Healthcare REITS You Should Look Into

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A brief review of some healthcare Real Estate Investment Trusts (REITs) encouraged me to delve further given their favorable yields and likely prospects for growth over the three-to five-year period. Indeed, it seems that the current/ pending nonresidential construction upturn that usually lags housing would render these investments worthy of consideration at this time. An overview of several firms' operations and valuations should help readers make informed investment decisions.

Counting on demographics

The largest domestic healthcare REIT I'm aware of is Health Care REIT (NYSE: HCN), a company that receives the largest proportion of its rent revenue from senior housing, specifically 33% of the total in 2012. The remainder was derived from post-acute/skilled (30%), life science (15%), medical office (18%), and hospital (4%) tenants.

Health Care REIT has been active in expanding its facility base, including in the life science, post-acute/skilled nursing, and senior-housing realms.

In fact, its three business strategies include the principles of opportunistic investing, portfolio diversification, and conservative financing. Thus, its financial results should be less volatile than that of its peers. This factor is visible in its beta of 0.8, which is lower than the broader sector.

As one might expect, given management's goals, Health Care REIT's funds from operations are climbing at a mid-single-digit rate (4% in the latest quarter). Also, a large proportion of its recent investments have been international, including with Revera in Canada and Avery Healthcare in the U.K. The resulting diversification should support stability in results going forward.

Accordingly, the shares, having recently sold off by nearly one-quarter from their 52-week high, appear favorably priced. Given a likely FFO for this year of around $3.00 a share, the P/FFO ratio is just over 21x. Plus, the shares yield 4.8% at the current price.

Growing its leasing business

Medical Properties (NYSE: MPW) attributes 73% of its 2012 revenue to owned real estate. Another 17% was contributed by mortgage loans, followed by other loans (7%), construction in progress (2%), and equity and other interests (1%).

In terms of earnings results, leasing income gains are lifting the bottom line. Furthermore, the acquisition and development of properties is allowing for projections of FFO of more than $1.00 looking toward year-end 2013.

In fact, as of this write up, Medical Properties had completed more than $407 million in acquisitions year-to-date. Most notably, it recently bought out five general acute care hospitals for about $358 million. Management touts the deals as adding to FFO/share in subsequent quarters, supporting dividend coverage and further diversifying the property portfolio.

As such, the shares are trading at a P/FFO of more than 13x. It is less diversified than Health Care REIT and has a beta of 1.6, meaning risk-tolerant investors may realize enhanced price upside. The yield is 5.7%.

Rapidly expanding portfolio

Real estate investment trusts are usually owners and investors in income-producing properties. For my third choice, National Health Investors (NYSE: NHI), this means more than half of its 107 facilities (55 to be precise) are skilled nursing facilities, while another 39 are assisted-living facilities. The remainder consists of senior living campuses (five), hospitals (three), independent living facilities (three), and medical office buildings (two). It also owns 27 mortgage and other notes receivable properties, including 23 skilled, two assisted, one senior, and one hospital.

What is impressive is that during the first six months of 2013, the company built its real estate holdings 31% to $699 million. Subsequently, on July 1, it announced a $135 million purchase of assisted-living facilities.

The expansion is helping to substantially boost the bottom line and FFO. Guidance is for 2013 FFO of around $3.50, bringing the P/FFO to about 18.0. With a beta of 0.8 and a dividend yield of 4.8%, the shares look appealing for their total-return potential.

Investments likely to drive profit upside

LTC Properties (NYSE: LTC), as of the end of 2012, attributed 49% of its investments to skilled nursing, 42% to assisted living, 6% to range of care, 2% under development, and 1% to schools.

Notably, on Aug. 7, the company reached an agreement whereby it would increase its number of skilled nursing beds by 2,092. At year-end 2012, that total was 10,072. The deal also included 24 independent-living units that fall under the "range of care" category, consisting of 11 units at year end.

Disregarding the third-quarter investments, FFO had been on pace to be about $2.35 a share this year. This would amount to a P/FFO of approximately 16.3. However, this metric is apt to be lower than this, and the shares have significant turnaround potential. Their recent price was 20% below the 52-week apex, and the beta is 0.8. At the current price quote, the yield is 5.0%.

Purchase decision

The second two REITs discussed here are my favorites among the group. Their enticing factors consist of aggressive expansion initiatives, while the shares still trade at reduced valuations.

The first, Health Care REIT, is a good choice too for exposure to the industry, and looks to have price upside in the near term, even from a more premium valuation. Finally, shares of Medical Properties Trust are a bit riskier, given its sole focus on real estate, particularly facility leasing.    

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Damon Churchwell has no position in any stocks mentioned. The Motley Fool recommends Health Care REIT. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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