REIT Stocks

Welltower Inc. Valuation – November 2015 Update $HCN

REITs often attract a great deal of investors because of their strong cash flows and dividends, and those investors often overlook other parts of the business, choosing to analyze the company under a different set of criteria than companies in other sectors.  This can create a problem in that it becomes difficult to compare a REIT to an industrial, which is fine if you use the typical top-down approach to stock selection; however, a top-down approach invites speculation in the fact that you are theorizing which sector will perform well going forward.  Benjamin Graham taught that we should avoid speculation as much as possible, which is why it is critical to develop a system for analyzing companies that will allow them to be compared across industries.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another investment opportunity.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Welltower Inc. (HCN) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Welltower Inc., formerly Health Care REIT, Inc., is a real estate investment trust (REIT). The Company’s portfolio has range of seniors housing and healthcare real estate, including seniors housing communities, nursing/post-acute facilities, medical office buildings, inpatient and outpatient medical centers and life science facilities. The Company operates in three segments: seniors housing triple-net, seniors housing operating and medical facilities. Its properties consist of land, building, improvements and related rights. The Company’s hospitals and seniors housing triple-net properties are leased to operators under long-term operating leases. Its medical office building portfolio is primarily self-managed and consists principally of multi-tenant properties leased to health care providers.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of HCN – November 2015

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $20,701,952,037 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 2.06 Pass
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end -13.38% Fail
6. Moderate PEmg Ratio PEmg < 20 35.38 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 1.41 Pass
Score
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 2.06 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 15.73 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

HCN value Chart November 2015

EPSmg $1.65
MG Growth Estimate 4.30%
MG Value $28.29
Opinion Overvalued
MG Value based on 3% Growth $23.97
MG Value based on 0% Growth $14.05
Market Implied Growth Rate 13.44%
Current Price $58.50
% of Intrinsic Value 206.81%

Welltower Inc. qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the insufficient earnings growth over the last ten years, and the high PEmg ratio.  The Enterprising Investor is only initially concerned by the level of debt relative to the net current assets.  As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $1.28 in 2011 to an estimated $1.65 for 2015.  This level of demonstrated earnings growth does not support the market’s implied estimate of 13.44% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Welltower Inc. (HCN)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Stage 3: Information for Further Research

HCN Charts November 2015

Net Current Asset Value (NCAV) -$32.27
Graham Number $51.58
PEmg 35.38
Current Ratio 2.06
PB Ratio 1.41
Dividend Yield 5.59%
Number of Consecutive Years of Dividend Growth 8

 

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Useful Links:

ModernGraham tagged articles Morningstar
Google Finance MSN Money
Yahoo Finance Seeking Alpha
GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Total Current Assets $1,415,709,000
Total Current Liabilities $686,651,000
Long-Term Debt $11,467,780,000
Total Assets $27,456,370,000
Intangible Assets $68,321,000
Total Liabilities $12,811,270,000
Shares Outstanding (Diluted Average) 353,107,000

Earnings Per Share History

Next Fiscal Year Estimate $3.06
Dec14 $1.45
Dec13 $0.28
Dec12 $0.98
Dec11 $0.90
Dec10 $0.83
Dec09 $1.49
Dec08 $2.76
Dec07 $1.46
Dec06 $1.31
Dec05 $1.15
Dec04 $1.39
Dec03 $1.60
Dec02 $1.48
Dec01 $1.52
Dec00 $1.91
Dec99 $2.21
Dec98 $2.24
Dec97 $2.12
Dec96 $2.18
Dec95 $1.16

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $1.65
Dec14 $0.93
Dec13 $0.74
Dec12 $1.12
Dec11 $1.28
Dec10 $1.51
Dec09 $1.78
Dec08 $1.82
Dec07 $1.36
Dec06 $1.33
Dec05 $1.37
Dec04 $1.52
Dec03 $1.63
Dec02 $1.72
Dec01 $1.90
Dec00 $2.10
Dec99 $2.13

Recommended Reading:

Other ModernGraham posts about the company

Health Care REIT Inc. Analysis – August 2015 Update $HCN
47 Companies in the Spotlight This Week – 5/16/15
Health Care REIT Inc. Quarterly Valuation – May 2015 $HCN
15 Companies in the Spotlight This Week – 5/3/2014
Health Care REIT (HCN) Annual Valuation – 2014

Other ModernGraham posts about related companies

Kimco Realty Corporation Valuation – November 2015 Update $KIM
Prologis Inc. Valuation – October 2015 Update $PLD
HCP Inc. Valuation – October 2015 Update $HCP
Essex Property Trust Inc. Analysis – October 2015 Update $ESS
Macerich Company Analysis – September 2015 Update $MAC
Alexandria Real Estate Equities Inc. Analysis – Initial Coverage $ARE
Weyerhaeuser Company Analysis – August 2015 Update $WY
Boston Properties Inc. Analysis – August 2015 Update $BXP
Health Care REIT Inc. Analysis – August 2015 Update $HCN
Kimco Realty Corporation Analysis – August 2015 Update $KIM

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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