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Long Term Opportunities in U.S. Real Estate

|Includes: Welltower Inc. (HCN), LTC, OHI, VTR

By Michael Filighera - Revere Data

Moving the Market
Over the past two years, the real estate and healthcare sectors have been at the center of economic turmoil in the U.S.  The real estate sector continues to have headwinds - two years after the subprime mortgage crisis - in terms of residential home prices as well as a looming need to refinance a record number of commercial mortgages.  Most recently, the healthcare sector has been in the headlines for the anticipated increases in insurance premiums, cuts in benefits, and an inflation rate that is significantly higher than the overall level of prices increases.  Taking into account the aging Baby Boomer population and the effect it will have on this sector, we see some bullish signals for healthcare.

The Outlook
Despite the headwinds facing the real estate sector; Revere's research has uncovered some potential long-term opportunities for investors - especially among Real Estate Investment Trusts (REITs).  Specifically, we identified a subsector of REITs that invest in Healthcare, focusing their investments on assisted-living facilities, nursing homes, hospitals, medical buildings, and hospices.

Revere Research Reveals
In analyzing the intersection between the real estate and health care sectors, we identified three factors that are driving stock performance: REITs & dividends, the lower cost of real estate and Baby Boomers.

By law, REITs are required to pay dividends, and they typically pay at higher levels than many common stocks.  As such, they are returning to favor as investors are looking for both some yield and capital appreciation in this choppy market.  For the purposes of this analysis, we used the Revere Hierarchy (NYSE:TM) to break down REITs into two categories - healthcare REITs and the broader equity REITs on a 3-year performance basis.

While the healthcare REITs sector tracked the broader REITs market during the 2008-2009 recession, the healthcare & life sciences subsector stabilized more quickly and has had a more sustained recovery than its peers.  Revere believes this trend will continue because of growing demand as more Baby Boomers continue to retire.

Lower Cost of Real Estate
U.S. Census studies show that retirees tend to move to warmer climates such as California, Arizona, Nevada, Florida as well as other coastal areas.  What is also noteworthy is that, perhaps coincidentally, these area have also been among the hardest hit during  this recession.  Many of these healthcare REITs are taking advantage of the depressed real estate prices to build additional facilities while simultaneously positioning themselves to profit from what they anticipate will be an increase in the demand for healthcare goods and services among this growing and aging population.

Baby Boomers
The Baby Boomers segment of the population (born 1946 - 1964) currently comprises 26 percent of the population, and by 2030, one in five Americans will be over the age of 65 - an estimated 56 percent increase from today.  As a result, given the consumption patterns of medical care, the stock values of the healthcare REITs subsector will continue to rise as there is likely to be continued revenue growth as well as steady dividend payouts.

REIT Dividend Yield
In analyzing the performance of the REITs by subsectors, the table below shows how the annual dividend yield for healthcare REITs is the highest among the groups that have a statistically relevant sample:


On a macro-economic and demographic basis, our conclusions are based on three observations:  the near universal agreement that the demand for healthcare-related services will increase over the next few years; the decline in real estate values over the past two years; and the appeal of stocks with dividends given the low level of current interest rates.

Among the dividend-paying asset classes, a significant disparity exists among the performance and dividends of various REITs, with the healthcare subsector posting outsized returns compared to the rest of the asset class for the past year.

We anticipate that this trend will continue for the medium term, and that there will be continued momentum for the healthcare REITs subsector as the fundamentals support their growth.


Disclosure: the author is long OHI

Disclosure: "Long OHI"