% | June: 6.09% | September: 6.22% | December: 6.73% |
| March 2006: 6.18% | June: 6.79% | September: 5.85% | December: 5.28% |
| March 2007: 5.33% | June: 6.24% | September: 5.90% | December: 5.77% |
| March 2008: 5.84% | June: 6.33% | September: 5.25% | December: 6.89% |
| March 2009: 9.11% | June: 7.88% | September: 6.67% | December: 6.31% |
| March 2010: 6.67% | June: 6.09% | September: 5.62% | December: 5.75% |
| March 2011: 5.48% | June: 5.64% | September: 6.02% | December: 5.34% |
| March 2012: 5.16% | June: 4.84% | September: 4.89% | December: 4.69% |
| March 2013: 4.66% | June: 5.09% | September: 5.49% | December: 6.02% |
| March 2014: 5.63% | June: 5.37% | September: 5.77% | December: |
The sector average yields have stayed fairly consistent in the five's and six's since 2005. With a current yield of 5.13%, we are at the lower end of this range. This metric provides evidence that we are at a sub-optimal time to be adding holdings in this sector.
Health Care Price/FFO Ratios 12-05
The analyst projected FFO stats for UTH that I sporadically find at Yahoo Finance have frequently looked 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 Growth | Price/FFO | 14 FFO Range | |||||||||||||
| Co. | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 12-13 | 13-14 | 14-15 | 2013 | 2014 | 2015 | High | Low | Range | |
| AVIV | 0.00 | 0.00 | 0.00 | 1.26 | 1.75 | 2.11 | na | 38.89 | 20.57 | 26.87 | 19.35 | 16.05 | 186 | 169 | 9.71% | |
| DOC | 0.00 | 0.00 | 0.00 | 0.26 | 0.71 | 1.08 | na | 173.08 | 52.11 | 60.00 | 21.97 | 14.44 | 74 | 67 | 9.86% | |
| HCN | 3.13 | 3.41 | 3.51 | 3.36 | 4.11 | 4.36 | -4.27 | 22.32 | 6.08 | 22.02 | 18.00 | 16.97 | 415 | 391 | 5.84% | |
| HCP | 2.19 | 2.69 | 2.76 | 3.01 | 2.97 | 3.09 | 9.06 | -1.33 | 4.04 | 14.72 | 14.92 | 14.34 | 305 | 206 | 33.33% | |
| HR | 1.29 | 1.15 | 1.31 | 1.32 | 1.46 | 1.56 | 0.76 | 10.61 | 6.85 | 19.93 | 18.02 | 16.87 | 148 | 144 | 2.74% | |
| HTA | 0.38 | 0.51 | 0.61 | 0.64 | 0.74 | 0.79 | 4.92 | 15.62 | 6.76 | 20.17 | 17.45 | 16.34 | 75 | 72 | 4.05% | |
| LTC | 1.88 | 2.15 | 2.26 | 2.37 | 2.56 | 2.75 | 4.87 | 8.02 | 7.42 | 17.47 | 16.18 | 15.06 | 258 | 255 | 1.17% | |
| MPW | 0.81 | 0.71 | 0.90 | 0.96 | 1.07 | 1.22 | 6.67 | 11.46 | 14.02 | 13.96 | 12.52 | 10.98 | 108 | 106 | 1.87% | |
| NHI | 2.76 | 2.88 | 3.18 | 3.55 | 4.17 | 4.59 | 11.64 | 17.46 | 10.07 | 18.53 | 15.77 | 14.33 | 422 | 411 | 2.64% | |
| OHI | 1.61 | 1.89 | 2.19 | 2.53 | 2.85 | 2.96 | 15.53 | 12.65 | 3.86 | 14.99 | 13.31 | 12.81 | 287 | 282 | 1.75% | |
| SBRA | 0.00 | 1.31 | 1.41 | 1.84 | 2.25 | 2.47 | 30.50 | 22.28 | 9.78 | 15.10 | 12.35 | 11.25 | 228 | 220 | 3.56% | |
| SNH | 1.70 | 1.73 | 1.75 | 1.69 | 1.75 | 1.82 | -3.43 | 3.55 | 4.00 | 13.21 | 12.75 | 12.26 | 178 | 174 | 2.29% | |
| UHT | 2.61 | 2.57 | 2.84 | 2.77 | 2.74 | 2.72 | -2.46 | -1.08 | -0.73 | 17.48 | 17.67 | 17.80 | 274 | 274 | 0.00% | |
| VTR | 2.85 | 3.37 | 3.80 | 4.14 | 4.43 | 4.66 | 8.95 | 7.00 | 5.19 | 17.16 | 16.04 | 15.25 | 448 | 422 | 5.87% | |
| Average | 6.89 | 24.32 | 10.72 | 20.83 | 16.16 | 14.63 | ||||||||||
Historical Price/FFO ratios for the sector:
| March 2007: 15.23 | June: 13.19 | September: 14.18 | December: 14.55 |
| March 2008: 14.17 | June: 13.27 | September: 15.95 | December: 12.38 |
| March 2009: 9.42 | June: 10.84 | September: 12.61 | December: 13.90 |
| March 2010: 12.61 | June: 14.10 | September: 15.45 | December: 15.41 |
| March 2011: 15.07 | June: 14.62 | September: 12.91 | December: 14.95 |
| March 2012: 14.21 | June: 15.25 | September: 15.05 | December: 15.82 |
| March 2013: 17.18 | June: 15.84 | September: 15.21 | December: 16.67 |
| March 2014: 13.92 | June: 14.73 | September: 14.10 | December: |
The new additions AVIV and DOC skewed the sector average higher in 2013. For example, without those two, the December ending average for 2013 would have been 14.07.
The sector average ratios have stayed fairly consistent in the mid to low teens since 2007. With a current ratio of 16.16, we are at the high end of this range. This metric also provides evidence that we are at a sub-optimal time to be adding holdings in this sector.
Dividend/FFO Ratios - Explaining Dividend Growth
REITs that retain more FFO/share than average to go towards future expansion should be able to also grow their dividends at a faster pace than average. The stats below offers at least a partial explanation of LTC's, NHP's, OHI's and VTR's better-than-average dividend growth, and offers hints as to why HR and UHT have underperformed.
| FFO / Share | Q1 annualized Dividend | Div/FFO Ratios | ||||||||||||||||
| Co. | 08 | 09 | 10 | 11 | 12 | 13 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 |
| HCN | 3.38 | 3.12 | 3.13 | 3.41 | 3.51 | 3.36 | 2.64 | 2.72 | 2.72 | 2.86 | 2.96 | 3.06 | 78% | 87% | 87% | 84% | 84% | 91% |
| HCP | 2.25 | 2.14 | 2.19 | 2.69 | 2.76 | 3.01 | 1.82 | 1.84 | 1.86 | 1.92 | 2.00 | 2.10 | 81% | 86% | 85% | 71% | 72% | 70% |
| HR | 1.63 | 1.65 | 1.29 | 1.15 | 1.31 | 1.32 | 1.54 | 1.54 | 1.20 | 1.20 | 1.20 | 1.20 | 94% | 93% | 93% | 104% | 92% | 91% |
| HTA | 0.00 | 0.00 | 0.38 | 0.51 | 0.61 | 0.64 | 0.00 | 0.00 | 0.00 | 0.00 | 0.57 | 0.57 | 94% | 90% | ||||
| LTC | 1.91 | 1.89 | 1.88 | 2.15 | 2.26 | 2.37 | 1.56 | 1.56 | 1.56 | 1.68 | 1.74 | 1.86 | 82% | 83% | 83% | 78% | 77% | 78% |
| MPW | 0.50 | 0.81 | 0.81 | 0.71 | 0.90 | 0.96 | 1.08 | 0.80 | 0.80 | 0.80 | 0.80 | 0.80 | 216% | 99% | 99% | 113% | 89% | 83% |
| NHI | 2.29 | 2.33 | 2.76 | 2.88 | 3.18 | 3.55 | 2.20 | 2.20 | 2.30 | 2.46 | 2.60 | 2.68 | 96% | 94% | 83% | 85% | 82% | 75% |
| OHI | 1.30 | 1.47 | 1.61 | 1.89 | 2.19 | 2.53 | 1.16 | 1.20 | 1.28 | 1.48 | 1.64 | 1.80 | 89% | 82% | 80% | 78% | 75% | 71% |
| SBRA | 0.00 | 0.00 | 0.00 | 1.31 | 1.41 | 1.84 | 0.00 | 0.00 | 0.00 | 1.28 | 1.32 | 1.36 | 98% | 94% | 74% | |||
| SNH | 1.67 | 1.69 | 1.70 | 1.73 | 1.75 | 1.69 | 1.40 | 1.40 | 1.44 | 1.48 | 1.52 | 1.56 | 84% | 83% | 85% | 86% | 87% | 92% |
| UHT | 2.49 | 2.80 | 2.61 | 2.57 | 2.84 | 2.77 | 2.32 | 2.36 | 2.40 | 2.42 | 2.44 | 2.48 | 93% | 84% | 92% | 94% | 86% | 90% |
| VTR | 2.74 | 2.66 | 2.85 | 3.37 | 3.80 | 4.14 | 2.05 | 2.05 | 2.14 | 2.30 | 2.48 | 2.68 | 75% | 77% | 75% | 68% | 65% | 65% |
| Average | 98.83 | 86.80 | 86.12 | 87.26 | 83.07 | 80.88 | ||||||||||||
The Dividend/FFO ratios are falling -- and that should be good news when it comes to forward dividend growth expectations. Currently, the Dividend/FFO ratio is 81.88%. The average Dividend/FFO ratio for years 2008 through 2013 is 85.57%. This metric provides evidence that we expect better "on average" dividend growth going forward. This ratio partially (or "mostly," but not "completely") justifies the higher-than-historical-average valuations found in the current yields and price/FFO metrics. Put in different words, the historical yield and price/FFO metrics are not comparing apples to apples. The 2014 vintage is a better grade of apples.
Setting the CAGRs
The two key concepts I derive from the sector average numbers from the long term trend data are that (1) CAGR projections need to be in rough alignment with FFO growth trends, and that (2) rising dividend to FFO ratios will cause smaller dividend growth in the future, so rising dividend/FFO ratios should result in falling CAGR projections. The implementation of those two concepts will cause me to have some CAGR projections that are not in alignment with the CAGR projections from third parties. I do not believe I am being over cautious by doing that. My purpose in going to this extra effort is to find cases where the market might be wrong. If my numbers consistently agreed with those of the market, then the extra effort would be spent without the reward of further enlightenment. My personal investing experience has taught me to beware of falling CAGR projections. I would not mind having a system that occasionally sent a few false warnings as long as it does a good job at producing nearly all warnings that prove to be true. This data omits three of the younger REITs with shorter historical records. I have already discussed the creation of price implied CAGRs in three prior segments of this series -- so that discussion should not be needed again.
Long-term metric trends
The average calculation for growth is for ten years -- for 2005 through 2014
The first average is the sum of changes for each individual year over ten year period - with that result divided by 10
The second average is the difference between the current and beginning number, divided by the beginning number - with that result divided by 10
At the far right is My CAGR, Yahoo's CAGR, David Fish's CCC List CAGR, the Last Five-Year average FFO Growth and Last 3 Years average dividend growth
| Co. | 04 | 05 | 06 | 07 | 08 | 09 | 10 | 11 | 12 | 13 | 14 | 15 | Average | Average | CAGR | PI-CAGRs & Yahoo | ||||
| HCN | FFO | 2.86 | 3.03 | 2.94 | 3.13 | 3.38 | 3.12 | 3.13 | 3.41 | 3.51 | 3.36 | 4.11 | 4.36 | My | 4.80% | TR-RRR | 5.36% | |||
| Growth | 5.94 | -2.97 | 6.46 | 7.99 | -7.69 | 0.32 | 8.95 | 2.93 | -4.27 | 22.32 | 6.08 | 4.01% | 4.37% | Last 3 | 3.60% | P/E Ratio | 6.75% | |||
| Div | 2.34 | 2.40 | 2.48 | 2.56 | 2.64 | 2.72 | 2.72 | 2.86 | 2.96 | 3.06 | 3.18 | CCC | 5.20% | Yahoo Q3-14 | 5.70% | |||||
| Growth | 2.56 | 3.33 | 3.23 | 3.13 | 3.03 | 0.00 | 5.15 | 3.50 | 3.38 | 3.92 | 3.12% | 3.59% | Last5 | 7.20% | Yahoo Q2-14 | 5.83% | ||||
| Div/FFO | 82% | 79% | 84% | 82% | 78% | 87% | 87% | 84% | 84% | 91% | 77% | 83.42% | Brkr | 4.50% | ||||||
| HCP | FFO | 1.66 | 1.89 | 1.82 | 2.14 | 2.25 | 2.14 | 2.19 | 2.69 | 2.76 | 3.01 | 2.97 | 3.09 | My | 3.80% | TR-RRR | 4.36% | |||
| Growth | 13.86 | -3.70 | 17.58 | 5.14 | -4.89 | 2.34 | 22.83 | 2.60 | 9.06 | -1.33 | 4.04 | 5.36% | 7.89% | Last 3 | 4.32% | P/E Ratio | 3.61% | |||
| Div | 1.67 | 1.68 | 1.70 | 1.78 | 1.82 | 1.84 | 1.86 | 1.92 | 2.00 | 2.10 | 2.18 | CCC | 3.70% | Yahoo Q3-14 | 3.00% | |||||
| Growth | 0.60 | 1.19 | 4.71 | 2.25 | 1.10 | 1.09 | 3.23 | 4.17 | 5.00 | 3.81 | 2.71% | 3.05% | Last5 | 7.44% | Yahoo Q2-14 | 3.43% | ||||
| Div/FFO | 101% | 89% | 93% | 83% | 81% | 86% | 85% | 71% | 72% | 70% | 73% | 80.43% | Brkr | 5.50% | ||||||
| HR | FFO | 2.76 | 2.28 | 2.13 | 1.51 | 1.63 | 1.65 | 1.29 | 1.15 | 1.31 | 1.32 | 1.46 | 1.56 | My | 3.00% | TR-RRR | 3.04% | |||
| Growth | -17.39 | -6.58 | -29.11 | 7.95 | 1.23 | -21.82 | -10.85 | 13.91 | 0.76 | 10.61 | 6.85 | -2.73% | -4.71% | Last 3 | 0.00% | P/E Ratio | 5.06% | |||
| Div | 2.52 | 2.60 | 2.64 | 2.64 | 1.54 | 1.54 | 1.20 | 1.20 | 1.20 | 1.20 | 1.20 | CCC | 0.00% | Yahoo Q3-14 | 4.00% | |||||
| Growth | 3.17 | 1.54 | 0.00 | -41.67 | 0.00 | -22.08 | 0.00 | 0.00 | 0.00 | 0.00 | -5.90% | -5.24% | Last5 | 4.26% | Yahoo Q2-14 | 4.00% | ||||
| Div/FFO | 91% | 114% | 124% | 175% | 94% | 93% | 93% | 104% | 92% | 91% | 82% | 106.27% | Brkr | 3.25% | ||||||
| HTA | FFO | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.38 | 0.51 | 0.61 | 0.64 | 0.74 | 0.79 | My | 3.20% | TR-RRR | 2.95% | |||
| Growth | 34.21 | 19.61 | 4.92 | 15.62 | 6.76 | Last 3 | P/E Ratio | 4.36% | ||||||||||||
| Div | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.00 | 0.57 | 0.57 | 0.57 | CCC | 0.00% | Yahoo Q3-14 | 4.00% | |||||
| Growth | NaN | Infinity | 0.00 | 0.00 | Last5 | 16.22% | Yahoo Q2-14 | 4.00% | ||||||||||||
| Div/FFO | 0% | 0% | 94% | 90% | 78% | Brkr | 4.00% | |||||||||||||
| LTC | FFO | 1.54 | 1.70 | 1.83 | 1.90 | 1.91 | 1.89 | 1.88 | 2.15 | 2.26 | 2.37 | 2.56 | 2.75 | My | 4.20% | TR-RRR | 7.96% | |||
| Growth | 10.39 | 7.65 | 3.83 | 0.53 | -1.05 | -0.53 | 14.36 | 5.12 | 4.87 | 8.02 | 7.42 | 5.02% | 6.62% | Last 3 | 6.71% | P/E Ratio | 5.20% | |||
| Div | 0.40 | 0.44 | 0.48 | 0.50 | 0.52 | 0.52 | 0.52 | 0.56 | 0.58 | 0.62 | 0.68 | CCC | 0.00% | Yahoo Q3-14 | 4.00% | |||||
| Growth | 10.00 | 9.09 | 4.17 | 4.00 | 0.00 | 0.00 | 7.69 | 3.57 | 6.90 | 9.68 | 5.51% | 7.00% | Last5 | 7.96% | Yahoo Q2-14 | 4.00% | ||||
| Div/FFO | 78% | 78% | 79% | 79% | 82% | 83% | 83% | 78% | 77% | 78% | 80% | 79.58% | Brkr | 4.00% | ||||||
| Co. | 04 | 05 | 06 | 07 | 08 | 09 | 10 | 11 | 12 | 13 | 14 | 15 | average | average | CAGR | |||||
| MPW | FFO | 0.31 | 0.74 | 0.93 | 0.80 | 0.50 | 0.81 | 0.81 | 0.71 | 0.90 | 0.96 | 1.07 | 1.22 | My | 4.50% | TR-RRR | 5.53% | |||
| Growth | 138.71 | 25.68 | -13.98 | -37.50 | 62.00 | 0.00 | -12.35 | 26.76 | 6.67 | 11.46 | 14.02 | 8.28% | 24.52% | Last 3 | 1.67% | P/E Ratio | 3.62% | |||
| Div | 0.00 | 0.00 | 0.84 | 1.08 | 1.08 | 0.80 | 0.80 | 0.80 | 0.80 | 0.80 | 0.84 | CCC | 0.00% | Yahoo Q3-14 | 5.90% | |||||
| Growth | 0.00 | 0.00 | 0.00 | 5.00 | Last5 | 9.31% | Yahoo Q2-14 | 5.70% | ||||||||||||
| Div/FFO | 135% | 216% | 99% | 99% | 113% | 89% | 83% | 79% | 100.23% | Brkr | 0.00% | |||||||||
| NHI | FFO | 2.42 | 2.28 | 2.67 | 2.49 | 2.29 | 2.33 | 2.76 | 2.88 | 3.18 | 3.55 | 4.17 | 4.59 | My | 5.20% | TR-RRR | 5.13% | |||
| Growth | -5.79 | 17.11 | -6.74 | -8.03 | 1.75 | 18.45 | 4.35 | 10.42 | 11.64 | 17.46 | 10.07 | 7.68% | 7.23% | Last 3 | 6.16% | P/E Ratio | 4.84% | |||
| Div | 1.70 | 1.80 | 1.92 | 2.00 | 2.20 | 2.20 | 2.30 | 2.46 | 2.60 | 2.68 | 2.94 | CCC | 5.40% | Yahoo Q3-14 | 6.30% | |||||
| Growth | 5.88 | 6.67 | 4.17 | 10.00 | 0.00 | 4.55 | 6.96 | 5.69 | 3.08 | 9.70 | 5.67% | 7.29% | Last5 | 10.79% | Yahoo Q2-14 | 5.60% | ||||
| Div/FFO | 70% | 79% | 72% | 80% | 96% | 94% | 83% | 85% | 82% | 75% | 71% | 81.82% | Brkr | 5.50% | ||||||
| OHI | FFO | 0.89 | 0.79 | 1.32 | 1.42 | 1.30 | 1.47 | 1.61 | 1.89 | 2.19 | 2.53 | 2.85 | 2.96 | My | 4.50% | TR-RRR | 5.64% | |||
| Growth | -11.24 | 67.09 | 7.58 | -8.45 | 13.08 | 9.52 | 17.39 | 15.87 | 15.53 | 12.65 | 3.86 | 15.54% | 22.02% | Last 3 | 9.82% | P/E Ratio | 3.61% | |||
| Div | 0.68 | 0.80 | 0.92 | 1.04 | 1.16 | 1.20 | 1.28 | 1.48 | 1.64 | 1.80 | 1.96 | CCC | 2.00% | Yahoo Q3-14 | 2.00% | |||||
| Growth | 17.65 | 15.00 | 13.04 | 11.54 | 3.45 | 6.67 | 15.62 | 10.81 | 9.76 | 8.89 | 11.24% | 18.82% | Last5 | 13.06% | Yahoo Q2-14 | 3.00% | ||||
| Div/FFO | 76% | 101% | 70% | 73% | 89% | 82% | 80% | 78% | 75% | 71% | 69% | 78.77% | Brkr | 3.50% | ||||||
| SNH | FFO | 1.50 | 1.44 | 1.57 | 1.62 | 1.67 | 1.69 | 1.70 | 1.73 | 1.75 | 1.69 | 1.75 | 1.82 | My | 1.80% | TR-RRR | 1.91% | |||
| Growth | -4.00 | 9.03 | 3.18 | 3.09 | 1.20 | 0.59 | 1.76 | 1.16 | -3.43 | 3.55 | 4.00 | 2.41% | 1.67% | Last 3 | 1.78% | P/E Ratio | 1.49% | |||
| Div | 1.24 | 1.28 | 1.28 | 1.36 | 1.40 | 1.40 | 1.44 | 1.48 | 1.52 | 1.56 | 1.56 | CCC | 0.00% | Yahoo Q3-14 | 2.70% | |||||
| Growth | 3.23 | 0.00 | 6.25 | 2.94 | 0.00 | 2.86 | 2.78 | 2.70 | 2.63 | 0.00 | 2.34% | 2.58% | Last5 | 1.41% | Yahoo Q2-14 | 4.15% | ||||
| Div/FFO | 83% | 89% | 82% | 84% | 84% | 83% | 85% | 86% | 87% | 92% | 89% | 85.96% | Brkr | 2.50% | ||||||
| UHT | FFO | 2.63 | 2.47 | 2.44 | 2.50 | 2.49 | 2.80 | 2.61 | 2.57 | 2.84 | 2.77 | 2.74 | 2.72 | My | 1.80% | TR-RRR | 4.34% | |||
| Growth | -6.08 | -1.21 | 2.46 | -0.40 | 12.45 | -6.79 | -1.53 | 10.51 | -2.46 | -1.08 | -0.73 | 1.04% | 0.42% | Last 3 | 1.09% | P/E Ratio | 6.45% | |||
| Div | 1.98 | 2.02 | 2.24 | 2.28 | 2.32 | 2.36 | 2.40 | 2.42 | 2.44 | 2.48 | 2.50 | CCC | 2.40% | Yahoo Q3-14 | 2.40% | |||||
| Growth | 2.02 | 10.89 | 1.79 | 1.75 | 1.72 | 1.69 | 0.83 | 0.83 | 1.64 | 0.81 | 2.40% | 2.63% | Last5 | 0.94% | Yahoo Q2-14 | 2.40% | ||||
| Div/FFO | 75% | 82% | 92% | 91% | 93% | 84% | 92% | 94% | 86% | 90% | 91% | 89.50% | Brkr | 0.00% | ||||||
| VTR | FFO | 1.79 | 2.08 | 2.44 | 2.69 | 2.74 | 2.66 | 2.85 | 3.37 | 3.80 | 4.14 | 4.43 | 4.66 | My | 5.60% | TR-RRR | 5.42% | |||
| Growth | 16.20 | 17.31 | 10.25 | 1.86 | -2.92 | 7.14 | 18.25 | 12.76 | 8.95 | 7.00 | 5.19 | 8.56% | 14.75% | Last 3 | 8.03% | P/E Ratio | 4.99% | |||
| Div | 1.30 | 1.44 | 1.58 | 1.90 | 2.05 | 2.05 | 2.14 | 2.30 | 2.48 | 2.68 | 2.90 | CCC | 0.00% | Yahoo Q3-14 | 5.20% | |||||
| Growth | 10.77 | 9.72 | 20.25 | 7.89 | 0.00 | 4.39 | 7.48 | 7.83 | 8.06 | 8.21 | 8.46% | 12.31% | Last5 | 10.43% | Yahoo Q2-14 | 5.73% | ||||
| Div/FFO | 73% | 69% | 65% | 71% | 75% | 77% | 75% | 68% | 65% | 65% | 65% | 69.53% | Brkr | 5.50% | ||||||
The setting of a good CAGR projection is one of a few steps in the valuation process that is so important -- that each setting merits a short discussion. That discussion is provided below.
HCN - The five-year trend in FFO growth (from 2010 to projected 2015) is much better than the last three-year trend in dividend growth. One can see the growth in the quarterly actual FFO numbers. The dividend/FFO ratio is falling. HCN has a strong weighting in operating or RIDE-A Senior Housing properties where SSNOI (Same Store Net Operating Income) growth has been good. I could be overly conservative in my projection. Until I see a growth trend in the dividend that supports a 5% projection, my CAGR for HCN will stay under 5%. But once that trend starts, my CAGR projection will be rising.
HCP - The five-year trend in FFO growth (from 2010 to projected 2015) is much better than the last three-year trend in dividend growth. But one can not see the growth in the quarterly actual FFO numbers. Still, the dividend/FFO ratio is falling. HCP has a lighter weighting in operating properties. Based on a comparison of my projection to other parties, I could be lightly optimistic in my projection for HCP.
With HCP and LTC, one can actually see trends in how the size of the dividend/FFO ratio influences dividend growth. Things like this are more likely to happen with the payout ratios are high. Don't leave this spreadsheet without seeing this correlation. Read the dividend growth line without context, and you have what looks like a parade of random numbers less than six. The pace of change is constantly making small changes. Now read the dividend growth line using the
dividend/FFO ratio as your context. In every year when the ratio was above 85%, growth was low. With the current dividend/FFO ratio of 73%, forward dividend growth in the mid term should be above the long-term trend.
HR has a high weighting in MOBs (Medical Office Buildings), and that asset type has been the highest valued and best performing sub-sector for several years in a row. On the other hand, HR has had nothing but dividend cuts since 2007. And using 2007 as a starting point, HR has lacked FFO growth. Given that poor record, it is hard to put much faith in a dividend projection containing any growth. It is great to have HR's numbers surrounded by REITs that are good examples of this asset class.
Look at the dividend/FFO ratios on the bottom line of HR's numbers. There were multiple years of ratios over 100% before the dividend was first cut. HR is a triple-net, which implies that the FAD numbers are close to FFO. And REITs can live with a year or two of near 100% FAD payouts, but that condition cannot last. How could we tell that the dividend was not safe after the first cut? The cut was only to a 94% payout. How often do you see mid-90s payouts in these numbers? Not that often. The first dividend cut was not big enough. Add to that, the FFO kept falling.
HR's historical numbers provides an example of what we want to avoid. The numbers in the spreadsheet for the last 8 quarters provide an example of what we should find attractive. And the current dividend/FFO ratio is also attractive. Thus, there is a numeric justification for the expectation that some low level of dividend growth is in HR's future.
HTA is the second Health Care REIT with a strong weighting in MOBs. Unlike HR, HTA has growth in its FFO. The coverage ratio is just now reaching the point where it can safely increase the dividend. I set conservative CAGRs. I do not want to have higher projections than those offered by third parties. The dividend/FFO ratio does not support a high CAGR, but the FFO growth trend does. Just like with HCN, once a trend in dividend growth support a higher projection, my projection for HTA will be rising.
LTC is tempting the question "what have you done for me lately?" There has been no dividend growth in the last twelve months. FFO growth has been anemic the last four quarters. On the other hand, the long-term trends are good. Dividend coverage remain OK compared to the rest of the sector, but poor compared to LTC's historical record. My 4.20% projection could be low, but I see signs that justify that caution.
The year-over-year changes in this spreadsheet compare the first quarters of the year. At that time, LTC had a year-over-year increase. I now have the stats in my year-to-date spreadsheet that compares quarter over quarter numbers from Q4 -- and LTC has not had a LTM dividend increase. Can we find reasons why dividend growth has slowed? When the FFO change was negative in 2009 and 2010, dividend growth was zero. The quarterly FFO numbers have been flat lately. Perhaps an easier way to anticipate dividend growth is to look at the dividend/FFO ratio as the omen. Currently, the ratio is right at 80%. In three prior Q1s, the ratio has been over 80. In two of those three years, there was no dividend growth.
MPW is the lone heavily "Hospital" REIT. It needs company. I would like to know if it is the asset type that has contributed to the oscillations in FFO -- or if it was inferior management. UHT is moderately weighted in hospital assets -- and it has also had FFO oscillations. So there is some evidence that the asset type is a leading cause for the lack of consistent FFO growth. The short term growth in FFO has been great. I wish MPW had the kind of record (based on dividend growth) that generated faith in the company. The yield + CAGR looks very attractive.
NHI is one of the three superior dividend growth REITs in this subsector. The ten-year average dividend/FFO ratio for NHI is 81.81%. That is one of the lower ratios. The other two superior dividend growth REITs have had even better growth and lower ratios. NHI has had superior dividend growth in the years where the ratio was below 80%. NHI enters 2015 with a ratio lower than that. And the five-year trend in FFO growth is great. I set conservative CAGRs -- I am not going to set a CAGR above the third party sources. In this case, I think the third party sources are low balling NHI. Put in different words, I would be comfortable with a 6.5% CAGR if the third party sources had higher projections. I also need to note that some of NHI's recent growth has come from its shift from an extremely low leveraged company towards one that is "only" a very low leveraged company.
OHI is one of the three superior dividend growth REITs in this subsector. The ten-year average dividend/FFO ratio for OHI is 78.77%. The ten-year and five-year average FFO growth is good. On the other hand, the third party projections for CAGR is low. Even the price-implied CAGR numbers are low. Why? I believe the low ball projections come from two metrics that are not in this spreadsheet. (1) Medicaid was 53.0% of the OHI revenue mix; Medicare/Insurance was 39.2%; and private pay was 7.8%. That is a very low number for private pay. It is generally expected that growth in government payouts will slow at time passes. Health Care REITs with higher CAGRs have higher private pay percentages. (2) Interest or mortgage income was 12.92% of OHI's income and 16.78% of total investments. That is also a typical percentage. Interest income is a zero CAGR investment. So there are strong metric reasons to expect OHI's dividend growth to slow. The good news -- (1) This slowing is already priced in. (2) OHI still has a very good dividend/FFO ratio. It is due to this ratio and the current growth trend that I am willing to go above the anemic projections from the third parties. I am willing to wait until February, when we will get the 2015 FFO projection from OHI, before I lower my CAGR projection.
I will combine the commentary for SNH and UHT. Both have average ten-year and five-year FFO growth that are well below sector average. Both have dividend/FFO ratios that are well above sector average. Both have third party CAGR projections that are low. I agree with those third parties.
VTR is one of the three superior dividend growth REITs in this subsector. The ten-year average dividend/FFO ratio for VTR is 69.53% -- the lowest in the sector by far. As you can tell by reading the above data, I believe there is some projection magic in this ratio. VTR, along with fellow large-caps HCN and HCP, has a lower average cost on its debt. That assists in FFO growth. VTR also has a good weighting in RIDE-A properties where SSNOI growth should be higher. I think the third party sources are low-balling VTR's forward CAGR. Put in different words, I would be comfortable with a 7% CAGR if the third party sources had higher projections.
My RRR assessments are set based on the cap rates from the properties they own. REIT RRR's have nothing to do with earnings projection accuracy, bond ratings and bond yields. Below is the property type weightings I gathered for Q2-14. MOB heavy REITs have RRRs in the sevens. Senior Housing REITs have RRRs in the nines. Skilled Nursing REITs have RRRs in the tens. The lone Hospitals REIT has an RRR in the elevens.
Property Type Weightings
| Company | Hosptals | Skilled Nursing | RIDE-A Sen Hou | Assisted Living | MOBs | Life Science | Debt | My RRRs | ||
| Aviv REIT, Inc. | AVIV | 3% | 84% | 0% | 10% | 0% | 0% | 3% | 10.60 | |
| Physicians Realty Trust | DOC | 13% | 21% | 0% | 0% | 66% | 0% | 0% | 9.00 | |
| Health Care REIT, Inc. | HCN | 4% | 14% | 39% | 25% | 15% | 2% | 1% | 9.50 | |
| Health Care Properties | HCP | 5% | 28% | 4% | 33% | 13% | 15% | 3% | 9.10 | |
| Healthcare Realty Trust Incorporated | HR | 9% | 0% | 0% | 0% | 87% | 0% | 3% | 7.60 | |
| Healthcare Trust of America, Inc. | HTA | 5% | 0% | 0% | 4% | 90% | 0% | 1% | 7.40 | |
| LTC Properties Inc. | LTC | 0% | 50% | 0% | 40% | 0% | 0% | 10% | 9.60 | |
| Medical Properties Trust Inc. | MPW | 86% | 0% | 0% | 0% | 1% | 0% | 13% | 11.50 | |
| National Health Investors | NHI | 4% | 33% | 12% | 41% | 1% | 4% | 6% | 9.60 | |
| Omega Healthcare Investors Inc. | OHI | 2% | 89% | 0% | 2% | 0% | 0% | 8% | 10.70 | |
| Sabra Health Care REIT, Inc. | SBRA | 12% | 67% | 0% | 9% | 0% | 0% | 12% | 10.70 | |
| Senior Housing Properties Trust | SNH | 3% | 3% | 14% | 34% | 44% | 0% | 0% | 8.90 | |
| Universal Health Realty Income Trust | UHT | 43% | 0% | 0% | 0% | 55% | 0% | 2% | 9.50 | |
| Ventas, Inc. | VTR | 7% | 3% | 27% | 47% | 16% | 0% | 2% | 9.50 | |
I have provided evidence that what a Health Care REIT owns in a major factor in its valuation and performance in a previous article. There are two text-based computer outputs I generate that shows the importance of property type on 2014 returns. The 2014 numbers are typical of prior-year numbers.
Intra-year FFO Estimate Increases and Year to Date Returns: Did REITs with improving 2014 FFO estimates since the beginning of the year outperform this year?
The following companies (excluding AVIV) had 2014 FFO estimate increases since the beginning of 2014: HCN, HR, HTA, NHI, OHI, SBRA, SNH and VTR. Their mean price gain for the year is 21.01%. Their mean total return for the year is 26.89% -- and 5 of the 8 beat the sector median yearly price gain of 21.99%.
The following companies had 2014 FFO estimate decreases since the beginning of the year: DOC, HCP, LTC, MPW and UHT. Their mean price gain for the year is 19.39%. Their mean total return for the year is 25.44% -- and 1 of the 5 beat the sector median yearly price gain.
In other sectors where I test the importance of intra-year earnings changes -- the differences between the two grouping is dramatically different. With REITs in the Health Care sub-sector, where there can be huge differences in the cap rates between REITs in this same sub-sector, the differences are extremely muted.
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 23.37%.
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 19.96%.
The following had over 25% in RIDE-A senior housing using this quarter's numbers: HCN and VTR. Their average YTD price change 23.67%.
The following had over 85% in medical office buildings: HR and HTA. Their average YTD price change is 27.33%.
The following had over 40% in hospitals: MPW and UHT. Their average YTD price change is 15.26%
While there are still variances in returns caused by other factors, property type alone explains a lot about the yearly performance of each REIT.
Now that I have provided the data to justify my RRRs and CAGRs, it is time to look at current valuations and discuss out best purchase options. This is done in the spreadsheet that follows.
Yield + CAGR Total Return Expectations
The Total Return projection is the yield + dividend CAGR. FFO Accr is short the historical FFO accuracy. Consensus Ratings are also gathered from Yahoo Finance. The Div/FFO is the annualized Q4-14 dividend to 2015 FFO projection ratio.
| Company | Q4-14 | My | Total | Bonds | Fx Chrg | EPS | My | Total Rtn | Consensus | Price Implied CAGR | Div | Price | ||
| Yield | CAGR | Return | Ratings | Coverage | Accr | RRRs | - RRR | Ratings | RRR-Yld | P/FFO | /FFO | /FFO | ||
| Aviv REIT, Inc. | AVIV | 4.25% | 5.20% | 9.45% | BB | 3.2 | 3.00 | 10.60 | -1.15 | 3.0 | 6.35 | 6.65% | 68.25 | 16.05 |
| Physicians Realty Trust | DOC | 5.77% | 3.20% | 8.97% | NR | 4.0 | 3.00 | 9.00 | -0.03 | 1.8 | 3.23 | 3.44% | 83.33 | 14.44 |
| Health Care REIT, Inc. | HCN | 4.30% | 4.80% | 9.10% | BBB | 2.8 | 3.50 | 9.50 | -0.40 | 2.6 | 5.20 | 6.47% | 72.94 | 16.97 |
| Health Care Properties | HCP | 4.92% | 3.80% | 8.72% | BBB+ | 0.0 | 1.50 | 9.10 | -0.38 | 2.8 | 4.18 | 3.44% | 70.55 | 14.34 |
| Healthcare Realty Trust Incorporated | HR | 4.56% | 3.00% | 7.56% | BBB- | 2.8 | 3.80 | 7.60 | -0.04 | 3.2 | 3.04 | 4.47% | 76.92 | 16.87 |
| Healthcare Trust of America, Inc. | HTA | 4.49% | 3.20% | 7.69% | BBB | 3.8 | 1.50 | 7.40 | 0.29 | 2.8 | 2.91 | 3.74% | 73.42 | 16.34 |
| LTC Properties Inc. | LTC | 4.93% | 4.20% | 9.13% | NR | 6.2 | 1.50 | 9.60 | -0.47 | 2.6 | 4.67 | 4.66% | 74.18 | 15.06 |
| Medical Properties Trust Inc. | MPW | 6.27% | 4.50% | 10.77% | BB | 0.0 | 3.00 | 11.50 | -0.73 | 2.8 | 5.23 | 2.48% | 68.85 | 10.98 |
| National Health Investors | NHI | 4.68% | 5.20% | 9.88% | NR | 6.4 | 1.20 | 9.60 | 0.28 | 2.6 | 4.92 | 3.93% | 67.10 | 14.33 |
| Omega Healthcare Investors Inc. | OHI | 5.48% | 4.50% | 9.98% | BBB- | 3.9 | 2.00 | 10.70 | -0.72 | 3.3 | 5.22 | 3.51% | 70.27 | 12.81 |
| Sabra Health Care REIT, Inc. | SBRA | 5.61% | 5.80% | 11.41% | BB- | 3.3 | 2.00 | 10.70 | 0.71 | 2.0 | 5.09 | 1.95% | 63.16 | 11.25 |
| Senior Housing Properties Trust | SNH | 6.99% | 1.80% | 8.79% | BBB- | 3.5 | 2.50 | 8.90 | -0.11 | 3.6 | 1.91 | 1.16% | 85.71 | 12.26 |
| Universal Health Realty Income Trust | UHT | 5.20% | 1.80% | 7.00% | NR | 0.0 | 3.50 | 9.50 | -2.50 | 3.0 | 4.30 | 7.30% | 92.65 | 17.80 |
| Ventas, Inc. | VTR | 4.39% | 5.60% | 9.99% | BBB+ | 4.4 | 1.50 | 9.50 | 0.49 | 2.5 | 5.11 | 4.75% | 66.95 | 15.25 |
| Average | 5.13% | 4.04% | 9.18% | 4.02 | 2.76 | 4.38 | 4.14% | 73.88 | 14.63% | |||||
Stocks that are fairly valued will have Yield + CAGRs that are roughly equal to their RRRs or Required Rates of Return. Stocks that are under valued will have Yield + CAGRs that are higher than their RRRs. In a sector where the yields are lower than historical average and the price/FFO ratios are higher than average, one should not expect many stocks currently looking like good values. Only HTA, NHI, SBRA and VTR look undervalued, but not by much. As a group, these four (plus the addition of HCN) would make a very good portfolio for someone wanting a very large weighting in this sector. I believe the timing is wrong to do that. One the other hand, a strong dose of predictable and boring is just what a good portfolio doctor would prescribe for many retirement portfolios.
SBRA is relatively new to my coverage universe. It was not discussed when I was on the subject of setting my RRRs due to lacking much of a historical record. Let me briefly do that now. SBRA began with two years where the dividend/FFO ratio was in the 90s. Dividend growth was 3% in both 2012 and 2013. For 2014, with the dividend/FFO ratio in the 70s, dividend growth has taken off. 2014 dividend growth is a sector leading 14.71%. FFO growth was great in 2012 and 2014, but that growth is currently projected to slow in 2015. SBRA has already broken a very strong trend in the quarter FFO numbers with a disappointing Q3-14. The current five-year forward projection from Yahoo Finance is 7.7%, while in the prior quarter that projection was 9.5%. CAGR projections have SBRA have been volatile. I am being my conservative self in setting a 5.8% projection. But even with being conservative, that is the highest CAGR projection in this sector. SBRA is another REIT that is heavy in higher RRR Skilled Nursing properties. Investment in mortgage debt and preferred equities was a high 13.23%. A light weighting in Assisted Living assets that are strong in the private pay attribute provided SBRA with a good portfolio average in private pay.
For my "Retirement Portfolio for Dummies" that contains only twenty components, I have room for only one of these REITs. I strongly believe that VTR makes the best option. I love the low dividend/FFO ratio because I love "growth you can believe in." I like the good weighting in RIDE-A properties with the potential for higher SSNOI growth. Equity investors need to know and use their knowledge of debt metrics. VTR is tied for the best credit rating in the sector -- and its fixed charge coverage ratio is superior to many other options. VTR's historical FFO projection accuracy is tied for best in the sector. The dividend CAGR projection is second-highest in the sector. What VTR lacks in yield, it more than makes up in superior safety and growth.
NHI and SBRA both have strong growth attributes that makes them fine choices. I want to err on the side of safety when providing suggestions to retirees. Going by bond ratings, NHI and SBRA just can't compete on the safety attribute with VTR. MOB owning HTA appears to already have a lot of forward good news already priced into the stock. In my opinion, this is the wrong time to be purchasing REITs with extra-high valuations.
In summation, this sector offers a combination of safety and growth attributes that investors in retirement should find attractive. I hope I have provided enough intro material to stimulate some in-depth due diligence on your part on some of these options. There are several good contributors to Seeking Alpha who have provided a lot of content on this sector. Use this resource. I hope that the above information is something you can use in comparing choice A to choice B -- and that "metric-based comparison shopping" is something I find lacking in other articles.
