REIT Stocks

Health Care REIT Inc. Quarterly Valuation – May 2015 $HCN

health-care-reit_416x416REITs 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 Health Care REIT Inc. (HCN) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): 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, skilled 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 consists 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.
HCN Chart

HCN data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 - PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 - FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 - PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 - PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years - PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $70.12
MG Value $52.10
MG Opinion Overvalued
Value Based on 3% Growth $29.34
Value Based on 0% Growth $17.20
Market Implied Growth Rate 13.08%
Net Current Asset Value (NCAV) -$32.08
PEmg 34.66
Current Ratio 2.05
PB Ratio 1.63

Balance Sheet - March 2015

Current Assets $1,236,000,000
Current Liabilities $604,000,000
Total Debt $11,015,000,000
Total Assets $26,629,000,000
Intangible Assets $68,000,000
Total Liabilities $12,074,000,000
Outstanding Shares 337,800,000

Earnings Per Share

2015 (estimate) $4.17
2014 $1.45
2013 $0.28
2012 $0.98
2011 $0.90
2010 $0.83
2009 $1.49
2008 $2.76
2007 $1.46
2006 $1.31
2005 $1.15

Earnings Per Share – ModernGraham

2015 (estimate) $2.02
2014 $0.93
2013 $0.74
2012 $1.12
2011 $1.28
2010 $1.51

Dividend History
HCN Dividend Chart

HCN Dividend data by YCharts


Health Care REIT Inc. is suitable for the Enterprising Investor but not for 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 concerned with the high level of debt relative to the net current assets.  As a result, Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with further research into the company.  From a valuation side of things, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $1.28 in 2011 to only an estimated $2.02 for 2015.  This level of growth does not support the market’s implied estimate of 13.08% annual earnings growth over the next 7-10 years, leading the ModernGraham valuation model to return an estimate of intrinsic value falling below the current price.  As a result, the company is considered to be overvalued at this time.

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 Health Care REIT 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.

Disclaimer:  The author did not hold a position in any company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from wikipedia; this article is not affiliated with the company in any manner.

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