My regular readers know that I have been increasingly cautious on the market over the last few months. They also know that I started to accelerate my allocation into high-yielding sectors of the market towards the last quarter of the year. These sectors had vastly underperformed the market in the last half of 2013 as interest rates rose precipitously from the time the Federal Reserve started to discussing the "taper" in late May.
I did not personally believe this rise could be sustained as I do not see the 3% GDP growth for 2014 that was the consensus to begin the New Year. I also thought there were some good values in these sectors after their declines in the back half of 2013. Finally, after 2013's ~30% rally, 2014 should be a very different year. It is hard to see returns exceeding 10% for the year after last year's big rise, with the Federal Reserve started to withdraw liquidity from the market and with the emerging markets starting to crater.
Given this outlook, finding attractive plays with 5% to 7% yields and reasonable valuations seems to be a smart strategy for the year. I like some of the medical real estate investment trusts (REITs) that offer solid yields, reasonable valuations and should outperform a flat market. Here are two that have received positive catalysts recently and look attractive here.
Physicians Realty Trust (DOC) is a self-managed healthcare REIT organized to acquire, selectively develop, own and manage healthcare properties that are leased to physicians, hospitals and healthcare delivery systems. The company invests in real estate that is integral to providing high-quality healthcare services and its properties typically are on a campus with a hospital or other healthcare facilities or strategically located and affiliated with a hospital or other healthcare facilities.
Physicians Realty just came public in mid-June 2013 but has a seasoned management team. DOC got a big "shout out" today from Wunderlich. The analyst firm calls Physicians their "top pick among equity REITs for 2014, because we think the company has a long runway of accretive acquisition potential. The combination of an aging population, healthcare reform, and a shortage of doctors is changing the way medicine is practiced in the U.S. DOC works with doctors and hospital systems to monetize their facilities without disrupting their patient service. "
Wunderlich also moved its price target to $14.75 a share from $14 previously. This is substantial above the stock price of ~$12 prior to the upgrade given that it also provides an over seven percent yield (7.3%). Compass Point also has a "Buy" rating on the relatively uncovered shares.
Revenues should more than double in FY2014 on the back of some recent acquisitions. This REIT posted break-even FFO (Funds from Operations) results in FY2012 but looks like it can post a ~quarter a share in FFO in FY2013. The current consensus calls for the REIT to come in with almost a $1 a share in FFO in FY2014. I will be picking up shares in this REIT during the next market pullback.
BioMed Realty Trust (BMR) continues to be a core income holding for me in this space. This REIT focuses on providing real estate to the biotech & life science industry in the United States. The company has a well-diversified portfolio with emphasis in the life science centers of Boston and San Francisco which account for ~45% of its overall holdings.
The shares are moving up in early trading Thursday as the company reported results that slightly beat on the top and the bottom line consensus. Even so, the stock is still off more than 15% from its highs in May before the Fed started to discuss "tapering". As GDP growth forecasts come down, these shares should outperform what I believe will be a flat market.
The shares yield just over 5% and the REIT has more than doubled its payout since emerging from the financial crisis. The company has consistently increased operating cash flow over the past few years. The biotech & life science space should continue to be strong over the next few years as R&D spending remains strong and the industry had the most drug approvals in 2013 than in 16 years. At just under 13x forward FFO, the REIT sports a reasonable valuation and should do well in a market that is showing increasing volatility.