Connecting The REIT Dots

Includes: HCP, OHI, SNH, WELL
by: John Rhodes


Many REITs took a dive on Friday, 12-September creating potential buying opportunities for investors.

Healthcare REITs were hit especially hard and there are three excellent candidates for due diligence.

These three healthcare REITs are especially interesting because they all made it through the Great Recession, they all yield over 5%, FFO is under 14, and more.

I'm a huge fan of combining simple ideas to get better-than-average results. It's why ideas like diversification (and concentration), margin of safety, economic moats and dividend growth investing appeal to me. Combine simple ideas like this together and you have the potential for what Charlie Munger calls the Lollapalooza Effect. The trick is to be prepared for them and then be ready to strike with conviction.

On Saturday, 13-September, I read Mr. Market Provides Some Early Fall Color For REIT Investors and something wiggled in my brain. The article really isn't very special or unique. It just points out that the REIT market took a hit. That said, there's a simple and very useful list of the 20 US Equity REITs hit hardest on 12-September.

So, this got me thinking about long-term opportunity with REITs. When prices go down, opportunities go up. The catch is that not all opportunities are created equal. In fact, what looks like an opportunity can be a sucker's trap and permanent loss of capital is a terrible and hidden risk. I want as big of a Margin of Safety as I can get, thank you very much.

The second idea that popped into my head was that Brad Thomas also made a list of REITs with great histories: These REITs Should Weather The Storm. The most important thing about that article is that Brad provides a list of the only 15 REITs that managed to pay increasing dividends through the Great Recession. It's beautiful!

Taken together, we have a list of REITs that have dropped in price and a list of REITs that are strong, long-term players. Now, combining these two lists of REITs, I see four strong businesses that recently took a haircut:

  • Health Care REIT, Inc. (HCN)
  • HCP, Inc. (NYSE:HCP),
  • Omega Healthcare Investors, Inc.(NYSE:OHI)
  • Senior Housing Properties Trust (NYSE:SNH).

For reference, HCN has paid increasing dividends for 6 years, HCP for 28 years, OHI for 11 years and SNH for 9 years.

You may be very interested in all four of these businesses. However, I'm not too interested in HCN simply because I don't think 6 years is nearly long enough of a dividend streak. I'm going to ignore HCN here from here forward for that reason, although you might not.

The three "survivors" are HCP, SNH and OHI. Here's how they look:

  • yield 5.4%, FFO 13.4, S&P Credit BBB+, 43% debt/cap
  • yield 7.3%, FFO 12.4, S&P Credit BBB-, 47% debt/cap
  • yield 5.9%, FFO 12.8, S&P Credit BB+, 63% debt/cap

Although you probably know this, HCP, SNH and OHI are all healthcare related REITs. It's pretty easy to figure out from their names alone.

So, what about their dividend growth rates?

  • HCP has a 5-year dividend growth rate of 2.9%, 3-year growth rate of 4.1% and 1-year growth rate of 5%, and a Chowder of about 8.
  • SNH has a 5-year dividend growth rate of 2.2%, 3-year growth rate of 2.5% and 1-year growth rate of 2% and a Chowder of about 9.
  • OHI has a 5-year dividend growth rate of 9.3%, 3-year growth rate of 10.7% and 1-year growth rate of 10.1%, and a Chowder of almost 15.

And what about estimated FFO growth? Without growing FFO, it's pretty difficult to grow dividends going forward without growing the payout ratio. I prefer FFO growth over payout ratio growth because it means the business is growing and staying healthy. That, in turn, means longevity of income growth and lower risk of capital loss.

Here's how that looks according to an admittedly small number of analysts.

  • HCP = 3.1% estimated FFO growth
  • SNH = 5.2% estimated FFO growth
  • OHI = 6.0 estimated FFO growth

For your convenience and mine, I've taken all the data above and combined it into a simple little table:


There's plenty to think about here. All three companies have weathered the Great Recession by paying increasing dividends for many years. They're all healthcare REITs. They are all now comfortably below their 52-week highs, although I would not say any of them have bottomed out. There's still room for prices to come down since they are still all above their 52-week lows.

I don't own any of these REITs at this time. However, I'm going to take a very serious look at these businesses and this part of the REIT universe with the recent drop.

These are all healthy companies, with growing yields, at a time when many investors are fearful of rising rates. Continued negative pressure could open up an exceptional opportunity to partner with one or more of these businesses. Even now, these might be seen as "deals" or even "steals" by some investors. And, of course, we'll also see what Mr. Market thinks soon enough.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.