Essential Healthcare REITs To Diversify Your Portfolio

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Includes: MPW, SNH, WELL
by: Avisol Capital Partners
Summary

Avisol Capital is planning to write a series of articles focusing on non-pharmaceutical stocks in the healthcare segment.

This is the introductory article in that series.

This covers three hREITs, with special focus on MPW.

Many investors diversify their portfolios by investing in the broader stock market spanning several sectors and industries. This, however, is a daunting task - retail investors may find it difficult to track even one sector properly, let alone multiple sectors. It is better, we always say, to focus on one or two sectors you are comfortable with, and increase your knowledge in those sectors.

Assuming you do that, one good way to diversify your holding is by investing in passive instruments such as REITs within your sector. If you are a biopharma investor, this can be done through Healthcare REITs.

Why Healthcare REITs?

First off, healthcare stocks and consequently REITs bank upon something which is inevitable in our society - old age and corresponding increase in healthcare spending. As the proportion of senior citizens increases, the healthcare sector shows great potential to become a hotspot for investment. Further, these senior citizens are now endowed with higher spending power than ever, meaning more expenditure on not only medicines but also on wellness products and gadgets.

Apart from these, senior citizens now also have longer life spans which translate into the creation of long-term market for healthcare products and services. Contrary to popular belief, healthcare sector is not just limited to pharma companies coming up with cures for terrible diseases, but it also includes hospitals, health tech companies and insurers, giving it a touch of diversification. Real Estate Investment Trusts or REITs as they are commonly known, are managed by professionals, with expert knowledge of their specialized sectors. Apart from professional management of funds, REITs may also come with other benefits such as tax exemptions, making them an ideal investment venue for you. Besides that, REITs also have higher yield than stocks, and are less volatile.

Here are three of the best healthcare REITs from our list.

Medical Properties Trust (MPW)

Medical Properties Trust manages a well-diversified portfolio of real estate. Its properties include regional hospitals as well as rehabilitation centers around the world, allowing you to benefit from global trends, without having to study international markets. The trust keeps expanding its reach through acquisitions, its most recent conquest being the acquisition of eleven hospital properties in Australia. The trust fund chairman Edward K. Aldag elaborated, “Those of you who have been with us for a long time have known that one of our goals has always been to invest abroad.” The future looks bright for the fund as it boasts of substantial liquidity which is likely to help it in its acquisition spree with fund management quoting “We’ve got about a half a billion dollars of liquidity to take advantage of that and great access to additional capital.”

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Source: Company website

So, how do these sunny projections pan out for the investors? The fund has an impressive track record of delivering capital growth as well as solid dividend yield which currently hovers close to 6%.

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The strength of the REIT is also visible through the fact that it is able to fund its dividends through its Funds from Operations. The valuation of the REIT is also quite reasonable at this point, but you need to keep in mind some of the risk factors as well. The fund is banking upon building a global portfolio of properties but acquisition opportunities may not be that aplenty, thus putting pressure on the fund’s performance. However, despite this probable downside, Medical Properties Trust is our top Healthcare REIT pick.

Senior Housing Properties Trust (SNH)

This NASDAQ listed REIT mainly invests in assisted living properties, medical office buildings and biotech laboratories. The REIT has two decades long history of providing solid returns to the investors and is a part of several prominent REIT indices such as the S&P REIT Composite Index, the S&P 400 MidCap Index and the Russell 1000® Index. However, in the current scenario, the fund is more in the speculative region: reasons being some of the recent management decisions related to dividend cut and future projections. Senior Housing Properties Trust saw massive decline in its pricing in the last couple of months, making it a highly attractively priced fund at the current price point.

However, it is important to keep in mind the factors behind the recent fall in its price. The REIT had reported decline in its revenue as well as in its AFFO (Adjusted Funds From Operations) per share for the first quarter. The fund is likely to be in a tight spot for quite some time. However, it still maintains strong fundamentals, which accompanied by its cheap valuation at the moment, make the fund an ideal candidate for investors with relatively strong risk appetites. The fund is likely to take some other drastic steps to get out of the financial hole such as selling off some of its assets. Overall, the stock is only suitable if you are looking to take some high risk with potentially high reward.

Welltower Inc. (WELL)

Amongst the largest healthcare REITs in the US, Welltower Inc. owns over 1,600 properties. The fund is also pretty aggressive about acquisitions as it acquired more than $4 billion worth of properties in the previous year. With its ever-growing AFFO, the fund is in a secure position and provides a measure of stability to any portfolio. Further, the fund also provides diversification as it has properties outside of the US as well, ensuring that you do not miss out on action happening outside the border. The fund took some hard hits in 2018, mainly owing to general weakness in the market, but has recovered fairly well.

Welltower Inc. has over three quarters of its portfolio invested in senior housing and long-term facilities, and thus is set to benefit from the increase in elderly population. Its leadership position in the segment also makes its position suitable as a long-term investment. The fund has almost half a century worth of experience in healthcare real estate and has survived several ups and downs. Welltower is thus a good choice for investors with long-term horizons.

Disclosure: I am/we are long MPW. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.