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Joe X

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  • I Found A Nice Margin Of Safety In Omega Healthcare Investors [View article]
    I would be careful about placing too much reliance on the rating agencies for credit predictions, particularly in real estate. All three (Fitch, Moody's, S&P) were spectacularly wrong when it came to analyzing residential real estate in the form of RMBS and CDO's. Their ratings for commercial mortgage-back securities (CMBS) were also faulty during the peak volume years of 2005-2007. About the only place they were actually on the conservative side was the REIT sector, which has seen only one default over the last 25 years (General Growth) and no losses.
    Jun 12 07:00 AM | 1 Like Like |Link to Comment
  • A Brand New Mortgage REIT That May Deliver Something Special [View article]
    Brad - thanks for bringing United Development Funding (UDF) to everyone's attention. However, I'm going to agree with more than a few of the guys above that UDF has a ton of intrinsic risk that is not nearly offset by an 8% dividend.

    At the bottom of the housing cycle, there is nothing more worthless than undeveloped or partially developed residential lots. While it's true that there is equity below UDF's loans, that equity will quickly vaporize when the cycle turns, and borrowers will not be able to stand up to their commitments. If you want an example of how this might play out in a public REIT format, look no further than iStar Financial, which is still trading 70% below it 2007 peak and hasn't been able to reinstate a dividend. Going into the downturn, iStar prided itself on itself on its custom-tailored financing solutions to smart borrowers. The company then spent years fighting these same borrowers through foreclosure, and STAR is now the successor owner to a lot of commercial and residential land deals. Sure that's a good thing when the cycle turns up, but STAR's pre-crisis investors were almost completely wiped out.

    If I were looking to take residential development risk, I would look to the established public homebuilder stocks such as Lennar or Pulte, where at least I get the upside of fat development profits on the upside of the cycle to compensate me for the intrinsic land risk. I would also take a hint from these same battle-scarred public homebuilders, who generally try to keep the land risk off their balance sheets.

    The good news I suppose is that we're still in the early innings of the housing cycle, and if you follow basic residential housing stats you find that the uptrends can easily go on for 10-20 years before the inevitable downturn. So it's entirely possible that UDF could have a nice run here. But with such a small balance sheet and concentrated loan portfolio, UDF's price would need to drop a lot more in order to make the value proposition more attractive. I would also keep in mind that an 8.20% dividend yield cannot be UDF's total cost of equity. So if UDF can't lever up (difficult given the collateral) or widen lending spreads (maybe more likely to shrink), then it's hard to see how the dividend is going to grow much. In this scenario, the stock price will then sink to where the dividend yield equals the cost of capital, likely double digits.


    Joe X

    Jun 8 08:09 AM | 6 Likes Like |Link to Comment
  • Healthcare REITs May Not Post Healthy Returns In A Rising Rates Environment [View article]
    User 5842391 - congratulations on getting the timing right if you indeed jumped into the net-lease sector toward the end of 2013. However, the gain you are sitting on should make you more cautious, not less. Let's address your points in order...

    1) If rates are at 11-month lows, the risk to companies with long-duration flat cash flows is greatest, not lowest.

    2) The liability side of the balance sheet (leverage) is a secondary issue. It's the asset side that's the problem. Properties under 20-year lease with generally reasonable extension options pose a risk in a rising rate environment. While you may eventually grow your way out of the problem, the typical 1.5% annual lease escalation is not sufficient to offset sudden jumps in market rates.

    3) While it's true that FFO yields might be higher than bonds, this ignores two really key items. First, FFO yields are not the right metric. Many health care REITs, especially the large-cap ones like HCP, HCN and VTR, own properties that require ongoing capital expenditures. Second, "FFO" is often the subject of dubious adjustments to make it look better. Omega Healthcare, in particular, likes to add back tenant credit losses, financing costs, and management stock compensation expense. All of these items combine to lower the yield premium to bonds and should not be ignored.

    Finally, net-lease REITs such as the health care names have much longer duration than the bond market. The weighted average maturity for the entire US bond market (AGG) is 6.9 years. In contrast, the net-lease REITs are usually sitting on something like 10-11 year average remaining primary lease terms, but that doesn't include extension options that can tack on 5-10 years after that.

    Let me also add my thanks to the Chilton REIT Team for providing a timely and thoughtful article on investing in the health care REITs.

    Rgds, Joe X
    May 2 07:48 PM | Likes Like |Link to Comment
  • Omega Healthcare Investors: The 'Realty Income' Of The Senior Care Market [View article]
    If you like nursing home risk, OHI is the stock for you. However, there is no free lunch, and in the event of any future cutbacks to Medicare reimbursement - or just nominal increases - that can place pressure on OHI's tenant base. The economics of this business are basically the same for all of OHI's operators, so if one goes under the others are likely to feel the pinch.

    This is a bullish analysis of OHI, but leaves out some important questions. Such as, if demographics are so great, why is industry occupancy flat at best? OHI's own occupancy was last reported at 83.8%, which illustrates that the great demographic wave still hasn't moved the needle. Another health care REIT, HCP, has been seeing cash flow coverage decrease in their SNF portfolio (run by Manor Care), to the point where investors are becoming concerned. Investors should also ask themselves what steps the government will take to control costs if and when demand does increase due to demographics. In summary, that rosy future for nursing home operators might still be a long way off.

    OHI is not just another health care REIT. Diversified companies like HCP, HCN and VTR have a much lower risk profile. I agree that OHI's management is experienced and does a good job running the company within this sector. And there's nothing on the near-term horizon that looks particularly threatening. Just be aware that OHI's higher going-in cap rates and higher dividend yield are there for a reason.


    Joe X
    Dec 2 06:31 AM | 8 Likes Like |Link to Comment
  • A Series Of Unfortunate Events For Digital Realty [View article]
    Jerry - from the data you presented I don't know why you see the pricing of DLR's preferreds as irrational. They are each trading with a current yield of 7.7% to 7.8%, which makes sense as they are each pari passu with respect to payment priority.

    I suppose you could say that the varying lengths of call protection (i.e. between 3 and 5 years) should perhaps be reflected in differences in current yield. But the potential for refinancing any of these preferreds is very low - rates have moved higher, seem likely to go higher still - and DLR's preferred issues are here to stay for a long time. It would take a very extraordinary environment again - incredibly low rates, recovery in real estate markets - to produce the kind of market demand where DLR would have the chance to reissue preferreds with lower coupons. This window in time has shut.

    I do agree that if DLR is ever liquidated along the way or purchased by an AAA conglomerate, then the Series G preferreds might be the ones to own. But absent that kind of scenario, all of DLR's preferred stock should (and apparently does) trade within a very tight band. Hope this is helpful.


    Joe X.
    Nov 14 09:00 AM | 4 Likes Like |Link to Comment
  • HCP - Cleared For Liftoff? [View article]
    Jon - you're correct that the last sentence was a little on the murky side. What I was trying to express so badly is that net-lease REITs (such as HCP) with their long-duration cash flows are fairly sensitive to changes in the rate environment. When long-term rates started to move in the early summer, the entire REIT sector sold off pretty badly, especially REITs with longer term leases. So rather than spending a lot of time at the moment trying to choose between HCP, HCN, VTR, etc., investors might be better off thinking about whether they want to be in the net-lease sector in the first place, and if so at what level of concentration in their portfolio. Hope that's helpful.


    Joe X.
    Oct 31 05:37 PM | Likes Like |Link to Comment
  • HCP - Cleared For Liftoff? [View article]
    Ricky - thanks for the comment. Regarding the negative $1.1 billion, you need to add back the $1.9 billion of non-cash depreciation charges (I'm looking at the Sept. 30 balance sheet) that HCP has taken on its real estate properties. When you do, you find that cash earnings have covered the dividends. Under GAAP accounting, non-cash depreciation charges tend to mask the true dividend capacity of real estate companies, which is why most REIT analysts focus on FFO/share rather than EPS as an earnings metric. Hope that's helpful.


    Joe X.
    Oct 31 05:12 PM | Likes Like |Link to Comment
  • I Don't See A Margin Of Safety In Healthcare REIT [View article]
    Geez, this is what happens when you get old and your Varilux prescription doesn't correct as well as it used to. Per the most recent proxy filed on 4/5/13, it's Debra A. Cafaro.


    Joe X
    Oct 28 04:58 PM | 1 Like Like |Link to Comment
  • I Don't See A Margin Of Safety In Healthcare REIT [View article]
    Apologies for the spelling error - Debra F. Cafaro is indeed correct as noted by the OP.
    Oct 28 04:44 PM | Likes Like |Link to Comment
  • I Don't See A Margin Of Safety In Healthcare REIT [View article]
    Thanks for the in-depth review of Health Care REIT (HCN) versus Ventas (VTR). I would be cautious however in extrapolating VTR's historical outperformance into the future. Here's why...

    Ventas was formed in 1998 when the former Vencor spun off its real estate into a separate public company. Owing to cuts in Medicare reimbursement and charges of over-billing, Vencor filed for bankruptcy in September 1999. This had a severe impact on Ventas of course, which forced the real estate company to eliminate its dividend and enter into restructuring talks with its own lenders.

    This is where Deborah Cafaro enters the picture. Cafaro was a former real estate attorney who was just coming off a successful CEO assignment at an apartment REIT (company was fixed and sold). The challenge for this new CEO at Ventas was to re-negotiate the leases with Vencor, deal with the bank group, and try to keep Ventas out of bankruptcy. To everyone's credit, all of this was accomplished. However, what needs to be remembered is that when the leases were restructured with Vencor (now Kindred), they were struck at below-market rates in order to give Kindred some breathing room and make it into a more viable tenant. In return for the below-market rates, the lease pools (there were four of them) were also structured with resets that would allow Ventas to recapture some of the upside in these properties over time.

    All of this background helps explain why VTR has had such strong dividend growth versus HCN and HCP (see the first graph in this article). This graph captures the recovery phase of the Kindred leases, but neglects to include the early part of the story when REIT investors would have incurred severe losses of income due to the dividend elimination. HCN and HCP were also dealing with tenant-related issues at the time, but managed to keep their quarterly dividends intact. Ventas also paid more for its debt in the early years, but has seen its cost of debt capital (a key earnings driver) improve as its ratings have reached parity with HCN and HCP.

    A lot of the upside in the Kindred leases has now washed through Ventas' income statement, and Kindred has now been reduced from a 99% portfolio concentration to 12% of NOI according to the latest supplemental. It's certainly been a great ride for investors, but some of that is just the reversal of a really bad ride for a few years. Today, VTR is one of the three large-cap health care REITs with a nicely diversified portfolio and a low cost of capital. Growth rates going forward are going to look nothing like the past, because leases are now at market rates and the high rate of balance sheet growth is unlikely to persist. If you take a look at the graph again, VTR's more recent growth rate, while positive, is much closer to its peers (HCN, HCP).

    In conclusion, VTR (today) is a well-managed and nicely diversified health care REIT with a low cost of capital. But so is HCN for that matter, and as you point out HCN has a much newer portfolio that is positioned very nicely to appeal to upscale boomers as they move through their senior years. While you would have been much better off owning VTR in 2002 when it was just emerging from a painful restructuring, it doesn't seem like there's a major case for outperformance looking forward.
    Oct 28 07:23 AM | 34 Likes Like |Link to Comment
  • HCP Recovering Lost Ground - Hold [View article]
    Guys - thanks for all the comments. It's been a couple weeks now since HCP's CEO change announcement on October 3rd, which is more than enough time for investors, traders and sell-side analysts to have digested the news. Here's the results:

    1) HCP closed at $41.77 on October 2nd, which was the night before the CEO announcement. The stock closed yesterday at $42.84, which is a 2.6% increase.

    2) Over this same time frame, the S&P 500 moved from $1,693.87 to $1,733.15, which is a 2.3% increase.

    3) If you had "dumped" your HCP at the $39.05 low (closing price on Friday, October 4), that was a full 6.5% below the pre-announcement price. The S&P was down only 0.2% during those two days, so trading HCP for the index just after the news would have lost you a full 6 points, which is equal to a year's worth of dividends for any of the health care REIT stocks. If you dumped HCP at the lows and just sat in cash while trying to figure it all out (a common reaction too), you'd have given up a 9.7% gain through yesterday's close.

    4) This illustrates the danger of trading on seemingly negative headlines, which crop up with every stock. Again, for those investors who have determined that an allocation to the health care REIT sector is appropriate for their risk tolerance and portfolio, we continue to believe that the best strategy is simply to hold a basket of the large-cap health care REITs (HCP, HCN, VTR), and try to ride out the inevitable headlines that come with holding any individual stock over a long period of time.
    Oct 18 08:37 AM | Likes Like |Link to Comment
  • A Nobel Prize Winner On Alpha [View article]
    Thanks for the update on Fama's work with mutual fund data. It is a strong reminder to only use mutual funds when you have to, and be very mindful of the fees.

    I would like to add one comment though regarding Buffett's returns at Berkshire Hathaway (BRK). There is a very unique structural advantage at Berkshire which doesn't seem to get much attention, and that is the practice of only paying management in cash. In conventional compensation structures, middle and senior management is compensated though base salaries, bonuses and oftentimes a significant stock component in the form of grants, options, etc. Over time, this stock compensation has the effect of diluting shareholder returns as the share count climbs each and every year.

    Buffet has recognized that management teams will effectively work for less if they are simply paid in cash every year, rather than paid in some combination of cash and shares. While it's theoretically attractive to align management and shareholder interests by requiring management to own shares, it's almost never achieved by requiring management to come out of pocket on their own. Rather, shareholders end up giving away a certain amount of their holdings each year to "incent" management to stay and do what they were probably paid very well to do anyway.

    Buffett's desire to control share count is very evident in his current investing style, which focuses on the outright acquisition of businesses (Burlington Northern, Lubrizol, etc.) rather than taking minority investments in public companies. Interestingly, we don't seem to hear reports that there is a mass-exodus of management once a company is acquired by Buffett, or that operating returns somehow become sub-standard.

    Fama's work shows that retail investors, on average, are being diluted by mutual fund fees. Buffett has taken this approach one step further and suggested that investors are suffering another level of returns dilution. Perhaps institutional investors will start to examine this issue more closely and realize that core market returns could perhaps be improved without taking on increased business risk or financial leverage. We'll see.
    Oct 15 08:39 AM | 3 Likes Like |Link to Comment
  • HCP Recovering Lost Ground - Hold [View article]
    Dragon - thanks for taking the time to comment.

    I suppose if you are pinning your investment thesis on a particular CEO, then you have to sell if he gets the boot. The problem with that strategy is it leaves you vulnerable and jumpy to negative events that crop up with every stock. Switching costs are high in these situations because you're invariably selling low (lots of volume out of HCP) and buying high (peers VTR and HCN getting pushed up as newcomers rush in).

    To be sure there are some companies - Apple and Berkshire comes to mind - where an iconic CEO really does make a difference. Health care REITs, though, are at the opposite end of that spectrum. Using HCP as an example, the investment portfolio is well diversified by product type and conservatively financed with a high equity component, tenants are locked in under long term net leases, and the end result is predictable cash flows to pay for a growing dividend. It's an extremely stable business model, to the point where the entire staff of HCP could take the week off and tenant rent checks would still be there on Monday morning.

    The reason to own HCP was not that Jay Flaherty was the former CEO, or that Lauralee Martin is the new CEO. Rather, you are looking for a large-cap health care REIT with diversified cash flows and an industry-leading cost of capital that allows you to partner with quality tenants. None of that changed last week, and even though Jay is gone the other 150 people at HCP are more than qualified to carry on. Lastly, take a look at the huge and complicated global book of business that Lauralee Martin ran for years at Jones Lang LaSalle - managing 150 professionals in Long Beach is going to seem like a vacation.

    Now let's address the question of whether there was adequate disclosure surrounding the announcement. On the conference call, Chairman Mike McKee was clear to point out the change in CEO's was basically a management style issue and not the result of some potential issue with the portfolio. To expect the HCP board, or any board for that matter, to go into chapter and verse on exactly why someone wore out their welcome after a long period of time is naive, and would be inadvisable from a legal standpoint. HCP probably has one of the toughest boards around if you're the CEO - Mike McKee, Lauralee Martin and David Henry are all active CEO's and Roath/Sullivan are each retired CEO's. Flaherty lasted 10 years reporting to this crowd and that in itself couldn't have been easy. In the end, the board simply decided it wanted Martin (62) rather than Flaherty (55) to groom the next layer of talent and that was the end of it.

    The most important part of Thursday's CEO announcement was that it was not accompanied by any type of earnings revision, real estate valuation charge, or tenant receivable reserve. If there was ever a time to make an announcement along those lines, Thursday was it. Assuming we're in the all-clear on those issues, the odds favor a continued recovery in HCP's stock price over the next few weeks.


    Joe X

    Oct 9 02:53 PM | 4 Likes Like |Link to Comment
  • I'm Dumping Shares In HCP And Hiring Debra Instead [View article]
    I would be careful in your thesis that Martin lacks the requisite experience to lead a large-cap health care REIT.

    Both Deb Cafaro and George Chapman were mid-level real estate attorneys when they made the transition to REIT management at VTR and HCN, respectively. Both have done well and both companies are now part of the S&P 500 along with HCP. Jay Flaherty was coming off a successful career in investment banking when he joined HCP, again without any prior public company management experience. The point being is that, back in the day, the names Cafaro, Chapman and Flaherty were not exactly household words in the halls of NAREIT.

    Lauralee Martin, in contrast, is bringing a huge amount of senior real estate experience to the table from her recent role as CEO - Americas for Jones Lang LaSalle. In case you're not familiar, JLL employs over 40,000 people worldwide and the Americas division accounts for about 44% of global revenue. Some of JLL's key business lines include leasing, property and asset management, real estate investment banking, and capital markets. Sound familiar? These are the exact same functions performed by HCP's team of about 150 people in Long Beach.

    On almost any measure, the board made a very informed decision to bring Martin in as CEO. She has a track record of success, has managed an organization many times the size of HCP, and has five years of experience on HCP's board and a solid understanding of the company's people, portfolio, and opportunities. In short, she is exactly the kind of seasoned real estate executive that most REITs would kill for.

    Just a thought.
    Oct 7 04:02 PM | 13 Likes Like |Link to Comment
  • Omega Healthcare Is A Sleep-Well-At-Night REIT That Pays 6.27% [View article]
    In regard to your lengthy and bullish article on OHI this week, I wouldn't be so quick to blithely dismiss Medicare cuts that "only impact short-term stay residents at nursing facilities. Medicare does not pay for long-term care at nursing homes."

    Short-term Medicare patients are the most profitable patients that a nursing home has. Medicaid rates for long-term patients are far lower, and result in only break-even margins for the operator. Therefore, changes in Medicare reimbursement are critical for the financial solvency of these facilities. In fact, when the government cut Medicare rates back in the late 1990's, many nursing home operators filed for bankruptcy, and the knock-on impact to OHI with its undiversified nursing home portfolio were quite severe. OHI eliminated its dividend, changed management, and went into a restructuring period that lasted several years. You should ask shareholders from this time period whether they were sleeping well at night.

    You might have also pointed out that OHI's price drop last week began after the HCP earnings call on Tuesday, where management noted that its HCR Manor Care nursing home portfolio "continues to face headwinds, notably the softness in admission and patient volumes experienced by the acute care hospital sector. As 90% of HCR's admissions represent discharges from the hospital sector, this dynamic negatively impacted HCR's occupancy during the first half of 2013."

    If the largest nursing home operator in the country is feeling these issues, don't you think they might also affect OHI? And if HCP has about 30% of its portfolio in the nursing home space, isn't the issue magnified about 3x for OHI?

    Finally, the yield on the 10-year treasury last week began at 2.62% on Monday and closed at 2.63% on Friday, with some minor variations in between. This would hardly be the catalyst for a major change in OHI's stock price, which seemed to be the opening thesis of your article.
    Aug 5 11:39 AM | 9 Likes Like |Link to Comment