A Defensive Investment with Aggressive Returns

Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

“Buy real estate now, they aren’t making any more of it!” While this quip doesn’t always represent an effective investing strategy, real estate is perhaps the world’s most time-tested investment vehicle, regardless of the speculation that it invites.

That being said, the average investor often ignores real estate, believing it to be too expensive and inaccessible. What they neglect to realize is that real estate investment trusts (REITs for short) allow individuals to invest in real estate as simply as they would in any other public company. Accordingly, REITs allow the average investor to get in on the action, for lack of a better term.

What is a REIT, to be precise? In the words of Mark Cussen, “REITs are a pool of properties and mortgages bundled together and offered as a security in the form of unit investment trusts. Each unit in a REIT represents a proportionate fraction of ownership in each of the underlying properties.” Most importantly, however, REITs are required by the IRS to pay out at least 90% of their income to shareholders via dividends. Accordingly this makes REIT dividends more predictable and consistent than most; as long as the income remains, so does the dividend. The key to investing in REITs, then, becomes finding those with attractive dividend yields that are well positioned moving forward in the economy.

Working off the latter part of that statement, there is ample reason to believe that healthcare REITs are well positioned moving forward. A few prominent names in this space include HCP, Inc. (NYSE: HCP), Health Care REIT, Inc. (NYSE: HCN), Healthcare Realty Trust Inc. (NYSE: HR), and—my personal favorite—Medical Properties Trust Inc. (NYSE: MPW).  Traditionally, the healthcare sector is one of the most defensive and stable in the entire economy. This is intuitive: people always need medical assistance, doctors, hospitals, etc. It is particularly attractive right now, however, for two reasons: demographics and politics.

As I am sure you are well aware, the “baby-boomer” generation is aging. What happens to people as they age? They require more medical attention. This will increase the need for properties related to healthcare, clearly a positive tailwind for healthcare REITs. Furthermore, Obama’s reelection has solidified the Affordable Care Act, which is expected to insure roughly 40 million more Americans. In other words, the market for basic healthcare will increase by roughly 40 million because of Obama-care, further fueling demand for medical properties. The combination of these tailwinds should, theoretically, propel either prices or volume, benefiting property owners either way.

While investors look to REITs primarily as a vehicle for income investing, they also stand to benefit from appreciation in share price. Typically, shares of a REIT might appreciate because of expectations of increased funds from operations (FFO: special term associated with REITs representing net income reconciled for property sales and depreciation) or property acquisitions. Market conditions can also drive share prices upward. The stage is set for this occur, largely because of deflated bond yields around the world. As central bankers continually minimize interest rates, investors are forced to seek returns elsewhere. While investors could, accordingly, flee to emerging markets, it entails significant risk. American real estate markets, on the other hand, are finally beginning to recover from the doldrums of the recession. Real estate associated with healthcare, once again, is particularly stable. Furthermore, the aging population we are currently experiencing in America is typically associated with a greater need for income-oriented investments. The lofty dividend yields offered by REITs would certainly satisfy this need.  All of these factors are tremendously favorable for REIT share prices, particularly those associated with healthcare.

At this point, you might agree with me that healthcare REITs look quite attractive in the current economic environment. But why am I particularly keen on MPW? To start off, the trust invests exclusively in hospitals, whereas REITs such as HCP and HCN are also involved with senior living and life sciences facilities as well. Hospitals are most likely to benefit from the effects of the Affordable Care Act because they offer basic services that are likely to be covered by insurance. Furthermore, MPW has room to grow as it currently owns just 68 properties or roughly 1.3% of the healthcare REIT market according to Brad Thomas of Seeking Alpha. CEO Edward Aldag indicated on Jim Cramer’s Mad Money in October that he expects the company’s growth to continue at a steady rate in 2013 including about $800 million in acquisitions.

To put it in perspective, compare MPW’s $1.59 billion market cap to HCP’s $20.39 billion and HCN’s 15.74 billion. Out of the healthcare REIT’s mentioned previously, the only one with growth potential similar to MPW’s is HR.  However, its performance lags behind MPW’s with gross margins of only .62 compared to MPW’s astonishing .96.  Furthermore, MPW’s dividend yield of 6.8% blows HR’s 5.00% out of the water, despite the fact that the share price has increased from roughly $9.90 in January to $11.90 currently. CEO Aldag also expressed belief that the current dividend yield could even be supported up through a share price of $14.00!

In today’s economy, I believe MPW to be an extremely attractive investment. Where else can one expect to safely earn nearly 7% per year while potentially benefiting from tremendous share-price appreciation?

FatNDSquirrels has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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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