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No. of Recommendations: 27
Just recently got the last of the REIT 1Q19 financial report data, that I uploaded into my Excel SS for tracking trends.

With a couple of exceptions, these data are making me nervous, as this REIT class is not showing much improvement over the past 7 to 10Q trending. Of the 9 HC REITs I track each quarter, WELL, HCN, VTR, OHI, LTC, NHI, HR, DOC and my favorite loser SNH, here's a brief summary of each:

WELL is my largest holding and my single biggest worry. Revenue and CFFO per share peaked 4Q16 from which they steadily declined until the most recent 2 quarters when they have ticked back up and brought the Dividend to Net CFFO payout ratio (POR) below 100%. Interest expense as a % of [CFFO + Interest] is probably my single greatest concern, as this has risen to 36.2% over the trailing 4Q, which in my experience is dangerously high and almost certainly will mean no dividend increase until this capital expense can be brought down into the mid 20% range. Were I not sitting on such a large capital gain, I'm afraid WELL would be gone now.

LTC is my second largest holding and is showing a bit better improvement. Revenue per share has gone flat since 4Q16, but Net CFFO per share has been steadily improving over past 7 rolling 4Q periods (R4QP). Interest expense as defined above has been dropping over past 5 rolling 4Q periods finishing out the past 4Q at 19.8% which is excellent for a HC REIT. Dividend to Net CFFO POR has steadily declined over the past 8 R4QPs down to 78%, and this is good. My principal concern with LTC is the drop in Revenues in 1Q19 by over 18%. It had been running consistently in the mid to low ($Millions) $40s down to $36.8 1Q19 with CFFO dropping about the same. Now, to the extent LTC is transitioning properties or for some other reason this is a temporary glitch in CF, and to the extent cash generated from the disposal of certain assets to pay down the cost of capital (debt, equity or non-controlling interests), the last quarter decline may not matter. But if this is indicative of future decline in incoming cash, this would not be good.

VTR's Revenue per share has been incrementally but steadily increasing since 1Q17 while Net CFFO per share had declined from $1.01 to $.96, upticking to $.98 over trailing 4Q. Dividend to Net CFFO POR has improved to 81% over TTM from 83% the two 4Q periods prior to that, but has been on a steady increase since 1Q14 when I began following it at 70%.Interest expense has been pretty consistent over the past 24Q 4QP at just under 22% which is about average. VTR's CFs look pretty stable in spite of it having widely fluctuating property buys and sells. Over the past 10Q, they have spent a net of only $460 on CFFI, with 4 of the past 10Q showing a net sale of properties for the quarter.

HCP has been able to gradually decrease interest expense over past 24 R4QP from 28% - 29% to just under 23% over TTM. Following the SBRA spin-off, revenue per share dropped sharply from $1.40 to $.99 from 3Q16 to 4Q17, but after this, revenue/share continued to decline from $.98 to $.938 while Net CFFO over the previous 4 R4QP has declined from $.44 to $.42. Dividend to Net CFFO POR has been pretty consistently in the mid 80%, finishing TTM at 88.5%. With the exception of its improving interest expense, HCP just does not look well.

HR has been able to get their interest expense from 36% in mid 2014 to 21% over TTM. Revenue per share has steadily gone from $.98 in late 2014 to $.91 over TTM, however, CFFO has steadily improved over this period from high $.30s to $.41 over TTM. This is likely due primarily to the dropping interest expense. Dividend to Net CFFO POR has declined from mid 80% ot 74% over TTM. Managerial efficiency, or how much CFFO can management create from each $1 of Revenue, has steadily increased from the mid $.30's to $.45 over TTM. HR's trending, despite their mill-pond FLAT dividend, has been good.

SNH is a dog with all CF metrics declining, nice and consistently. I won't waste any time on it except to say a dividend cut is almost a certainty, as it has not been able to cover its dividend with Net CFFO since 1Q18 and this ratio is getting progressively worse.

OHI I no longer hold as I'd sold out when its Dividend to Net CFFO POR exceeded 100% 5Q ago. But for those who hold or are considering holding it, it had a steadily growing Revenue per Share from 1Q14 to 2Q17, that subsequently declined from $1.18 to $1.10 over past 3 4Q R4QP. Interest expense had jumped up to 30% in 2017 but has since dropped down to just under 26% over TTM, which is still high. POR is alarming at >100% over past 5 4Q periods, dropping back to 100% over TTM. Clearly, this dividend is not very well covered.

DOC I hold a small position in, but am considering jettisoning it. Revenue per share has been steadily improving since I began following it 4Q15, but Net CFFO/share has gone flat over past 8 R4QP at about $.26 to $.27/share. Interest expense has been steadily increasing and is now at $25.3% over TTM. Dividend to Net CFFO POR has climbed steadily from low 80% range to 90% over TTM. My concern with DOC is they've spent about $3.5B on properties since 1Q15, but over this period, have only been able to generate about $57MM in CFFO after distributions to be used towards this large capital expense, meaning their debt expense has grown much faster than the net cash generated from these investments, and this is not good.

NHI is the one bright spot in HC REITs. Interest expense has consistently been in the 17% - 19% range over past 24 4Q rolling periods, ending TTM at 17.3%. Revenue and Net CFFO per share have been steadily improving over past 24Q while dividend POR has low 80% to high 70% range to 72% over TTM. It is also the only HC REIT that has consistently grown its dividend over past 5 years in excess of 3%/yr, and will finish 2019 at 4% growth if the dividend remains at $1/Q. This would be a ho-hum annual dividend growth rate with other REITs, but sits at the top for HC REITs.

When I run a @Slope calculation over the past 20-24Q of R4QP Net CFFO per share, and then do the same over the most recent 10Q and then over the most recent 5Q, this will give an idea of how this CF metric's growth is growing or declining. All HC REITs but NHI show either a slowing of growth or an increase in the decline rate of this metric over these 3 time periods. This shows that HC has been having a tough time increasing its net operational cash after all financing methods have been taken into account, including issuing equity, issuing debt or taking cash from a non-controlling interest. NHI is the only REIT that has shown an increase in the slope of this CF metric for each of these periods.

The paradox here is all of these REIT prices, except of course SNH, have been increasing this year at a rate higher than the stabelizing of CFs might suggest. And all, except NHI and SNH, are trading near their 12 month highs (SNH is trading near its 12 month low...duh).

So my election is to not pull the chord just yet on any of these I'm currently holding despite their lofty valuations. The latter may be due to the markets seeing these as domestic safe harbors in the event of a trade war with China....I'm not sure. But my primary concern is if any negative news comes out on Medicare reimbursement rates or any incentive for a decrease in utilization may cause prices here to fall, quickly and current yields to come back up in line with historic rates. For example, the 2014 Workforce Innovation and Opportunity Act requires all Medicare beneficiaries with Medigap plans share in some cost of utilization, so the Part B deductible (currently $185/calendar year) must, beginning 2020, be paid by the Medicare beneficiary. This will result in the eliminating of the C and F Medigap insurance plans beginning 2020 (existing C and F plans will be grandfathered). Will this negatively effect the cash flows of clinic/outpatient services operators? It doesn't seem to have yet...but these are the type of regulatory changes that HC REIT holders need to be concerned with.

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