If you found out a company developed a ground-breaking new way to treat prostate cancer, you might seriously consider investing in that company in the hope that it produces a billion dollar drug, the pharmaceutical equivalent of a home run!!
Dendreon Corp (DNDN) did just that, with its Active Cellular Immunotherapy (ACI) drug Provenge, which essentially treats a patient’s immune system to recognize and fight cancer. The problem is that Dendreon is a one-trick pony and competition in ACI is heating up and coming from the pharmaceutical giants with much broader product lines and much deeper pockets.
In our view, Dendreon is a lame duck. The only hope for investors is that it gets acquired by one of the large pharmaceutical companies looking to leverage the technology that Dendreon pioneered. But we don’t see a catalyst for this to happen in the near future and while it is looking at partnership opportunities for the European market, it may need to raise more capital to continue to operate until it becomes cash flow positive.
We understand how investors can be excited by ACI, we just don’t think Dendreon is the way to play it.
It’s no secret that Fiat owns a big chunk of Chrysler. Yes, for those of you hiding in your closets during every episode of Budget Talks, Obamacare, and Debt Ceiling, wondering if the end of the world is near, the Italians own one of Detroit’s finest. The big debate over the last few years is between Fiat and the United Auto Workers Trust that still owns 41.5% of Chrysler. The UAW Trust wants to maximize the amount they get paid for selling it’s share to Fiat. This way, they can pay benefits to retired Chrysler employees. Fiat, on the other hand, wants to pay as little as possible, with the idea to own all of Chrysler, so they can take advantage of economies of scale to reduce costs and increase shareholder value. You can see the dilemma.
With an agreement hard to come to, Chrysler has put plans in place for an initial public offering (IPO), where they will be offering Dodge Ram trucks to all new shareholders. Ah, just kidding. The idea behind the IPO actually, is to let the market decide the proper value of the company and therefore, eliminate the haggling going on between the Italians and Americans. We suggested an interpreter but that one just got left in the box. Instead, it seems that the folks over at the UAW didn’t like what they heard from the underwriters and decided not to proceed.
The underwriting banks were looking at selling about a 16.6% stake that would raise anywhere from $1.5 billion to $2 billion dollars. According to the article in today’s Wall Street Journal, that puts Chryslers value at $9 to $12 billion. That would certainly pay for quite a bit of benefits, but we guess that the UAW was expecting more.
For investors currently holding Fiat shares, us included, it’s tough to root for one team or the other. On the one hand, Fiat shareholders want to be able to buy the rest of Chrysler for as little as possible. On the other hand, investors want the value of Chrysler to be perceived by the market to be as high as possible.
Either way, we think Fiat will benefit in the long run. The two automakers will probably be joined by sometime in early to mid 2014. This would give Fiat a globally competitive auto business with diversification across regions and with less reliance on its domestic market. In fact, the last several years, when Italian auto demand has basically fallen off a cliff, Fiat has made headway into the US, with its sporty and economic Fiat 500 popping up from coast to coast, literally.
If you are a current Fiat investor, sit tight, Morningstar analysts have a price target of $19+ on the stock if Fiat ends up buying all of Chrysler. If thy don’t, they still see a price increase of 50% or so. Don’t let today’s price decline scare you. Fiat is a long-term buy.
Back in May and June, if you were invested in REITs, you saw the value of those positions take a huge hit as did most fixed income investments. But REITs aren’t fixed income, you say, so why were they so negatively impacted?
Well, bottom line is that REITs are perceived to be ‘high yield’ plays, or more broadly, that investors invest in REITs for the income they provide. After all, they have to pay out 90% of their income to unit holders. Therefore, when interest rates rise, there is the perception that REITs will be negatively impacted similar to how fixed income reacts to interest rate increases.
This is a myth, however, or at least, not entirely true across all types of REITs. In fact, there are some REITs that may actually benefit from interest rate increases, which usually occur when inflation is rising. Not the case in May and June 2013, but usually, when interest rates are rising, it is accompanied by inflation.
Cohen and Steers have put together an interesting white paper on the topic and we found the following chart quite compelling:
As you will notice, the types of REITs across the top of the chart are those REITs with shorter lease durations. Senior Housing, Manufactured Housing, Self Storage, Apartments, and Hotels. The latter being able to change rates daily if need be.
Short leases can be advantageous in an inflationary environment because REITs can increase their lease rates to keep up with price increases and more importantly, cost increases, including the cost of borrowing. We have been particularly focused on the top left of the graph, where you’ll find Senior Housing. Not that we don’t like the other types of REITs, but we feel that the demographic trends impacting Senior Housing are extremely attractive as the baby boomer generation begins to retire.
There are several large REITs that operate in the space such as Healthcare REIT Inc.(HCN), Ventas (VTR), and HCP Inc.(HCP), and these large REITs are poised for additional growth through both organic and acquisition activities. Consolidation in the industry is still in the early stages as only 10% of healthcare properties are owned by REITs.
There are a few smaller players in the space but the only one we have recently covered is Senior Housing Properties Trust (SNH), which is about 1/4th the size of the three mentioned above, but the largest of the rest of the senior housing focused REITs.
As investors, you can’t go wrong with the big three even if their growth rates may slow relative to recent years. As competition for acquisitions has increased from private equity firms, non-public REITs, and even office REITs, the deals available are less attractive as prices are bid up.
Despite the slower growth, however, they will continue to grow and will continue to pay nice dividends. For the more aggressive investor, SNH may be a better option albeit it still has a way to go to reach the level of ‘stability’ we see in the big three. To give investors an idea, SNH is at about the size that VTR was about 7 years ago.
Whichever way you might decide to play it (you can always diversify across multiple names), we like the senior housing theme for the long run.