Friday, December 13, 2013

H & R Real Estate Trust 2

I do not own this stock of H & R Real Estate Trust (TSX-HR.UN, OTC-HRUFF). Before I started blogging, I was following a number of REITs and this is one I had followed. It also used to be on a dividend list I followed. They are not on any dividend list that I know of at this time.

There is not much going on in insider trading. There is $188,160 in insider buying and $165,488 in insider selling for net insider buying of $22.672 over the past year. There was no insider trading in the last month. There seems to be lots of options. In 2011 stock options exercised were worth $6.9M at 2011's median stock price and in 2012 stock options exercised were worth $12.2M at 2012's median stock price.

The company obviously does not want anyone to use Price/Earnings per Share Ratios as they do not provide any EPS values. However, they do provide net income and average and diluted shares outstanding. The 5 year low, median and high median P/E Ratios are 8.64, 15.21 and 17.50. The P/E Ratio based on diluted EPS for the 12 months ending in Quarter 3 at $1.17 and a stock price of $21.12 is 18.12.

The 5 year low, median and high median Price/FFO Ratios are 11.66, 12.84 and 14.06. The current P/FFO Ratio is 12.00 based on FFO estimate for 2013 of $1.76 and a stock price of $21.12. Using the latest favourite valuation ratio of the AFFO, I find that the 5 year low, median and high median Price/AFFO Ratios are 12.92, 14.65 and 15.99. The current P/AFFO Ratio is 14.67 based on AFFO estimates for 2013 $1.44 and a stock price of $21.12.

All of this shows that using the P/E Ratio, the current ratio is slightly above the 5 year median high ratio and therefore the stock price is on the high side. The P/FFO testing shows that the current P/FFO Ratio is slightly below the 5 year median ratio and therefore the stock price is reasonable. The P/AFFO testing shows that the current P/AFFO Ratio is slightly above the 5 year median P/AFFO and therefore the stock price is still reasonable.

If you use the Graham Price test and calculate the Graham Price using the EPS and FFO, then in both cases the P/GP Ratio is lower than the 10 year median low P/GP Ratios and shows that the stock price is low. The Graham Price using EPS is $24.59 and using FFO is $30.23.

The 10 year median Price/Book Value per Share Ratio is 1.69 and the current P/B Ratio is 0.92 a value that is only 54% of the 10 year median P/B Ratio. This test shows that the stock price is cheap on a relatively basis. It also shows that the stock is cheap on an absolute basis because the Book Value is higher than the stock price.

Now on to what is my favourite test and that is comparing the 5 year median dividend yield, which is 4.79%, and the current dividend yield which is 6.39%. This test says that the stock price is cheap as the current dividend yield is 33.5% higher than the 5 year median dividend yield.

Why is the dividend yield test my favourite? I cannot see much room for anyone to manipulate any values here. It is pretty clear what dividends were paid and what the stock prices has been. The method of calculating FFO values has changed over the years and for both FFO and AFFO, different analysts seem to have different methods to calculate these values. As far as book value goes, the new accounting methods have had a significant effect on this, especially for real estate companies.

The thing with my favourite stock price test is that it is using just 5 years of data and this is a relatively short period of time. If I test the current dividend yield against the 10 year median dividend yield, I get a 10 year median dividend yield of 6.25% compared to the current dividend yield of 6.39%. In this case the stock price is relatively reasonable as the current yield is only 2.3% higher than the 10 years median dividend yield.

A final note on stock price is the fact that the dividend yields used to be significantly higher on this stock if you look at the ones in the 1990's. I have values going back to 1997 and if you get relative highs and lows for dividend yield from 1997 to today, these dividend yields have a high value of 11.40% and a low value of 4.52% and an average value of 7.96%. This historical average is some 19.7% higher than the current dividend yield and suggests the stock price may actually be rather high.

When I look at analysts' recommendations, I find Strong Buy, Buy and Hold recommendations, with the consensus being a Buy. The 12 month target price is $24.50 and this implies a total return of 22.4% with 16.0% from capital gains and 6.4% from dividends.

The charts show that this stock hit a peak in May of 2013 and have been trending lower ever since. Also, the charts show that the stock hit a peak in August 2012 that it has never breached since. The blogger Happy Capitalism addresses this subject.

There is an article in the Financial Post talking about the $200M price tag for the company to internalize the management contract. The Motley Fool thinks that this stock currently deserves a close look at present.

The stock price is probably reasonable. See my spreadsheet at hr.htm.

This is the second of two parts. The first part was posted on Thursday, December 11, 2013 and is available here.

H&R Real Estate Investment trust is an open-ended real estate investment trust. They have a portfolio of office properties, single-tenant industrial properties, retail properties and development projects. They operate across Canada and US. Its web site is here H & R Real Estate .

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on Twitter or StockTwits.

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