Healthy Income Investments for Challenging Times

We are clearly in a bear market and one that could be particularly tough on REITs, which experienced a tough 2007 already despite falling Treasury yields. Many REITs have dividends that depend upon acquisitions, which seem less likely in these times of tightening credit. Additionally, property owners generally suffer in an economic downturn, as occupancy declines and/or rents come under pressure. Finally, the market value of holdings may decline. So, what is an income investor to do?

One area that may be somewhat immune from these pressures is the Healthcare REIT group. I have included a table of 13 stocks, sorted by dividend yield, that are part of this universe (with apologies for any exclusion):

click to enlarge

I am no expert in this area, but I do have a few words of caution. First, keep in mind that the highest dividend today isn’t necessarily the highest one in the long-term. Second, it probably pays to spend some time examining the assets. I recently bought Biomed (BMR) because they own primarily lab space and office space for biotechs. Their closest peer is (Alexandria) ARE, which a client of mine informs me is the Rolls-Royce of the group (thus the low dividend). For what it is worth, his firm also likes Health Care REIT (HCN) and Ventas (VTR). Several of these REITs own old hospitals and nursing homes, which aren’t necessarily the best assets to own. One should look for newer assets that reflect the many changes in the delivery of healthcare in recent years. I have highlighted companies that have been increasing dividends (and include BMR as its public history is just 4 years). I have also highlighted three underleveraged entities as well, each with less than 15% debt-to-capital. The group as a whole trades at 2X book value, though several are well below that (including BMR). Finally, I have reviewed the last three months of insider trading on Insider Scoop. There was some buying at BMR, HR and Universal Health (UHT). Selling was most pronounced though still quite negligible at HCN and VTR.

Disclosure: Long BMR

Comments

[granger:]

Yes, there is one that you forgot. It focuses on the new trends of healthcare. It is MPW. It is newer and lesser known, but I consider it to be the best and most undervalued.

At first, glance the payout ratio and high dividend yield may throw you off, them seem too high. But I urge you to dig deeper.

The annual report is worth a read. This management team is rock solid. Their plan and focus is completely different then anyone out there. This is a growth story and the yield will be more than covered and probably actually grow in my opinion.

I am long and accumulated aggressively over the last few months. I am a long term, buy and hold type investor.

Just my opinion, MPW deserves a look

2008 Jan 29 06:13 AM

[granger:]

I almost forgot. Thank you for the article, good stuff.

2008 Jan 29 06:17 AM

[Alan Brochs...:]

Thanks for the heads- up - I will make sure that I include it in any follow-up articles.

2008 Jan 29 06:11 PM