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Healthcare REITs: Still Doing Well, But Will That Trend Continue?

by: Alan Brochstein October 13, 2008 | about stocks: ARE / BMR / CSA / HCN / HCP / HR / LTC / MPW / NHI / NHP / OHI / SNH / UHT / VTR    

Alan Brochstein

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Earlier this year, I shared an idea for income-oriented investors who were concerned about the deteriorating economy and the impact it might have on their investments.  I suggested looking at the Healthcare REITs, as they were less likely to suffer from concerns about the ability of tenants to pay. 

The group has performed exceptionally, down about 7% as you can see in the table below.  When I reviewed the group in late January, it was down a little over 2%.

(click to enlarge)

Healthcare REITs

So, what now?  If one owns them, one should feel very fortunate in most instances.  At this point, I am generally cautious on this group for two reasons:

  • They could lag significantly in any rally
  • They could fall absurdly if economic conditions continue to deteriorate.

The first scenario isn't necessarily a reason to sell at all, but one should be aware that investors in the REIT universe have some terrific choices if they are willing to assume some risk.  The typical REIT has fallen over 13% (the median of the 61 REITS in the S&P 1500).  Other types of high-yielding investments have fared even more poorly (MLPs come to mind). 

The second scenario concerns me more, as I have seen so many strange occurences as investors liquidate with abandon.  I wrote this weekend about a massive bond ETF, AGG (AGG), trading at a significant discount to its NAV (which isn't supposed to happen!).  The point is that investors are nailing anything that they can, and the fact that this group is down "only" 7% seems like it could be an invitation for liquidity seekers. 

I wouldn't argue with anyone for selling one of these to buy Johnson & Johnson (JNJ), for instance.  Additionally, while most of the group seems to have a decent balance sheet, the financial situation could impact the ability of these companies to roll over debt.  Also, the operating conditions could worsen as Medicare and other types of reimbursements come under pressure.  Ultimately, in a very bearish scenario, the underlying assets could diminish in value.

The other scenario, and perhaps the most likely, is that ultimately these companies on average will remain nice safe havens during generally challenging economic times ahead.  The valuations relative to book value are low, providing somewhat of a margin of safety. 

As I indicated in the original article, a few of these names seem to have too much debt.  Medical Properties Trust (MPW) wasn't on the original list - that one looks to be in some trouble (sitting on some vacant hospitals).  On the flip side, National Health Investors (NHI) and LTC Properties (LTC) appear to be extremely underleveraged. 

I looked a little further into NHI and discovered that the former chairman attempted to buy the company for $34 in 2007.  Finally, BioMed Realty Trust (BMR) is the one I know best, having owned it earlier this year.  I am contemplating adding it back, as it has been absolutely pounded since doing a secondary offering of stock to replace a short-term borrowing mechanism.  The company has a very diversified base of tenants, primarily biotech (most of which are quite established). 

It would seemingly avoid what I believe could be a big risk to some of the other REITS:  Medicare reimbursement.  On the other hand, it does have some exposure to VC-funded biotech companies.

Disclosure:  No positions

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This article has 5 comments:

  •  
    Oct 13 11:33 AM
    Healthcare REITS, if one does the research, and chooses carefully, are still one of the few safe places to be; I've contributed automatically, and regularly for fifteen years. The returns have been consistently in the high single, low double digit dividends. We're in the DRIP plan, so they've doubled in value a few times, and right now, like everything else, they're down in stock price. To me, this is an excellent time to buy all you can afford. It's not for anything other than a long term plan, but solid.
    - Take a look at SNH, IRETS, HRP, - DO the research.
    Reply
  •  
    Oct 16 09:20 PM
    I wanted to follow up regarding an observation that I made about one of the companies in the sector, MPW. I was concerned looking at the high payout ratio and the very high dividend (too good to be true???), especially given my awareness of a problem with a hospital in Houston (two buildings). A representative from the company contacted me to clarify the situation. I learned that the payout ratio is overstated due to several one-time charges that the company recognized in Q2. According to the Finance Director, the company has no significant debt repayments due in the next few years, which is encouraging. I am not in a position to suggest that MPW merits investment, but I did want to share the company views for anyone who is contemplating investment.

    Reply
  •  
    Oct 25 10:22 PM
    OUCH... Two weeks later, and it looks like scenario two has kicked in: Absurd free-fall. While the S&P 500 has fallen about 2.5% in the past two weeks (from 10/10 close), this group has fallen 18% on average and at the median. As I suspected, with no such thing as a safe haven, investors saw that these stocks weren't down that much, so they sold. Cogdell and Alexandria were the hardest hit at 29% and 27% respectively, while the best performer turned out to be one I highlighted, NHI, falling just 3.7%. I ended up buying BMR at 17.5, well below the 21 at the time of this article but much higher than the close of 15.60 yesterday.
    Reply
  •  
    Nov 21 01:45 PM
    I own MPW stock and was considering buying more if the price dropped below $5.00. My simple rational is based on the S&P analysis that said this:
    "Our 12-month target price of $10 is based on a multiple of 9X our 2009 FFO per share estimate of $1.15, about a 25% discount to health care REIT peers. We believe a discount is warranted by MPW's limited customer base and risks related to recent acquisitions."
    If it is a bad 2009, and FFO is cut in half so should the target price but the 60% decline makes me wonder if something is wrong. Is this drop due to liquidation from safe havens or is there a problem? I can not seem to find any info that says anything terrible is happening.
    Reply
  •  
    Nov 21 07:35 PM
    The whole group has collapsed along with REITs in general. Even REITS with relatively smaller amounts of debt are getting hammered. The ability to roll over debt down the road is being questioned by the market. The prices seem insane to me, but that is the kind of world we are living in. No one wants to lend to anyone.
    Reply
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