Analysis And Ranking Of Healthcare REITs

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Includes: HCN, HCP, OHI, VTR
by: Stephen Fortin

Summary

The metrics of OHI, HCP, VTR and HCN are analyzed and ranked.

Based on the analysis of metrics, a total score is assigned to each company.

OHI may represent the highest potential value to investors, but is subject to changes in government reimbursement.

VTR may represent the second-highest potential value to investors, and may be less risky than OHI.

Introduction

Due to advances in the medical field, the population of Americans over the age of 65 is now projected to more than double over the next 40 years from 46 million today to 98 million by 2060. As such, it is safe to assume that spending on the care of our aging population will also increase. Investors looking to take advantage of this trend may consider investing in healthcare REITs, which, as the name implies, invest primarily in healthcare properties (ie., senior housing, skilled nursing facilities, long-term care facilities, etc...). That being said, many such companies exist today, and an analysis of their company metrics can serve as an important guide in making an investment decision.

Data Collection And Analysis

Four healthcare REITs with market cap greater than $6 billion were selected for this analysis: Welltower Inc. (NYSE:HCN), Ventas, Inc. (NYSE:VTR), HCP, Inc. (NYSE:HCP), and Omega Health Investors, Inc. (NYSE:OHI). Data was collected from investor presentations, financial statements and press releases. Based on this data, the companies were analyzed and compared in terms of the following metrics:

1. Price to adjusted funds from operation (P/AFFO)

2. Growth from previous year (Gprev)

3. Projected growth for next year (Gfut)

4. Dividend Yield

5. Payout Ratio - calculated as AFFO/Dividend

6. Debt-to-equity (D/E)

7. Price-to-book (P/B)

Each company was ranked from first to last (1 to 4) for each of these metrics. Afterwards, each company received an overall score by tallying the totals of their ranks across each metric. In this study, a lower total score signifies that a company may represent a better value in terms of potential returns.

Results

Table 1, shown below, shows a summary of the data collected for each company. Over the course of this section, companies will be compared and ranked according to the metrics outlined in the "data collection and analysis" section of this article.

Table 1. Comparison of Metrics (OHI, HCP, VTR, HCN)
OHI HCP VTR HCN
P 31.62 30.12 60.51 67.28
AFFO15 3.41 3.16** 3.95 4.33
AFFO16 3.41 2.04* 4.13 4.53
AFFO17 (projected) 3.42 1.93 4.15 4.2
P/AFFO16 9.27 14.8 14.7 14.9
Gprev 10.7% (35%)** 4.56% 4.61%
Gfut 0.3% (5.4%) 0.5% (7.3%)
Dividend Yield 7.86% 4.93% 5.13% 5.17%
Payout Ratio 70% 63% 75% 78%
D/E 1.13 1.66 1.04 0.83
P/B 1.61 2.54 2.01 1.77

*AFFO16 of HCP has been adjusted to remove AFFO from recent QCP spin-off for the full year.

**AFFO15 includes AFFO derived by assets contained by QCP (recently spun-off of HCP). As such, Gprev may accurately reflect growth from 2015 to 2016 of the HCP.

Price to adjusted funds from operation (P/AFFO)

Table 2 - Rankings - P/AFFO
OHI HCP VTR HCN
P/AFFO 9.27 14.8 14.7 14.9
Rank 1 3 2 4

In terms of P/AFFO, OHI has the most favorable ratio at 9.27. HCN has the highest P/AFFO ratio (14.9), although this ratio is close to that of HCP (14.8) and VTR (14.7).

Previous year growth (Gprev)

Table 3 - Rankings - G (from previous year)
OHI HCP VTR HCN
Gprev 10.7% (35%)** 4.56% 4.61%
Rank 1 4 3 2

OHI has experienced the highest level of growth from 2015 to 2016 (10.7%), followed by VTR and HCN (4.56% and 4.61%, respectively). The large decrease in AFFO noticed in HCP is caused by its recent QCP spin-off. As such, comparing change in AFFO from 2015 to 2016 may not fairly represent the recent growth prospects of the HCP.

Projected growth for next year (Gfut)

Table 4 - Rankings - G (future)
OHI HCP VTR HCN
Gfut 0.3% (5.4%) 0.5% (7.3%)
Rank 2 3 1 4

None of these stocks project strong growth for 2017. OHI and VTR project AFFO in 2017 to remain similar to 2016 with growth targets of 0.3% and 0.5%, respectively. HCP projects a decrease in AFFO of 5.4%, and HCN projects an even larger decrease in AFFO of 7.3%. Both HCP and HCN are in the midst of restructuring their current portfolio of properties, which may account for their poor prospects for 2017. An anticipated increase in interest rates may play an additional role in reducing growth prospects for these companies in 2017.

Dividend Yield

Table 7 - Rankings - Dividend Yield
OHI HCP VTR HCN
Dividend Yield 7.86% 4.93% 5.13% 5.17%
Rank 1 4 3 2

OHI has the highest dividend yield (7.86%) among these companies. HCP, VTR and HCN all have similar dividend yields ranging between 4.93% and 5.17% .

Payout Ratio

Table 6 - Rankings - Payout Ratio
OHI HCP VTR HCN
Payout Ratio 70% 63% 75% 78%
Rank 2 1 3 4

HCP has the most conservative payout ratio (63%) indicating that it has the most room to increase its dividend payments. HCN has the highest payout ratio at 78%.

Debt-to-equity (D/E)

Table 7 - Rankings - D/E
OHI HCP VTR HCN
D/E 1.13 1.66 1.04 0.83
Rank 3 4 2 1

HCN has the most favorable D/E ratio (0.83), which indicates that it has been less aggressive in using debt to finance its growth. On the other hand, HCP has been the most aggressive with a D/E ratio of 1.66.

Price-to-book (P/B)

Table 8. Rankings - P/B
OHI HCP VTR HCN
P/B 1.61 2.54 2.01 1.77
Rank 1 4 3 2

OHI offers the most value in terms of P/B (1.61) followed by HCN (1.77). Meanwhile, investors are willing to pay more for assets owned by HCP, which has the highest P/B (2.54).

Overall Rankings

Table 9. Overall Rankings
OHI HCP VTR HCN
P/AFFO 1 3 2 4
Gprev 1 4 3 2
Gfut 2 3 1 4
Dividend Yield 1 4 3 2
Payout Ratio 2 1 3 4
D/E 3 4 2 1
P/B 1 4 3 2
Total 11 23 17 19

OHI had the lowest score in terms of overall rankings (11), meaning that it could represent the most value in terms of returns on investment. VTR came in second place with a total score of 17, and was closely followed by HCN with a score of 19. Meanwhile HCP lagged behind with a score of 23.

Discussion

All four of these companies have their merits, and may represent excellent investment opportunities. That being said, the aim of this study was to uncover which of these companies offered the most potential value to investors at this point in time.

Based on this data, it would appear that OHI has the most potential to return value to investors at this time. The company has the best P/AFFO ratio, growth rate from 2015-16, dividend yield and P/B. It is second best in terms of projected growth in 2017 and D/E. Furthermore, it did not score at the bottom of any category. That being said, OHI invests primarily in skilled nursing facilities and, therefore, its revenues are highly dependent on government reimbursement rates. Risk averse investors may be avoiding this stock due to the potential risk of government cutbacks on reimbursement rates. Cutbacks on healthcare spending, which has been discussed at length in recent politics, would significantly decrease OHI's revenues.

The second-highest ranking healthcare REIT was VTR, which had the highest projected growth for 2017 (0.5%). Furthermore, VTR scored second in terms of both its D/E and (beating OHI in this category) and P/FFO. Furthermore, it did not score last in any category. VTR may represent an excellent investment opportunity to investors looking for future growth.

HCN was the third-highest overall ranking company. It has the most favorable D/E profile, and the second most favorable profile in terms of P/B, growth over the past year and dividend yield. Nonetheless, it has the worst metrics in terms of P/AFFO, payout ratio and future growth projections. In fact, the company projects its AFFO for 2017 to decline by over 7% as it sells off underperforming assets in its portfolio. Although this strategy may pay off at some point in the future, it does not help unlock value for investors during the snapshot of time that this analysis focuses upon.

HCP scored fourth overall in terms of its value-creating potential to investors. Although it had the most favorable payout ratio (63% of AFFO), it had the worst P/B, D/E and dividend yield. The calculated growth rate from 2015 to 2016 is inaccurate due to the recent spin-off of its skilled nursing facilities; however, projected growth in 2017 is still negative. While the spin-off may help reduce the companies exposure to political risk in the future, it is unclear that it will create value in the short-term.

Conclusion

OHI currently offers the best potential returns to investors; however, there is significant risk attached in terms of potential changes in government insurance reimbursement rates. Risk-averse investors may, therefore, consider VTR, which scored second highest, as a potential investment. That being said, it is of interest to note that neither of these companies project large growth in AFFO for 2017. HCN and HCP, which scored third and fourth, respectively, are currently undergoing structural changes and actually project AFFO to decline in 2017.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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