Healthcare: Healthy REIT

by Nathan Slaughter for Forbes

I know with the bad headlines about real estate, many investors are steering clear of real estate investment trusts, but the truth is, many REITs have performed solidly over the last few months. I pinpoint one in particular that’s caught my attention in the still weak recovery.

Health Care REITĀ  is one of the nation’s largest, well, health care REITs. The company might not have the most creative name, but that’s about its only flaw.

Like other real estate investment trusts, HCN owns a collection of income-producing properties and distributes the bulk of its profits pre-tax to investors. In this case, those properties are medical office parks, outpatient clinics, nursing homes, independent retirement communities and assisted living facilities. In total, the portfolio represents more than 600 properties spread throughout 39 states nationwide.

I like the firm’s focus on the health care field. Retail and industrial tenants come and go in a weak economy, but demand for medical attention and senior housing doesn’t flinch much–even in recession. That means the firm’s renters (and occupancy) are generally stable. Better still, roughly two-thirds of revenue generated by tenants comes from private payers, meaning the firm is less exposed to the vagaries of Medicare reimbursement than its peers.

Of course, REITs typically distribute the lion’s share of their cash as soon as they collect it, so they occasionally have to tap the credit markets. When that ATM went out-of-order during the credit crunch, liquidity fears plagued the sector, driving down share prices. Here too, the firm has a distinct edge over its peers, with a modestly leveraged balance sheet and virtually no borrowings set to mature before 2011 at the earliest. So when just about every other stock tumbled during the selloff of 2008, HCN actually finished the year in positive territory.

Finally, it’s worth noting that the firm works with more than 60 different operating partners, none of which account for more than 7% of revenue. Nearly all of its properties are triple-net leased, which means costs like property taxes, insurance and maintenance are paid by tenants. Those leases also allow for inflation-based rate hikes and generally last for more than a decade.

All of this means the firm’s income is highly stable and predictable. More than 80% of funds from operations are dished out to stockholders each year. The latest quarterly payment of $0.68 per share marks the 155th consecutive dividend and equates to a sizable annual yield of 6.8%.

With more than $500 million spent on new development projects over the past year, there is plenty in the pipeline to keep those distributions growing. HCN has never been in a stronger financial position. The company has just prepaid a chunk of higher-cost debt, which will reduce future interest obligations. It has also raised more than $1 billion in fresh capital, not counting $175 million in proceeds from recent property sales.

With a hefty yield near 7% and additional upside of +30% to my $52 “target price,” I think HCN is poised to deliver superior total returns during the next 12-18 months.

Nathan Slaughter is editor of StreetAuthority Market Advisor. For more profitable tips, including how to receive Market Advisor’s 11 Surprising Investment Predictions for 2010, visit this link.


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