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HCN has its best year in a long time! February 20, 2014

Posted by shaferfinancial in Finance.
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My second longest holding is Health Care REIT. As regular readers know, last year I sold a good percentage of my holdings when the price went up well into the 70s [I actually sold in the high 60s]. I felt it was overvalued then and used the funds to purchase higher yielding stocks. Also regular readers know that I have been unhappy that the dividends have not been rising enough.

In order to keep raising dividends, REITS need to get more for their leases and to grow by purchasing new assets. HCN invested $5.7 Billion in 2013. In the last 5 years it has acquired $20B of assets while shedding $2B. So it is doing well in its acquisitions. Growth in the senior housing portion [60% of its income] was 7.4%. This means that their leases were doing well. Skilled nursing increased 3.1%. Medical office buildings saw a 2.2% increase for the year.

It seems as if HCN is hitting on all cylinders at this point. Which gets me to my main worries.

Management still sees much opportunity to invest in high quality properties. But at some point those opportunities will start to get harder to find. Currently they operate in three countries [USA, Canada, UK] all of which have done well after the recession. Hopefully, the investment opportunity will continue for quite a few years, but eventually there will be a lull.

Secondly, even though HCN continues to lower debt [42.6% of book value] with a goal of 40% and a coverage ratio of 3.4X this is a double edge sword. Leverage allows for greater growth. While the current debt environment is at a very low interest rate. Therefore in the future one should assume higher interest costs which will lower funds available for distribution.

Perhaps this is why they have not raised the dividend as much as one would think. FFO and FFD payout ratio’s for the last quarter were lower at 77% and 89%. They paid dividends that were up 3.9% in 2013. This despite having FFO and FAD increase 8% for the year. Their prediction for 2014 is for FAD increase from 5-8%.

I understand they are like a squirrel putting away nuts for the winter, but at some point I would like to see dividend increases over 5%. Maybe this year?

So, I will continue to hold onto this stock. If it does get over valued again I would consider selling some more shares to fund purchases of other faster growing companies. For the year of 2013 the value of the stock went down 14%. With dividends included my unrealized loss on the stock in 2013 was 8%. It peaked at $77.95 in May which is absurdly overvalued. Currently sits at $57.33 and is fairly valued. Year to date is has risen 7%. My yield on cost is 16% at this point with the current yield at 5.5%. I have done very well in my 10+ years of ownership but haven’t purchased any shares since 2009. For me this is a sit, wait, collect dividends, and watch for opportunity to sell.

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