I don’t have much time this week, so I’m in shallow water. I’ve got a little back-of-the envelope one for you. Healthpeak Properties Trust (DOC) is a Denver-based owner of outpatient medical buildings and lab space. The company merged with Physicians Realty Trust in 2024. The stock has not performed well, but the 7% dividend yield is very enticing. DOC trades with a market cap of $12.5 billion.
The dividend seems well-covered, however the lab space (31% of revenues) is a wildcard. There has been an incredible amount of new supply, and the biotech market isn’t exactly robust. Despite the risks, this one deserves a closer look.
For now, here are my rough numbers. I am taking a leap of faith by annualizing just one quarter for the balance of 2025. The stock trades with an FFO yield of approximately 11%. I subtracted maintenance capital expenditures (taking management at face value) from net operating income, and it appears that the real estate trades for an implied cap rate of 7.3%. This seems pretty high, but it probably reflects the risks associated with lab space tenants. Leverage is also a little higher than I’d prefer, but the maturity timetable appears manageable.
The problem with Healthpeak, and so many other office REITs for that matter, is “what does upside look like?” How does this story improve? It’s not like the National Intitutes of Health is going to start writing grant checks for new clinical trials any time soon. Healthpeak doesn’t have the ability to refinance debt any more cheaply than what’s on its books today.
Beware the siren song of high dividend yields. Usually the market knows something about risk that you don’t. If you’re just buying debt with a single-B credit rating, you should definitely receive more than 7% on your money. The “equity” may not be worth more than a similar junk bond.
Until next time.
DISCLAIMER
The information provided in this article is based on the opinions of the author after reviewing publicly available press reports and SEC filings. The author makes no representations or warranties as to accuracy of the content provided. This is not investment advice. You should perform your own due diligence before making any investments.
I keep a $5,000 short position in Welltower. It’s my hairshirt. I know it won’t change anything. My penance will not help mankind. I continue to view Welltower (WELL) as the most absurdly overvalued real estate investment trust in the market today. The company is a provider of senior living residential facilities. Welltower mesmerizes all who worhsip at the orthodox church of demographics. “Thou shalt not question thy trend of aging baby boomers” is the first commandment obeyed by all who kneel at the altar. Yet here I am. Tilting at windmills.
Welltower hovers near the $100 billion market capitalization level. No REIT can match Welltower for its voracious pace of expansion which exceeds double digit percentages on an annual basis. It has been an incredible growth story. But growth requires capital, and capital comes from the addition of new shares and debt. REITs, by their tax-advantaged status, must distribute most of their net income to shareholders. Retained earnings are usually a small source of investment capital.
Issuing new shares and debt for growth works just fine for as long as you can earn a return above the cost of capital. More shareholders aren’t a problem as long as the pie is bigger. Fail to do so, and the music eventually stops. REITs become dilution machines. Welltower is on the cusp of such an inflection. The company has raised nearly $21.5 billion in new shares since Covid. It has worked so far, but Welltower now struggles to cover its shareholder distributions. Will the market eventually figure it out?
Welltower’s real estate is valued by the market at an eye-watering implied capitalization rate of just over 2.5%. The FFO yield is 2.5%, and dividends yield a paltry 1.76%. In fairness, housing the elderly is more than just real estate. Services are a key part of the menu. But here’s where it gets worrisome: Welltower is unable to cover it’s current dividends with operating cash flow. By my estimation, about 25% of the company’s dividends to shareholders are funded through the issuance of new shares. The music is playing. The chairs are in a circle.
Just for fun, let’s look at BXP. One of the leading office landlords, BXP has seen its challenges since Covid. The stock trades with a $12.8 billion market cap and offers a 5.44% dividend yield. The implied cap rate for some of the nation’s premier office buildings is about 6.22%. This seems like a reasonable cap rate, until you start asking this question: “Who are the next buyers of these office buildings?” Pension funds probably aren’t lining up to acquire these assets. No more trophies. Class A in appearance, Class A in rentability, but probably not Class A in the transaction market.
Lest you be tempted by the 5% dividend yield, you should know that BXP also struggles to pay that dividend with cash flow.
So, it’s a quick look at a couple of REITs this week. It’s Father’s Day, so brevity is best.
Until next time.
Note: The estimate of maintenance capital expenditures for Welltower is based on 1.41% of depreciated assets in service. This is the average level of improvements as a percentage of total assets for the past six years. Also, some of you may think that I am unfairly punishing these two REITs by deducting capital expendiures from net operating income. I will say that my experience has been that you can’t have it both ways. You can’t add back depreciation AND exclude capital expenditures.
DISCLAIMER
The information provided in this article is based on the opinions of the author after reviewing publicly available press reports and SEC filings. The author makes no representations or warranties as to accuracy of the content provided. This is not investment advice. You should perform your own due diligence before making any investments.
Kewpie Mayonnaise is a household staple in Japan. It was introduced to the country in 1924 after Toichiro Nakashima enjoyed the condiment during a visit to the United States. Today, Kewpie has been elevated to cult status. You can even visit the company “terrace” in Tokyo. Many Western chefs say it’s the best mayonnaise in the world. Kewpie is serious about its appeal beyond Japan and just opened a new production facility in Tennessee.
Japanese mayo uses only egg yolks, so it has a more yellowish appearance than, say, Hellman’s. Creamier and mellower than it’s US cousin, Japanese mayo receives a distinct character from the addition of apple cider vinegar and monosodium glutamate (MSG). The American version of Kewpie omits MSG. Purists say don’t bother. Go straight to the Japansese original for the best flavor. MSG gets a bad rap in the States, but aficionados rave that the addition of monosodium glutamate triggers the famous “fifth taste” known as umami.
Kewpie (2809.T) has a market cap of ¥481.8 billion ($3.34 billion). The company’s shares seem reasonably priced. The stock trades at an earnings multiple of 17 and an EV/EBITDA multiple around 8. Sales have grown better than 5% per year for the past three years.
But Kewpie’s much smaller competitor is a better bargain. Kenko Mayonnaise (2915.T) is a distant second in the Japanese market with FY 2025 sales of ¥91.7 billion – less than a fifth of Kewpie. Kenko trades at ¥1829 for a market capitalization of ¥28.9 billion ($200 million).
The stock is very cheap, trading at an enterprise multiple of 1.5 times EBITDA. Kenko carries just ¥3.8 billion of debt and holds cash and securities of ¥21.3 billion. The stock has declined 23% from its 2024 peak. I believe Kenko trades at a market price that is half of its intrinsic value.
I performed a valuation of the business using an earnings power valuation method (EPV) which capitalizes free cash flow at an appropriate discount rate – the weighted average cost of the company’s capital.
First, I normalized operating income at a 2.94% margin which represents the average for the past five years. The resulting ¥2.7 billion of operating income was adjusted by subtracting taxes and adding ¥2.4 billion of depreciation. Next, deductions were made: ¥822 million for capital expenditures and ¥206 million for working capital. The sum of ¥3.25 billion is Kenko’s normalized unlevered free cash flow.
The denominator in the value equation is 7.72%, a figure representing the weighted average cost of capital. The market value of Kenko’s debt accounts for 10% of the company’s capital. Under current bond market conditions, the after-tax cost of debt is 1.78%. The cost of equity was computed at 8.4%. This represents a 6.91% premium to the current Japanese 10-Year bond yield of 1.5%. The capitalized gross value for Kenko at a weighted average rate of 7.72% is ¥42 billion.
Cash and securities were added to this amount, with deductions made for the market value of debt, pension liabilities and about ¥1.9 billion for long-term payables. The final EPV amounts to ¥57.8 billion ($400 million) or ¥3,654 per share.
The potential upside is 100%.
Too good to be true? Perhaps. Kewpie has a dominant brand, and it is unlikely that Kenko can increase market share without significant additional marketing expenditures. Kenko is a well-regarded product and it is popular in the Kansai region which includes Osaka, Kyoto and Nara, but it’s customers aren’t fanatics.
There’s also the problem with the aging domestic population. Japan’s population is shrinking. Kewpie has begun to carve a path to global growth, but the same can’t be said for Kenko. Where will growth come from?
Kenko has also suffered from erratic financial results. Operating margins have ranged from 5.3% in the most recent year ended March of 2025, to barely north of zero in FY2023. Returns on capital are in the low single digits.
I am also troubled by the possibility that Kenko’s free cash flow doesn’t accurately reflect the cost to maintain the plant and equipment. Depreciation is double the amount spent on capital expenditures. As Japan finally shakes off the curse of deflation, shouldn’t capital expenditure costs match or exceed depreciation levels?
Finally, corporations may finally be exiting the dark tunnel of deflation only to stumble into the harsh light of higher interest rates. Japanese yields have almost doubled since October, rising about 70 basis points. This is a stunning move. A massive unwinding of Japanese credit could lead to a serious fiscal reckoning and a recession. At the very least, higher rates could exert a gravitational pull on levitating stock prices.
Despite all of these concerns, Kenko still holds investment appeal. Kenko offers a wide margin of safety. Mayonnaise has become a central component of Japanese cuisine. Owning the second-best brand seems like a tasty choice… especially when its on sale.
Until next time.
DISCLAIMER
The information provided in this article is based on the opinions of the author after reviewing publicly available press reports and SEC filings. The author makes no representations or warranties as to accuracy of the content provided. This is not investment advice. You should perform your own due diligence before making any investments.