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 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 spans the spectrum of seniors housing and health care real estate, including seniors housing communities, post-acute care facilities, medical office buildings, inpatient and outpatient medical centers and life science facilities. It operates through three segments. The Seniors Housing Triple-Net segment’s properties include independent living facilities, independent supportive living facilities (Canada), continuing care retirement communities, assisted living facilities, care homes with and without nursing, Alzheimer’s/dementia facilities, post-acute care facilities and hospitals. The Seniors Housing Operating segment’s properties include independent living facilities and independent supportive living facilities, assisted living facilities, care homes and Alzheimer’s/dementia care facilities. The Medical Facilities segment’s properties include medical office buildings and life science facilities.
[level-free]
To read the rest of this valuation, you must be logged in as a premium member. If you are not a premium member, please consider becoming one.
Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Here is a free sample valuation pdf, and here is a post detailing what can be found within each individual company’s valuation.
[/level-free]
[level-mg-stocks-screens-subscriber]
Downloadable PDF version of this valuation:
ModernGraham Valuation of HCN – August 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 | Pass | |
| 2. Sufficiently Strong Financial Condition | Current Ratio > 2 | Fail | |
| 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 | Fail | |
| 6. Moderate PEmg Ratio | PEmg < 20 | Fail | |
| 7. Moderate Price to Assets | PB Ratio < 2.5 OR PB*PEmg < 50 | 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 | Pass | |
| 2. Sufficiently Strong Financial Condition | Debt to NCA < 1.1 | 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
| EPSmg | 1.84 |
| MG Growth Estimate | 6.45% |
| MG Value | $39.29 |
| Opinion | Overvalued |
| MG Value based on 3% Growth | $26.63 |
| MG Value based on 0% Growth | $15.61 |
| Market Implied Growth Rate | 14.32% |
| Current Price | $68.20 |
| % of Intrinsic Value | 173.59% |
Health Care REIT Inc. qualifies for the Enterprising Investor but is not suitable for the more conservative Defensive Investor.  The Defensive Investor is concerned with the low current ratio, insufficient earnings growth over the last ten years as well as the high PEmg ratio.  The Enterprising Investor is only 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 $1.84 for 2015.  This level of demonstrated earnings growth does not support the market’s implied estimate of 14.32% 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 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.
Stage 3: Information for Further Research
| Net Current Asset Value (NCAV) | -$32.68 |
| PEmg | 37.13 |
| Current Ratio | 1.90 |
| PB Ratio | 1.63 |
| Dividend Yield | 4.75% |
| Number of Consecutive Years of Dividend Growth | 8 |
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 | $1,239,000,000 |
| Total Current Liabilities | $650,437,000 |
| Long-Term Debt | $11,552,370,000 |
| Total Assets | $27,407,480,000 |
| Intangible Assets | $68,321,000 |
| Total Liabilities | $12,720,310,000 |
| Outstanding Shares | 351,366,000 |
Earnings Per Share History
| Next Fiscal Year Estimate | $3.61 |
| 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 | $1.84 |
| 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
Other ModernGraham posts about related companies
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.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.
[/level-mg-stocks-screens-subscriber]
Leave a Reply