This Healthcare REIT Share Price Hasn’t Taken Off Yet

chart02In hopes of a stock rebound, activist Levin Capital Strategies made an agreement with the externally managed healthcare REIT, New Senior Investment Group, last month. This is just another development by an activist in a market that has seen several stocks become underappreciated by sellouts in 2015 and has never recovered.

In addition to agreeing to add an independent board member, Levin Capital will not object to board director nominees at the next annual meeting. When Levin complained about New Senior’s stock performance last September, they owned 6.5% of New Senior; since then, they have likely not profited from them yet.

chart05New Senior Investment Group is externally managed. In November 2014, Fortress Investment Group LLC spun off New Senior Investment Group from one of its publicly traded funds, Newcastle Investment Group, hoping that the aggregate market value of both companies would be higher.

Nevertheless, the share price hasn’t taken off. In fact, last year the stock dropped by 40%, the worst performance among healthcare REITs. On the other hand, assets saw a 50% increase and debt level almost doubled. It appears that the management pushed the boundaries last year.

chart01Their share price performance has followed trends similar to other externally managed REITs, such as NorthStar Realty Finance and Ashford Trust. Interestingly, Levin also owns shares of NorthStar Realty Finance.

Despite its short history as a standalone company and being externally managed, New Seniors does have good things going for it. The defensive sector stock currently has the highest yield among healthcare REITs and its dividend payout to AFFO is below 90%.

For those who don’t like investments dependent on Medicaid and Medicare, New Senior sources their revenues primarily from private sources. They invest in independent living and assisted living/ memory care facilities. In a spectrum between minimal and intensive care, they are situated in the middle.

New Senior’s portfolio is composed of managed and triple net lease properties. In managed properties, the company has direct participation in the cash flow of the facilities. In Q4 2015, managed properties occupancy has advanced by 310 basis points year over year, and triple net lease properties occupancy has increased by 110 basis points. Like many, their triple net lease tenants don’t have much room to cover rental payments, EBITDARM is around 1.28x.

chart03

Additionally, AFFO per share increased 58% in Q4 2015 year over year. Their AFFO multiple is around 8.4x, as opposed to the sector median of 16x.

What concerns us most is that their total debt to total enterprise has reached 71%, which is high. Management is well aware of the leverage level, but they don’t seem to be too concerned about it. While they are selling some properties, they prioritized stock repurchases for now, where they can extract higher cap rates (even more than buying properties, according to management). As of now, their debt hasn’t been rated by major credit agencies, so it’s difficult to know exactly where they stand.

chart04In conclusion, we believe that New Senior does have some very good qualities, but they also have very bad ones. Given its share price discount and the existence of an activist as a catalyst of change, we are placing this on our activist/speculative bucket.

Source: New Senior Investment Group (NYSE:SNR), SEC

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

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

Hilton as a REIT & FelCor on a Roll

chart01Last Friday, Hilton Worldwide finally announced a plan to spin off its hotel and timeshare businesses and to create an REIT from the hotel assets. The new hotel REIT will encompass 70 properties and 35,000 rooms and will likely be one of the largest hotel REITs. The properties that are going into the REIT will be largely domestic, which according to the company will be more appealing to investors.

Although new legislation prevents an immediate tax-free spinoff into an REIT, Hilton should be exempted from such legislation because it had submitted a request to the IRS before December 7, 2015. The new legislation denies tax-free treatment to a spin-off in which either the distributing corporation or the spun-off corporation is an REIT. It also prevents a distributing corporation or a spun-off corporation from electing REIT status for a 10-year period following a tax-free spin-off.

FelCor

chart02Among all lodging REITs, FelCor Lodging Trust seems to be on a roll over the past weeks, especially after Land and Buildings made a series of proposals in late January. FelCor argued that they have already been pursuing the proposed initiatives. Land and Buildings cited an upside of 60% to NAV to justify a 2% ownership.

The first visible development is that FelCor and Land and Buildings have recently agreed to nominate two new independent directors to the board and reduce average board tenure. Two long-serving board members will step down by 2017. FelCor will also de-stagger the board, as proposed by Land and Buildings. This is what the board looks like today (Name, Position, Director Since):

Thomas J. Corcoran, Jr., Chairman of the Board and Co-Founder, 1994

Richard A Smith, President and Chief Executive Officer, 2006

Glenn A Carlin, Outside, 2009

Robert F. Cotter, Outside, 2006

Christopher J. Hartung, Outside, 2010

Charles A. Ledsinger, Outside, 1997

Robert H. Lutz, Jr., Outside, 1998

Robert A. Mathewson, Outside, 2002

Mark D. Rozells, Outside, 2008.

The decision to revamp the board seems to be in the right direction. FelCor also announced in its Q4 results that it is pursuing the sale of five hotels, including three in New York, to repay debt balances and repurchase stocks. Last April, Standard & Poor’s rated the company B, which is two notches below investment grade. The company posted a total debt to total capitalization of approximately 52%.

What is in the company’s favor is its portfolio composed of suburban, airport, and resorts, which is not one of the subsectors potentially affected by supply growth.

FelCor has come a long way before realizing its full NAV. Besides reducing leverage and renewing its board, FelCor is faced by the cyclical nature of the lodging industry. The possibility that hotels have reached its peak has scared off many investors.

FelCor stocks rallied by 34% from its 52-week low on January 19, but it still has to rally another 34% to reach Land and Buildings’ target of $10.50.

I’d place this stock in speculative/activist portfolio.

Source: Hilton Worldwide (NYSE:HLT), FelCor Lodging Trust (NYSE:FCH)

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

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

NRF Shareholders, Don’t Celebrate Too Early

chart01Last Friday, NorthStar Realty Finance (NRF) announced its Q4 results, along with several initiatives intended to close the gap between its intrinsic value of $25 (per management) and share price of almost $13. The announcement brought a breath of fresh air to NRF, as well as its external manager, NorthStar Asset Management (NSAM) and spinoff European branch, NorthStar Realty Europe (NRE).

Last week, NRF increased by 24%, while NRE increased by 7%, and NSAM increased by 5%. Following the spinoff of NRE in late October 2015 and a 1-for-2 reverse stock split at the beginning of November, NRF share prices plummeted by more than 50%, reaching a 52-week low of $8.38 on February 9.

There were three major takeaways from the announcement.

  1. NFR is in the process of selling almost $2 billion in assets, which should raise approximately $930 million in cash. This will be used to pay down debts and repurchase stocks. They are negotiating interests in real estate private equity funds, commercial real estate loans, securities, and commercial real estate.
  2. NRF is pursuing the possibility of recombining itself with NSAM. To spearhead this initiative, they will create a special committee of independent directors advised by UBS.
  3. After the spinoff and reverse stock split, dividend has been set on $0.40. With this change, its annualized dividend yield is now a more realistic 13%. In our list of dividend yields, NRF has passed the baton of highest yield among REITs to CorEnergy Infrastructure Trust.

If you are a recent NRF shareholder, congratulations, you have just made some bucks by tapping into a deeply discounted REIT stock. Now, if you have been a long-term NRF shareholder, I’d be cautious to celebrate. Here are the reasons why.

  1. The share price is still 50% lower than its late October price (after spinoff).
  1. Activist Lands & Buildings have not added NRF shares to its portfolio, only NSAM and NRE. According to Lands & Buildings 31 Dec 2015 Form 13F, their position for both NSAM and NRE doesn’t even reach $10 million, which is smaller than their average individual portfolio position. If the size of this position reflects potential share price appreciation, risk to make the interference work in their favor and effort, not buying NRF and only allocating a small position to NSAM and NRE is not a good sign. Since it is likely that they haven’t profited from it yet, they will keep pushing for changes as a result. They just released another letter this Monday, addressing NSAM’s lead independent director.
  1. NSAM will not let NRF go. I truly believe that a standalone NRF would be the best for NRF shareholders. Although Land & Buildings suggested that NSAM sold NRF management contract and distributed a special dividend from the sale proceeds, this seems to be only a remote possibility. There is an overlap between the boards of NSAM and NRF. Previously, NSAM had hired Goldman to look for strategic alternatives for the company. NRF just hired UBS to pursue a recombination with NSAM. We don’t really need a crystal ball to see that both sides are preparing for a merger.
  1. In an apparent attempt to validate a recombination with NSAM, NRF has created a special committee with independent directors and hired an investment bank to act as a financial advisor. Forming the committee of independent directors doesn’t change the fact that the NRF board is biased toward NSAM’s interests. This seems to be a move to give increased legitimacy to NSAM’s decisions.

Source: NorthStar Realty Finance Corp.(NYSE:NRF), Northstar Realty Europe Corp.(NYSE:NRE), Northstar Asset Management Gro(NYSE:NSAM), Land and Buildings

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

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

U.S. REITs: Flight to Quality

 

net leaseThis year so far net lease retail has gotten a head start on being the best performing REIT sector. Realty Income, National Retail Properties, and Agree Realty have been the companies with top returns, ranging between 9% and 14%. Their rally, however, has decreased dividend yields, generating discontent from dividend investors who do not appreciate reduced yields.

Investors are turning to net lease because they tend to be less volatile than the financial markets. Realty Income, for instance, has a beta of 0.12 for the last 36 months. That is, when the S&P500 varies by 1%, the stock only varies by 0.12% on average.

Also, net lease retail has a good record of paying dividends year after year. Realty Income, National Retail Properties and Agree Realty have been distributing similar or increasing dividends for many consecutive years (18, 26 and 5 years, respectively).

In addition, landlords love net leases because they push costs of maintenance, taxes and insurance to the tenant. Landlords like the convenience of not having to spend time and money maintaining the property. In the end, they benefit from a leaner cost structure and more stable funds from operations.

For all the reasons that I mentioned above, the increasing demand for net leases can be interpreted as a flight to quality.

Single Family Homes

At the same time net lease retail is experiencing a thriving performance, single family homes have been the worst performing sector so far this year. Last year’s announcement of the merger between American Homes 4 Rent (AMH) and American Residential Properties (ARPI) didn’t seem to help their stock performance in 2016. Since January, both AMH and ARPI stocks have dropped by almost 15%.

During the fourth quarter, activist Land and Buildings have tripled their position on ARPI.  On 31 December 2015, ARPI represented Land and Buildings’ second largest investment and Land and Buildings were one of ARPI’s largest shareholders. We don’t know yet if the drop is associated with a potential exit of Land and Buildings, which have applauded the merger decision.

As to the newly formed Colony Starwood Homes, the stock has been holding up better. Their 2016 return has been virtually flat. They will release Q4 results this Monday.

This week’s performance

This past week was another good week for REITs. We saw some familiar faces as top performing stocks. For instance, NorthStar Realty (NRF) has climbed to the top after the company has announced the sale of various investments, as well as the creation of a special committee to explore the possibility of recombining with its external manager NorthStar Asset Management. NRF stocks went up by 23%.

NRF rally must have been a relief for shareholders following weeks of poor performance. Nonetheless, there is still a long way to go if the company really wants to regain its November prices.

Check the reports for Dividend Yield by Sector and Weekly Returns.

Source: Realty Income Corporation(NYSE:O), National Retail Properties, In(NYSE:NNN), Agree Realty Corp.(NYSE:ADC), NorthStar Realty Finance Corp.(NYSE:NRF), Northstar Asset Management Gro(NYSE:NSAM), American Residential Propertie(NYSE:ARPI), American Homes 4 Rent(NYSE:AMH), Colony Starwood Homes(NYSE:SFR), Yahoo!Finance, SEC, Fast Graphs, Land and Buildings

Disclaimer: This is not a recommendation to buy or sell stocks. The highest-yield stocks are not necessarily the best portfolio investment choice. The purpose of this report — which is essentially a snapshot of information available on February 26, 2016 — is to reduce your stock analysis by enabling you to compare stock and sector performance. Please do your own due diligence before making any investment decision.

As of January 31, 2016, the equity REITs are constituent companies of the FTSE NAREIT All REITs Index. Companies whose equity market capitalization is lower than $100 million have been disregarded.

This report is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

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

The Truth Must Be Told: Industrial REITs Have Not Been a Breeding Ground to Harvest Hefty Dividends

chart01Last November, we asked ourselves why First Industrial had not been generous enough with its shareholders. Although the dividend has grown at a double digit every year since it was reinstated in 2013, the dividend yield was way below its peers; in fact, it is one of the lowest among equity REITs. For the fourth quarter, the company decided to correct this situation and its dividend has gone up by almost 50%.

The company’s quarterly dividend rate went up from $0.13 to 0.19, equalizing an annualized yield of 3.7% with the sector median. Its previous yield was on par with the 10-year U.S. Treasury yield, likely the most obvious reason why management decided to bump it up. Also, the AFFO payout was below 60%, which made room for aggressive increases.

chart02.png The truth must be told: Industrial REITs have not been a breeding ground to harvest hefty dividends. Except for STAG Industrial, Liberty Property Trust, and Monmouth Real Estate Investment Corporation, all others have yielded below the equity REIT average. STAG Industrial has been the most popular for investing in secondary and tertiary markets. First Industrial, in turn, invests in the top industrial real estate markets in the U.S.

First Industrial went through tough times during the great recession, turning itself very stringent about dividend distributions. Its share price reached the bottom at $1.91 on March 03, 2009, after reaching its all-time peak of $50.52 in November 2006. On March 31, 2009, its total debt to total market capitalization reached 84%. Its FFO per share plummeted in 2008 and went negative in 2010. For that reason, liquidity has become an important component of its strategy. In 2009, they announced that they would distribute the minimum amount of dividends required to maintain the REIT status.

chart03.png Fast forward to December 31, 2015, and the situation had completely changed. Its share price had surpassed $20. Its total debt to total market capitalization had plummeted to 36% and last September the company was granted investment grade status by Standard & Poor’s. That recognition must have also encouraged the company’s decision to make the dividend policy less stringent.

Last year, First Industrial stock performed well. Its total return was just under 10%, which was better than most of its peers. Only PS Business Parks and Terreno did better than First. Since management expects its FFO per share will increase by 15% in 2016, there’s a good chance that the company can continue its stock performance in 2016. In terms of AFFO multiple, the company is comparatively cheap. While the peer average is 18x, First has been trading at 16x. It is not as blatantly cheap as STAG (which is trading at 11x), but there’s certainly room for appreciation.

The only caveat is that First shares tend to be as volatile as the market. In 2016, we’ve seen a significant drop of 5%, a bit more than S&P500’s drop of 7%. Given that the Q4 results last Friday were strong, this could be a good entry point.

chart04

Source: First Industrial Realty Trust(NYSE:FR), Fast Graphs

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

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

What Can We Learn From HCP?

chart01In 2015, HCP recorded a $1.3 billion impairment related to their HCR ManorCare investments. HCR ManorCare, their biggest tenant in the post-acute/skilled nursing segment, has experienced deteriorating operational performance due to changes in reimbursement rules. Also, the U.S. Department of Justice has sued HCR ManorCare on the grounds that they had filed claims to Medicare for services not needed by their patients.

Although the litigation is at an early stage, this is nonetheless a reminder to investors who invest in skilled nursing facilities (SNFs) through healthcare REITs that their investments tend to be reliant on Medicare and Medicaid reimbursement. As a result, changes in Medicare and Medicaid reimbursement can have enormous consequences for their investments, which can catch them by surprise.

How Can You Evaluate Healthcare REITs Investing in SNFs?

Before evaluating healthcare REITs that invest in SNFs, it is important to mention some of the background. In brief, Medicare and Medicaid reimbursement rates tend to increase over time, as shown by how average Medicare reimbursement rates rose from $408 per day in 2008 to $484 per day in 2014 while average Medicaid reimbursement rates rose from $164 per day to $186 per day across the same period of time according to Eljay LLC and CMS. This means that SNFs possess potential in the long run, though the same cannot be said in all periods of time.

If you are interested in investing in SNFs through healthcare REITs, there are some simple ways to evaluate your potential investments:

* The Centers for Medicare and Medicaid Services post updates such as the payment rates for 2016, meaning that it can be worthwhile for investors to monitor their website. While its updates can have a wide range of effects on SNFs, most may not prove pleasing to investors because it has an unsurprising interest in ensuring that the costs of Medicare and Medicaid are as low as possible.

* Some SNFs have slimmer margins than others, meaning that a negative occurrence can hurt them and thus their investors more than competitors. One way to avoid such SNFs is to examine their EBITDAR coverage ratio, which is their earnings before interest, taxes, depreciation, amortization, and rent divided by rent costs. A higher coverage ratio means that a SNF is more resilient in the face of negative occurrences because it has the earnings needed to tough them out.

* Occupancy is a useful figure for telling whether a SNF will be profitable or not because each occupied unit is a unit that is earning revenue for the SNF. There is a problem in that the occupancy at which a SNF becomes profitable is not the same from SNF to SNF. However, it is very much possible to compare occupancy from year to year for the same SNF, meaning that a rising occupancy is a positive sign for its profitability.

* Finally, check whether a healthcare REIT has all of its investments in the same state or has taken the proper precautions by spreading them out. You should avoid healthcare REITs that cannot be bothered with diversification because a statewide change for the worse can hammer their figures, which is particularly problematic because state governments can have significant influence over Medicaid spending.

Source: HCP, Inc.(NYSE:HCP), Ventas, Inc.(NYSE:VTR), CMS

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

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

Something that we haven’t seen for quite a while

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Download our Dividend Yield Report. 

It’s been a very good week for equity REITs, something that we haven’t seen for quite a while. Virtually all stocks went positive. In fact, a mere 8 out of the 174 we track had a negative performance. On average, stocks saw a 4.2% increase, higher than the S&P500. We had several stocks that closed the week with a two-digit growth.

Last week, in anticipation of the release of the Q4 results, investors discovered some stocks that had been undervalued and went on a buying spree. Last week’s top three performers, Monogram Residential Trust (apartments), Pebblebrook Hotel Trust, and Sabra Health Care REIT, will soon be releasing results this week. Other top performers included lodging and timber REITs, as well as CorEnergy Infrastructure Trust, which had been one of the most volatile among equity REITs.

At the same time Monogram stock spiked by 6% on Friday, Madison International Realty, a global real estate investment company and current stockholder in the company, disclosed their potential interest in the acquisition of assets. I’m not sure how or even if they are related, but this stock has seen a lot of activity over the past week. Monogram stocks increased by 13%, topping the list as our best performing stock of the week. On the surface, their stock seems to be overpriced since AFFO multiple has reached 21x. As for Pebblebrook and Sabra, their stocks seem to be a bit underpriced.

The sectors that exceled last week were lodging, healthcare, and self-storage. The first two have certainly been battered this year, so it is understandable that there would be some type of reaction above the market average. The median return for both was between 6-7%, but they will still enjoy one of the highest dividend yields among REITs.

On the other hand, self-storage seems to be unstoppable, bordering on irrational exuberance. Public Storage released strong results last Tuesday and their stocks soared by 8%. Its AFFO multiple is very close to the 30s. Sovran Self Storage and CubeSmart also released the Q4 results and their guidance for AFFO growth has been strong. These two stocks have AFFO multiples in the 20s. The truth is that self-storage hasn’t been a sector to find yields. Stocks have fared well, but yields have been below the REIT industry average.

CubeSmart’s growth was spectacular in the fourth quarter. Their FFO share increased by 18% year over year and same-store net operating income growth reached 11%. The company will not be able to keep up this growth in 2016, but the guidance for next year’s growth rates is still very good. FFO per share growth should grow by 10% and same store NOI by 8%.

As for Public Storage, the largest in this sector, their Core FFO per share increased by 11% in the fourth quarter year over year. The company also touched upon market supply, which appears to be growing at 2-2.5%, and even more in highly populated states, including Texas and Florida, where we expect a decrease in rental rates at some point. However, the company wasn’t able to say when the sector as a whole would be affected by oversupply.

Check the reports for Dividend Yield by Sector and Weekly Returns.

Source: CubeSmart(NYSE:CUBE), Monogram Residential Trust, In(NYSE:MORE), Public Storage(NYSE:PSA), Sovran Self Storage Inc.(NYSE:SSS), Pebblebrook Hotel Trust(NYSE:PEB), Sabra Health Care REIT, Inc.(NasdaqGS:SBRA), SEC, Fast Graphs

Disclaimer: This is not a recommendation to buy or sell stocks. The highest-yield stocks are not necessarily the best portfolio investment choice. The purpose of this report — which is essentially a snapshot of information available on February 19, 2016 — is to reduce your stock analysis by enabling you to compare stock and sector performance. Please do your own due diligence before making any investment decision.

As of January 31, 2016, the equity REITs are constituent companies of the FTSE NAREIT All REITs Index. Companies whose equity market capitalization is lower than $100 million have been disregarded.

This report is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

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