"To me there are things you're good at and things you're not so good at. For some reason, I'm good at darker characters. It has to do with how you look." - Christopher Walken
With the Affordable Care Act coverage enrollment deadline of December 15, 2013 for plans that start January 1, 2014 looming, plenty of hurdles have slowed the pace of enrollment as well as general interest in the plan.
Although these problems have weakened confidence in the system as well as the federal government, it can be predicted with confidence that "Obamacare" is here to stay. As such, investors looking to profit beyond direct health care stocks may add real estate investment trusts (REITs) focused on health care properties to their portfolio.
Obamacare Dissatisfaction In America
According to the most recent Gallup Poll statistics from November 2013, when asked what the largest problem is facing America today, the quality and cost of health care was cited as the second-highest concern. The number of Americans that specified this concern was 19%, nearly twice as high as the September figure of 10%.
The largest problem facing the country today, according to Americans, is the government. This rise may also be associated with health care concerns of a poor Obamacare rollout and the 2013 U.S. government shutdown.
As we know now, the President recently resigned to a federal government shutdown which could have been avoided with negotiation regarding the Affordable Care Act roll out. As reported by CNN on October 1, 2013:
The (government) shutdown appeared inevitable Monday night as House Republicans acknowledged they couldn't overcome Senate objections to a proposal that includes provisions aimed at derailing Obamacare."
As such, investors should acknowledge that the President's commitment will be pushed at very high costs regardless of congressional or popular support.
In light of the recent shutdown, Gallup reported that as of mid-November that Congressional job approval was 9%, which is the lowest job approval to date. Gallup also recently noted that Obama's approval rating in early November was the lowest of his Presidential career at 39%, with disapproval also at a career high at 53%.
While the Affordable Care Act may be currently viewed as a darker character in the American movie script that has shaken government confidence and the President's approval ratings, investors must realize that President Obama has showcased a 100% commitment to his health care legacy and that as a result, Obamacare will survive.
How Investors Will Profit From Healthcare Policy
Whether the government makes great policy decisions or not, investors will asses each situation and predict how they can profit from it. With Obamacare on the books all year, the biggest winner in 2013 has been the general health care market.
When measuring the health care sector, many follow the SPDR Health Care Select Sector ETF (XLV), which measures a general U.S. health care index and holds nearly $8 billion in assets. When compared to the S&P 500, as measured by the SPDR S&P 500 ETF (SPY), the U.S. health care sector has outperformed the S&P 500 36.2% to 26.4% as of November 15, 2013.
As the aggregate number of insured Americans in the health care system is expected to increase, such a trend will directly benefit pharmaceutical firms, drug companies and a host of other medical-related industries.
Making Stable Income From REITs In The Health Care Sector
While many investors will continue to favor health care stocks in an overweight position moving forward, there are many income plays which may prove quite rewarding as well. Real estate investment trusts specializing in health care own and lease hospitals, medical office buildings, nursing facilities, senior housing and life science buildings.
As REITs are required to distribute at least 90% of their net income to shareholders as a tax incentive, many income investors lean to REITs as an asset class of its own in income-producing portfolios. Many health care REITs are yielding between 5% and 6% per year at current pricing.
Wait A Minute.. The REIT Market Is Weak
The U.S. REIT market as a whole has been slaughtered since the end of May 2013 and is currently positioned for further decline with bearish technicals. As measured by the iShares U.S. Real Estate Index ETF (IYR), the U.S. REIT market is up .4% year-to-date and currently sits 4.5% below the 200-day simple moving average and .6% below the 50-day simple moving average.
The REIT market may be end up down on the year, however one must look at the long-term benefits that REITs have today to make an investment decision. Here are a few reasons that investors may want to look into REITs this year.
REIT Benefits In 2013
- Low interest rates
- Easy access to capital (borrowing)
- Easy access to capital (stock offerings)
- Out of favor with investors
- Above-market yields
- Several large-cap stable, income-producing assets
- Several specialized, sector-specific REITs
- Several financially healthy REITs
While there are several trending themes that play into long-term REIT success, there are risks as well
Current REIT Risks
- Negative momentum
- Tax-selling as market is underwater for most of year
- 10-Year Treasury Yield trending higher
- High S&P 500 year-end gains increasing tax-loss selling
- Fund manager end-of-year momentum into winning sectors
The REIT Way To Play Nice With Obama
There are several ways to indirectly play on Obamacare within the REIT world. These reflect hospital landlords, as well as those who own other medical facilities and offices. The hospital operators will have an increase in new customers and as such, the number of uninsured will drop. As hospitals take on huge losses due to uninsured customers that do not pay, the profitability will improve. Other related health care fields will continue to improve and become more competitive, thus allowing for rental increases in line with demand growth.
REIT Banking On Health Care
There are many diversified health care REITs. Three options included here are HCP, Inc. (HCP), Ventas (VTR) and Medical Properties Trust (MPW). This selection is made to showcase two large, diversified landlords as well as one small-cap hospital pure-play.
HCP and Ventas are the two largest health care REITs based in the U.S., valued at roughly $18 billion each. Both companies have a diverse portfolio that leans heavily on senior care but also includes hospitals, medical office buildings and other related facilities.
- HCP Portfolio (As of Q2 2013)
- VTR Portfolio (As of Q3 2013)
The senior housing portfolio is higher with VTR, while HCP has a higher concentration of nursing facilities. HCP also owns life sciences buildings, which house large biotechnology companies such as Amgen (AMGN) and Genentech.
Our third selection, Medical Properties Trust, is a smaller health care REIT with a primary focus on hospitals. As a hospital landlord, the company works with its operators to develop new facilities as well as renovate existing hospitals according to new health care technology demands.
Regarding these three companies, there are a few clear risks that are important to note. The first is market size, as a smaller company may have a higher risk due to a smaller portfolio and less diversification. In this regard, HCP and Ventas can be seen as more stable investments.
In the charts below, less-favorable data columns are highlighted in RED. Note this does not make a company unsuitable for investment.
On a general basis, smaller capitalized REITs often come with a higher relative yield to their larger peers. Of these three selections, VTR is the least attractive regarding yield while MPW tops the list at just over 6%.
Many REITs imploded during the great financial crisis by taking on too much debt and as such, financial flexibility is deemed crucial to risk. REITs with less than a 50% debt to market cap in the current climate are seen as flexible companies that are efficiently using debt, while those with long-term liabilities over 50% are seen as a larger risk.
As seen above, VTR has a higher debt ratio. It could be inferred that VTR has used this debt to finance higher relative growth versus HCP and MPW, as noted below.
With the higher growth rate, VTR has a much higher P/FFO ratio versus its selected peers. In a similar fashion to the P/E ratio for stocks, REITs use pricing relative to funds from operations (FFO) to determine valuation.
With Obamacare coming into fruition there are several health care industries that will benefit as more Americans will be insured. As such, real estate landlords will benefit as their tenants are more profitable and will have a higher demand for their services.
While the 2013 U.S. Real Estate Index has suffered as noted by the IYR, there are several health care REITs that offer stable, growing dividends that may be suitable for income investors. With further declines and a watchful eye, such investments may offer more attractive valuations by the end of the year.
At current valuations, there are three health care REITs that offer compelling yields and strong market positions. These companies are listed below for comparison with the less favorable metrics highlighted in red.
With a little research, income investors are able to select health care REITs that could make long-term sense in their portfolio.
For further insight into the two mid-cap health care REITs discussed here (HCP and VTR), please read The Top Mid-Cap U.S. REITs For Income Investors.
To learn more about the health care secular-growth trends in the U.S. and select REITs that may benefit, please read 7 Secular Growth REITs to Generate Income Now.
To learn about additional small-cap health care REITs not mentioned in this article, please read Small-Cap U.S. Healthcare REITs: Own Or Avoid?