To paraphrase the most interesting man in the world; I don’t often sell, but when I do, I prefer to sell for a profit. Unfortunately, none of this is true when it come to my situation and short lived relationship with HCP, Inc (HCP). I sold out of my shares in HCP today for a moderate loss and some well earned lessons.
The challenges at HCP are well documented but just a quick recap:
- HCP, a Real Estate Investment Trust (REIT), was a Dividend Champion with strong historical performance and a track record of increasing dividends for 30 consecutive years.
- HCP’s largest tenant, ManorCare (a network of skilled nursing facilities), accounted for ~25% of revenue started to recently began to experience trouble – most of which where self inflicted.
- The challenges reached a crescendo last year when ManorCare was charged with submitting fraudulent claims to Medicare.
The challenges at ManorCare resulted in significant strain on HCP’s business. It started initially with adding a bunch of debt to HCP’s balance sheet by acquiring properties and equity in ManorCare back in 2011. The debt issue was then compounded by recent struggles when occupancy dropped at ManorCares and that drove down cash flow to levels that were borderline unsustainable.
All of the struggles with ManorCare led HCP to spin-off ManorCare into its own separate REIT, Quality Care Properties (QCP), which was completed on October 31, 2016. The spin-off resulted in shareholders receiving 1 share of QCP for every 5 shares of HCP. In addition, the spin-off also result in HCP cutting its dividend.
Once HCP cuts its dividend – I was out. Once any company I own reduces it dividend then I immediately sell my out of my position entirely. My entire reason for investing in dividend growth stocks is to gain an attractive yield initially and have my payouts grow every subsequent year. If I can’t count on a company to deliver against these expectations, I have no desire to be a shareholder. This is part of my 5 rules for dividend investing.
Now, I must admit, I didn’t sell immediately. As I stated earlier, I sold my shares on Dec 13th, so I sat on my shares for over a month after I knew the cut was coming. I had a few reasons for doing this and some were better than others. First, I wanted to receive my shares in QCP as well as my November dividend and since I was so close to the next ex-dividend date, I waited. But I have to be honest, the main – which isn’t a good one- was I was just riding the market. I couldn’t bring myself to sell for a loss and the market was shooting up, so I decided to ride it for awhile and maybe get back to even. I finally realized I just needed to stick to my approach and stay disciplined, so I sold out. Now, I will admit I wasn’t too broken up about reducing my loss my a few hundred bucks over the last month.
The experience has taught me a lot of lessons, some more philosophical, some more tactical. For instance, I will continue to stick to my approach and be more disciplined when its time to sell. But the other lesson learned is I’m done investing in individual REITS. At the end of the day they have different valuations methods with unique metrics like fixed-fee coverage ratio, or FFCR and I just decided this was additional complexity I didn’t need in my portfolio. I can get great exposure to real estate through REIT based mutual funds or ETFs where they have very low expense ratios and nice yields. I’m looking to take the cash from the HCP and QCP sale and roll them into a fund like Vanguards REIT Index Fund (VGSIX) where I can get a very attractive yield of 3.65% with a reasonable expense ratio of 26 bps. By leveraging this strategy I get exposure to real estate in my asset allocation, exposure to dividend friendly REITs for passive income and more time to focus on businesses I really understand and appreciate.