Can Externally Managed REITs Build Good Track Record?

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REITs can be managed using either internal managers or external managers. Like their names suggest, internal managers are employees of the REIT, whereas external managers are contracted to manage the REIT’s investment portfolio in exchange for a base management fee as well as a performance-based fee to serve as incentive. Sometimes, REITs use external managers because their resources cannot support a full management team, whereas other times, REITs use external managers because it simplifies their infrastructure. Regardless, externally managed REITs are a fairly controversial practice with a wide range of detractors.

In short, both internal and external managers can be skilled and reliable professionals, but the interests of the latter are not as strongly aligned with the interests of the REIT’s shareholders. This is because both base management and performance-based fees can incentivize decisions that maximize short-term gain for management at long-term loss for shareholders, which is a serious problem for the shareholders but not so much for the external managers. However, it is important to note that in spite of their issues, externally-managed REITs can still make profitable investments and build a good track record.

For example, Gladstone is an example of an externally-managed REIT with a good record when it comes to dividends. After all, while they haven’t raised their dividends in 8 years, they also haven’t missed one of their dividend payments since 2003, which is particularly impressive considering the timing of the Great Recession. Although their AFFO payout ratio is close to 100 percent, its chances of missing a dividend payment are minimal in the short term when considered in combination with their consistently high occupancy rates currently sitting at 97.4 percent as well as a 7 percent expiration rate for its forecast rents through 2019. Finally, it is worth mentioning that the fees for its external managers were recently lowered from a base fee of 2 percent to 1.5 percent and an incentive fee of 20 percent to 15 percent of core FFO. Combined with the insertion of a termination fee when the agreement between the REIT and its external managers is terminated without cause, this should serve to relieve concerns about whether dividends are reliable or not.

With that said, while Gladstone is a profitable investment and has built a good track record, it should be noted that it specializes in providing a stable income rather than spectacular price appreciation, which is something that interested investors should keep in mind when scrutinizing Gladstone shares for their investment portfolios.

Source: Gladstone Commercial Corp.(NasdaqGS:GOOD), 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.

U.S. REITs: Our Best 2016 Month Yet

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March of 2016 has been an enormous success for equity REIT stocks. In total, equity REIT stocks rose by 9 percent in value, which comes as welcome news after the unpleasant seesawing of recent times. However, it is important to note that like always, some equity REITs have benefited more from the surge than others. For example, Manufactured Homes managed no more than 5.6 percent, whereas Timber managed a much more respectable 16 percent.

Regardless, two top performers were Ashford Hospitality Prime and CorEnergy Infrastructure Trust, which have long been popular choices for speculative investors because of their volatile prices. In brief, CorEnergy managed to claim the top position with an astonishing rate of return of 52 percent, which was fueled by two hectic weeks of activity after it released its 10-k in the middle of March. However, the reasons behind the rapid increase remain unclear at the moment. After all, although CorEnergy’s dividend yield remains one of the highest in its field at 15 percent, the performances of its biggest clients, Ultra Petroleum and Energy XXI, remain lackluster because oil prices remain low.

Likewise, Ashford Prime’s stock prices have seen enormous increases in spite of somewhat mixed circumstances. On the one hand, its stock is currently trading at 6 times its AFFO compared to 5 times its AFFO not so long ago, which is still low enough to permit room for further increases in the stock price. On the other hand, it is currently caught up in a struggle between its current external leadership led by Montgomery J. Bennett and Sessa Capital led by John Petry.

In short, the struggle has revolved around governance issues, including a $100+ million termination fee that Bennett has imposed on Ashford Prime in case its shareholders choose to remove its current team of advisors, though this is but one of the concerns that have been brought up by Petry. To correct these problems, Petry wants to bring in new directors to replace the current directors, which will be decided by the shareholders in the annual meeting.

Currently, investor uncertainty regarding the future of Ashford Prime is undoubtedly keeping its stock prices low, particularly since Sessa Capital has little experience as an activist. As a result, it remains to be seen whether the REIT stock can continue rising higher for the foreseeable future.

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Source: Ashford Hospitality Prime, Inc(NYSE:AHP), CorEnergy Infrastructure Trust(NYSE:CORR), Ultra Petroleum Corp.(NYSE:UPL), Energy XXI Ltd.(NasdaqGS:EXXI)

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.

The Dividend Prospects of this Student Housing REIT

 

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A student housing REIT named American Campus Communities has experienced a recent fall in its funds from operations (FFO) per share, which is basically the cash flow from its operations calculated by adding both amortization and depreciation back to its earnings. As a result, it should come as no surprise to learn that some of its investors have become concerned about its dividends even though it has been paying either similar or higher dividends for 11 years straight now, which is an impressive record that most REITs cannot match.

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On the surface, it would seem that these investors are correct to be concerned about American Campus; however, the company is experiencing a period of significant appreciation, which can be seen through its metrics. Industry wise, student housing has seen a falling capitalization rate and a vanishing premium versus multifamily residences, which are significant on their own, but become much more when taken in at the same time.

chart03For starters, its adjusted funds from operations (AFFO) multiple is closing in on 20x, which suggests that it is one more in a long list of overvalued residential REITs. Furthermore, it has had a below-average dividend yield of 3.4%.

With that said, not all is lost, particularly since American Campus seems to have been putting its resources to excellent use in preparing for the future. For example, it has been selling older student housing that are situated further from the campuses in preference for focusing on newer and more convenient student housing, which is obviously more attractive from the customer’s point of view. Similarly, it has been using the cash raised from the recent issuance of 18 million shares to pay down its outstanding debt, so much so that its ratio of net debt to EBITDA has fallen from 7.4x to 5.6x, which is so impressive that S&P has upgraded its credit rating from BBB- to a much more respectable BBB.

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Although it is not guaranteed that American Campus will prosper in the future, their moves are nonetheless encouraging, particularly since the student housing market still retains enormous potential. After all, the successful management of student housing needs specialized expertise and experience from specialist REITs such as American Campus, meaning that investors are more interested in entrusting their investments to them than banking on new ventures. Combined with the fact that the student housing market is enormous as well as the fact that the REIT should be more than capable of covering its expected dividends (payout ratio is 58%), there are no signs that American Campus plans to break its streak anytime soon.

Source:American Campus Communities, I(NYSE:ACC)

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.

Healthcare REITs Exposed to this Top SNF Tenant

chart05.pngIndividual dividend investors fond of healthcare might find this article useful as we look at the skilled nursing facility industry. The last time we reviewed this industry, we pointed out that operators in the industry have been tenants of their fellow healthcare REITs. Looking at it from another angle, we wonder what the effect is on individual healthcare REITs who are dependent upon a single, interdependent tenant.

Genesis Healthcare, a prominent healthcare operator and publicly traded company, is one of the United States’ largest post-acute care operators. Genesis is associated with Omega Healthcare, LTC Properties, and Welltower. Due to challenges in the industry, Standard & Poor’s downgraded the company to B- last year and put it on alert.

Genesis Healthcare is a sizable healthcare operator, with almost $400 million in market cap. Despite the size, the company is highly concentrated in Medicare/Medicaid revenues. It has 475 skilled nursing facilities and 56 standalone assisted/senior living facilities across 34 states. A lot of the facilities are located in the Northeastern U.S and most are leased.

Margins have been thin due to levels of high competitiveness and government pressure to reduce healthcare costs. As a result, some segments of the company have not been profitable; overall, the company incurred losses in 2015, 2014 and 2013. The company intends to strengthen its balance sheet in 2016. They are selling non-strategic assets which should generate U$100-150 to pay down debt. This initiative has been welcomed by S&P.

Exposure to Genesis

Genesis is Omega Healthcare’s top tenant, responsible for about 7% of its annualized base rent. Overall, Omega has a good number of operators (83 in total); none of the top 10 operators individually are responsible for more than 10% of revenues. This is a good indication that the company would not be hugely affected by a potential Genesis’ default.

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While Omega’s top 10 tenants encompass 48% of revenues, LTC Properties’ top 10 consists of 81%. In LTC’s case, Genesis is among the top 10 tenants but is seventh in the rankings. It is responsible for 5% of revenues. Certainly, the management has other tenants to care about equally.

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Genesis is also a top tenant of Welltower, which leases 187 facilities to Genesis via a long-term, triple-net master lease. For the year ended December 31, 2015, the lease with Genesis accounted for approximately 31% of Welltower’s triple-net segment revenues and 10% of total revenues. In terms of net operating income, this is equivalent to 14%.

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Genesis’ shares have lost two-thirds of their value over the past 12 months. The lowest point was in February when the stock bottomed at $1.42. More recently, the stock has rebounded and is now trading at around $2.35. During the same period, the three healthcare REITs above mentioned have experienced some depreciation as well, but not as severe.

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Extra vulnerable companies such as Genesis have suffered more, in light of being exposed to regular sell-offs in the financial markets. The reason for Genesis’ distress is further related to its high leverage, high competitiveness in the industry, and heavy reliance on the Medicare/Medicaid industry.

In summary, it is not entirely clear how the healthcare REITs’ underperformance is associated with Genesis’ distress; but, as we’ve seen, a single, shared tenant/operator such as Genesis Healthcare can certainly cause some damage and negatively affect the multiple REITs it is involved with.

Source:Omega Healthcare Investors Inc(NYSE:OHI),Genesis Healthcare, Inc.(NYSE:GEN),LTC Properties Inc.(NYSE:LTC),Welltower Inc.(NYSE:HCN)

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.

Most Consistent Dividend Paying U.S. REITs: Gladstone Commercial

chart02Gladstone Commercial Corporation (GOOD), a small cap in the diversified sector, is part of a select club that has paid similar or increasing regular dividends time and time again for more than ten years. Some can argue that their last dividend was a very long time ago (eight years ago, to be precise, but you can’t deny that they managed to keep dividend rates unscathed during the great recession. Less than 20% of the stocks in our pool of equity REITs have managed to accomplish such an impressive dividend record. The purpose of this post is to clarify what you should expect from GOOD and look at the reasons why you should consider it.

First of all, you have to think of Gladstone Commercial as a disciplined stock. The first time I learned about Gladstone I found it boring and unattractive. However, as time has progressed, the stock has grown in my eyes. Perhaps these volatile times have made me think that I need more stable stocks in my REIT portfolio and, although growth is nice, a certain level of stability has become paramount. When you look at it from this perspective, GOOD fits the bill.

chart01Since Gladstone declared its first dividend on 9 December 2003, they have never interrupted the series of distributions. In 2004, they distributed quarterly dividends, but by the following year they were distributing monthly. They quickly achieved an annual dividend rate of $1.50 in 2008 and have maintained this rate ever since. In Q4, their AFFO payout dividend ratio was 97%.

Although their dividend rate has been flat, it doesn’t mean they haven’t been growing their assets. It’s actually quite the opposite. Their historical asset growth has had a CAGR of 18%. They are not market timers, so they have consistently issued equity, sometimes at a larger pace to decrease leverage. By continually doing this, they have decreased leverage from 67% to 52% over the past five years.

chart04The portfolio has been built in a peculiar way. Management mostly considers transactions between $5 and $20 million. They target secondary markets with attractive economic growth trends, growing population, and increasing employment. The portfolio has been built for durability – net lease (less operational leverage), diversified but biased towards office and industrial, and present in 24 states. There is no major area of concentration in regards to tenant industries or individual tenants (above 10%).

What I don’t like about the company is that it is externally managed by the advisor Gladstone Management Corporation and the administrator, Gladstone Administration, LLC. Some senior executives work across all three companies. In order to avoid conflict of interest, I’ve always had a preference for internally managed companies.

chart03Their fee structure has been revised to be more in line with other REITs. For the advisor, the management fee is 1.5% of the shareholders’ equity and incentive fees are contingent on the core FFO’s performance. They do not charge acquisition or disposition fees. The administrator covers overhead expenses, including rent and personnel. Both the advisor and administrator also oversee several other publicly traded funds in addition to Gladstone Commercial. They also manage four public companies listed on the NASDAQ exchange – GLAD, GOOD, GAIN and LAND, as well as privately held funds.

From a valuation standpoint, dividend yield is one of the highest among equity REITs, while their AFFO multiple has been lower than their historic normal. The stock seems undervalued. Contrary to its share price performance, the stock is up 9% this year, but those who buy GOOD aren’t interested in price appreciation. As long as they don’t interrupt or slash dividends, their shareholders will be happy.

Source: Gladstone Commercial Corp.(NasdaqGS:GOOD), Fast Graphs, Yahoo!Finance.

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.

Our Highest Yielding REIT Stock Not An Investor’s Dream

 

chart01Following the recent dividend reduction by NorthStar Realty Finance, CorEnergy Infrastructure Trust (CORR) has become our highest yielding stock among equity REITs, with a whopping rate of 20%. This could be a dividend investor’s dream–except for the fact that CORR is also one of the most volatile REITs. CorEnergy may have had a good dividend record over the past six years for distributing similar or increasing dividends; but right now, the truth is that they have been highly speculative.

CEO David Schulte has been trying hard to dissociate CORR’s stock from the energy markets’ volatility. He has focused on the importance of the company’s assets in order to help the tenants run their operations. He mentioned that the company’s properties are part of the tenants’ essential operations and rent payments are not an expensive portion of their operating expenses. Also, although the company has participating rents in the tenants’ operations, he emphasized that CORR receives the rent payments before debt and equity service. That is, from the tenants’ standpoint, a priority for them to keep paying CorEnergy.

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The company went further and disclosed this early March, that major tenants have been compliant with their lease contracts, despite their liquidity concerns. Their three major tenants: Ultra Petroleum Corp (UPL), Energy XXI Ltd (EXXI), and Arc Logistics Partners LP have all paid on time. In a recent presentation, the company provided precise examples of where the rents stand on both UPL’s and EXXI’s income statements. See Below.

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Although I have no doubt that Pinedale lease agreement should be important for UPL’s operations, the concerns about UPL go deeper. The company is in a vulnerable position and is struggling to be a going concern. It has to either be able to comply with financials covenants or renegotiate them. Since oil and natural gas prices have not shown material improvement, it has been trying the latter. If UPL doesn’t successfully meet payments, it may file for Chapter 11 or a creditor may file for Chapter 11 for it. This does not exclude the possibility of renegotiating lease rates.

EXXI has been in the same boat as UPL and has already mentioned that filing under Chapter 11 may be unavoidable. EXXI revenues have significantly diminished quarter after quarter. Last month, the company decided not to pay $8.8 million in interest payments and entered into a 30-day grace period. They made the payment eventually, but entered into a new 30-day grace period for another payment due on March 15, 2016, which may lead it to a default.

The stock performance for both UPL and EXXI have been dire. Today they are a small percentage of their 52-week high, putting them into the category of deeply distressed stocks. Last month, the EXXI share price was so low (below $1.00 for 30 days in a row) that NASDAQ informed EXXI that they have to regain minimum bid price or delist the company. As Richard Zeits mentioned in his Seeking Alpha article, investing in EXXI resembles one of a lottery situation. The difference is that in the lottery you know the amount and the timing; in this near-default stock’s case, you don’t.

chart05In summary, aware of the tenants’ severe distress situation, it is hard to buy or hold CorEnergy, except for speculative purposes. Despite their dividend record, to say they have not been an ideal stock for dividend investors is a euphemism.

Source: CorEnergy Infrastructure Trust(NYSE:CORR), Ultra Petroleum Corp.(NYSE:UPL), Energy XXI Ltd.(NasdaqGS:EXXI)

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: Longest Dividend-Paying Stocks — Welltower (HCN)

 

chart01Although Welltower may not have the highest dividend yield in the healthcare REIT sector, the company certainly makes up for that fact with their size, solid dividend history, and high quality investment properties. This company enjoys status as the longest paying dividend healthcare REIT along with their competitor Universal Health Realty Income Trust (UHT) and HCP. Welltower has recently completed an outstanding forty-four years of quarterly dividend payouts to their investors. This is certainly an incredible record.

Welltower changed the company name from Health Care REIT last September. This initiative was designed to match the name with their investment strategy that is focused on wellness. With $24 billion in market capitalization, this business is a giant player in the healthcare industry. They tend to invest in senior housing, along with post-acute communities, and outpatient medical properties. Welltower maintains investments in the United State, Great Britain, and Canada, although the majority of their annualized base rent is in the U.S.

chart02The Welltower property portfolio is well diversified, as would be expected for a REIT of this size. They divide into three main segments that include triple net lease properties, seniors housing operators, and outpatient medical facilities.

  • Their Triple-net properties tend to range from zero assistance to intensive care facilities. A few examples of this are independent living facilities, assisted living facilities, Alzheimer’s/dementia care facilities, long-term/post-acute care facilities, and hospitals. Welltower does not manage these properties; instead the company leases them to operators under long term, triple net master leases. This portion of the business accounts for thirty-one percent of total revenues.
  • Seniors housing operators are included in some of the above-mentioned properties; however, they are the result of a joint venture between Welltower and the operator. This segment accounts for almost sixty percent of annual revenues. They are structured under the commonly referred to RIDEA structure, which allows REITs to participate in actual net operating income, as long as there is an involved third party manager.
  • Welltower’s outpatient medical segment includes medical offices, surgery centers, laboratories, and diagnostic facilities.

chart04Welltower is certainly a defensive stock that works well in these volatile times. The company has low 0.1 three-year beta. On average it has barely moved in tandem with the S&P500, although it is a component of the index. In addition, the estimated population of the United States citizens sixty-five years or older may very well grow by forty percent by the year 2024. Management is looking ahead and believes that they have room to grow. According Welltower, they have captured less than three-percent of the health care industry.

chart03Welltower has proven methods in order to sustain a 3-4 percent growth in their annual dividend rate. As the funds from operations (FFO) per share grow quicker than its dividend rate, the proportion of FFO paid to their shareholders has declined during the past years. As a matter of fact, this past quarter the company’s FFO payout ratio fell down to 73 percent. It was 90 percent in 2010.

In addition, a conservative capital structure provides the tranquility that dividend investors seek out. Standard & Poor’s has maintained the company’s credit rating at a triple B, which was reaffirmed last year. Much like many other REITS with similar ratings, Welltower’s net debt to adjusted EBITDA remains below 6x. The major private revenue sources, high occupancy rate across their various property types, and the good rent coverage have all helped investors to remain optimistic about the company’s future prospects.

chart05In summary, Welltower has proven itself enough to deserve a place on the cautious dividend investors watch list. Although their AFFO multiple of 17x may not signal the ideal entry point, they do have a superior dividend yield (5.2%) when compared to the average REIT.

Source: Welltower Inc.(NYSE:HCN), Universal Health Realty Income(NYSE:UHT), HCP, Inc.(NYSE:HCP), Fast Graphs, Yahoo!Finance.

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.

Six Reasons Why We Like National Health Investors

 

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We’d like to let you know about National Health Investors, a company we’ve identified as one of the most consistent dividend-paying REITs. It doesn’t yet enjoy the longevity of either HCP, Welltower (HCN), or Universal Health Realty (UHT) in terms of the longest paying dividend stocks in the healthcare REIT sector, but so far it has accumulated a respectable dividend history. By distributing similar or growing dividends for the past 14 years, National has already placed itself in this elite club of dividend-paying REITs.

Those investing, in general, seem to like the healthcare sector because of its defensive nature–National Health is no exception in this group of REITs. We are not currently in a recession even though the markets have been volatile; however, some experts have argued that we are headed for one. Regardless of the abundant number of opinions floating around, investor fears’ could be reduced if their investments were in stocks that do not fully ride the market’s roller coaster. With a 3-year beta of 0.5 (a move, on average, half of what the SP500 index moves), National Health is among those stocks that can provide some peace of mind.

So what do we like about National Health Investors? We find six reasons why this is. First, over the past five years, the dividend rate has grown at a CAGR of 8%. In fact, the company just increased its dividend rate following its last years’ distribution routine.

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The second reason is that for over the past five years, the funds from operations (FFO) per share have been at a CAGR of 11%. A strong FFO-per-share growth likely translates into a strong dividend rate growth, which allows maintenance of a reasonable payout ratio in the range of 80%. Just last quarter, National’s AFFO payout ratio was 83%.

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Another reason we like National is that its portfolio is diversified in terms of property type. It is a great option for those who don’t want to be too dependent on Medicaid and Medicare revenues, from which the company has moved away since 2009. The company basically splits its portfolio into 35% medical and 62% senior living, but further clarification is needed. The properties encompass 116 senior housing properties (both assisted and independent living), 68 skilled nursing facilities (SNF), 3 hospitals, and 2 medical office buildings.

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The fourth reason we like National is that although the company has not been rated by a major credit rating agency, it appears to have a conservative debt profile. Less than one-third of its capital structure is composed of debt. Its net debt-to-adjusted EBITDA ratio is about 4.2x, more stringent than the typical investment-grade REIT ratio. For instance, Welltower, rated BBB by S&P, has an equivalent ratio of 5.6x.

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Fifth, we like that National’s lease portfolio has been holding up well. EBITDARM coverage, which is relevant for the healthcare sector, is a measure of a property’s ability to generate sufficient cash flows. This allows the operator/borrower to pay rent and meet other obligations, assuming that management fees are not being paid. National’s EBITDARM varies depending on the type of property, but the full portfolio coverage is 2x, which is reasonably good.

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And, finally, there are no major lease expirations in the short, midterm. The number of expirations will only pick up in 2025.

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Source: National Health Investors Inc.(NYSE:NHI), Universal Health Realty Income(NYSE:UHT), Welltower Inc.(NYSE:HCN), HCP, Inc.(NYSE:HCP), Yahoo!Finance, 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.

Should You Be Investing in Mall REITs?

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Click here to check dividend yields and stock performance.

Macy’s, J.C. Penney, and Wal-Mart are some of the retailers that are closing stores, prompting fears that now is not the time to invest in mall REITs. For example, Chris Versace, a writer for the Eagle Daily Investor, has stated that anchor store closings and the rising number of online sales are changing how retailers operate, meaning that people should not invest in mall REITs until the resulting wave of store closures have come to a conclusion.

Are These Concerns Warranted?

There are reasons to believe that fears about mall REITs are overblown. For starters, some stocks have been performing better than others, meaning that there is still hope in the form of REITs with high sales per square foot such as General Growth Properties, Macerich, and Simon Property Group. Also, REITs are still planning new malls, which they probably wouldn’t be if the prospects were really so bad. Mall vacancy rate has been trending downwards since the great recession.

In fact, these companies have been performing better than the average equity REIT. Their dividend yields have been lower, usually an indication that things are going in their favor. As another point of view, WP GLIMCHER and CBL & Associates Properties are offering higher-than-average dividend yields because they have suffered from tenant bankruptcies and store closures with corresponding consequences for their own financial states and share prices.

Also, Brookfield Asset Management bought mall REIT Rouse Properties last month, elevating Rouse’s share price by 25% in 2016. This transaction elevated mall profile, as well.

It is worth mentioning that the concerns over store closures have been exaggerated. For example, Macy’s opened 26 stores even as it closed 40 stores in 2015, suggesting that the problem wasn’t across the board but concentrated in particular locations. Similarly, both Macy’s and J.C. Penney have pointed out the positive correlation between brick-and-mortar stores and their online counterparts that exist because people are able to browse and return products that they buy online. In other words, the conclusion that the rising number of online sales is causing an industry-wide problem for mall REITs is suspect because the evidence shows that having both an online and offline store actually drives up sales rather than drive them down.

Further Considerations

Summed up, it is debatable that mall REITs should be avoided because of the rising number of online sales and stores closures. However, interested individuals should remember that successful investing is based on a lot of hard work, meaning that they should not take this as an endorsement to invest in mall REITs at random without putting in the necessary time and effort.

Source: CBL & Associates Properties In(NYSE:CBL), Rouse Properties, Inc.(NYSE:RSE), WP GLIMCHER Inc.(NYSE:WPG), Simon Property Group Inc.(NYSE:SPG), The Macerich Company(NYSE:MAC), General Growth Properties, Inc(NYSE:GGP)

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.

Why Do People Invest in Skilled Nursing Facilities (SNFs)?

chart01.pngHere is a real estate investment proposition that might spark your interest. You will own facilities whose tenants serve an increasing amount of elderly patients in the United States. The majority of the patients will pay your tenants through government program reimbursements. Remember, governmental programs depend on federal and state budgets, some of which may have shortfalls. Over the past years, the reimbursements have increased by a compound annual growth rate (CAGR) of 2-3%. Tenant profitability is low, and in a previous budget sequestration, government programs have not been preserved and Medicare has suffered cuts. Would you invest in skilled nursing facilities?

The skilled nursing facility industry today provides many excellent benefits but also downfalls. One of the best aspects of the industry is the future demographics. As the baby boom generation ages, they will need to visit healthcare facilities more frequently. The United States census notes that the number of citizens older than 85 years will increase significantly in the coming decades.

On the other hand, there is a highly regulatory aspect of the business. Obamacare increased the number of insured citizens; however, the healthcare system has suffered regular changes and scrutiny has intensified. The Center for Medicare and Medicaid Services (CMS), a federal agency within the United States Department of Health and Human Services (HHS), has been executing details of Obamacare. CMS is trying to increase transparency within the industry by tracking payroll, staffing and number of penalties (see website here). They are also looking to contain growth in Medicaid expenditures and control daily rates which affects SNFs’ revenues and profitability.

The performance of Genesis Healthcare Inc. in the financial market may reflect the invest mood of the SNF industry. Genesis Healthcare is a publicly-traded company and one of the largest post-acute care operators in the United States. Genesis Healthcare is a tenant of healthcare REITs Omega Healthcare and LTC Properties. In January 2015, it was downgraded by Standard & Poor’s to B- for challenging prospects in the SNF industry. Their year-to-date share price has plummeted by almost 50%.

In Standard & Poor’s January 2015 report, they highlighted the following: “The downgrade follows a review of the industry prospects for nursing facilities and reflects our assessment that Genesis will be challenged to generate substantial free cash flow on a sustained basis,” said credit analyst David Kaplan. Our rating on Genesis reflects our assessment of its business risk profile as “weak” and the financial risk profile as “highly leveraged”, and our view that the company’s financial risk is comparatively weak within the highly leveraged assessment. Our outlook is stable, reflecting our view that industry headwinds will offset margin expansion initiatives, leading to thin margins near current levels, and that the company will generate only modestly positive free cash flow.”

In summary, the SNF business offers excellent demographic fundamentals with minor upside and major downside as a result of constantly changing government regulations. If that is the case, why invest in the industry? First, healthcare REITs have historically been immune to the swings of the stock market. Second, yields have been one of the highest among equity REITs. Furthermore, if we saw less regulatory impact and revenues continued to grow incrementally, healthcare would be the ideal REIT stocks. They would provide stable, gradually-increasing dividends over time.

Source: Omega Healthcare Investors, Inc. (NYSE:OHI), Standard & Poor’s, Genesis Healthcare, Inc.(NYSE:GEN), LTC Properties Inc.(NYSE:LTC), CMS, Ventas, Inc.(NYSE:VTR)

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