Diversified healthcare real estate investment trust HCP, Inc. (HCP) announced fourth-quarter earnings on Tuesday, actually beating expectations. Yet HCP stock finished the day off roughly 17% — and worse, the selling spread to rivals in the space, including Ventas, Inc. (VTR) and Welltower Inc (HCN), down more than 7% and 8%, respectively.
Now for the obvious question: Why?
If you’re trying to make sense of this, don’t. It doesn’t make sense. The fact is, we’re in a bear market, and this is the sort of volatility that comes with it. Stocks — good stocks — fall for any reason or for no reason at all.
My advice is not to get upset about it. If you own a solid dividend payer with a safe payout, a 20% price drop is nothing to worry about. Your dividend check will still arrive in the mail next quarter. Yes, we’ve had some high-profile dividend cuts of late — perhaps none more high-profile than that of Kinder Morgan (KMI) last year and ConocoPhillips (COP) more recently. But these were a result of the worst energy bear market in history.
There is no reason to worry that healthcare REITs suddenly have a secret, hidden connection to energy that none of us noticed before.
HCP Earnings
Let’s dig into the HCP earnings release to see what all the fuss is about. HCP generated adjusted funds from operations (FFO) of 80 cents per share, beating expectations of 78 cents per share. Revenue came in at $668 million, up by 10.6% over last year, and also soundly beating the consensus estimate of $638 million.
Seriously. What’s the problem?
Guidance left a little to be desired. Management saw full-year 2016 FFO of $2.74 to $2.80 per share, while the consensus expected to see $3.17 per share.
Most people buy REITs as income vehicles, so let’s stop for a minute to talk about the dividend. HCP recently raised its quarterly dividend to 57.5 cents per share, up a penny from last quarter. At current prices, that amounts to a dividend yield of 8.5%. And it’s worth noting that HCP has raised its dividend for 31 consecutive years.
In a world where the 10-year Treasury yields less than 2%, a safe 8% yield should not exist. It should rank with unicorns and mermaids as fantasies that simply don’t exist.
But remember, we’re in a bear market … and nothing really makes sense in a bear market. Selling begets selling, which begets more selling, until there is no one left to sell.
Does this mean that HCP still has further to fall?
Frankly, I have no idea, and neither does anyone else. But if you bought HCP for the dividend, I see no compelling reason to dump it simply because the price fell.
I don’t currently own HCP, but I do own its competitor Ventas. The entire health and senior-care subsector of the REIT universe has been getting slammed for months. But then, so have plenty of other income-oriented sectors such as mortgage REITs and business development companies. If you can’t handle the volatility, then by all means take some money off the table. Sell and sit on cash for a while.
But I would add that nature hates a vacuum, and high yields like these will not last forever. The market will right itself — eventually — and when it does, investors in these sectors should enjoy a nice jump in share values, all while collecting a reliable income stream.
Charles Sizemore is the principal of Sizemore Capital, a wealth management firm in Dallas, Texas. As if this writing, he was long VTR and KMI.
