Good Yields From a Healthcare REIT

 | Jun 24, 2013 | 2:00 PM EDT  | Comments
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One theme I have been writing about is using the significant pullback in high-yield sectors caused by the recent backup in interest rates to deploy cash to pick up income stocks at a nice discount.

In my columns and in Columnist Conversations I have highlighted opportunities in both the energy sector and in some hotel REITs. Today, I want to discuss one of the largest healthcare REITs, Health Care REIT, Inc. (HCN). HCN has sold off more than 15% in the last month and is now offering long term value and income investors a good entry point, which also was recently pointed out by "El Capitan" Jim Cramer..

Company Overview:

Health Care REIT, Inc. is one of the biggest players in the sector (enterprise value of over $26B). It invests across the full spectrum of health care real estate, including senior living communities, medical office buildings, inpatient and outpatient medical centers and life science facilities. The firm primarily invests in senior living and health care properties. HCN has a large and diversified portfolio of properties that are leased under long-term contracts. The company also has used the economic weakness of the last few years to grow its property portfolio strategically.

Tailwinds:

Value and income investors should appreciate that there are several powerful tailwinds that come with owning and operating healthcare facilities. I would like to highlight a couple of points, the first being the aging population and the associated additional health care costs this creates (See Chart).

Second, implementation of the Affordable Care Act will drive a significant increase in insured Americans (See Chart), which should also drive increased utilization of health care facilities across the board.

Valuation:

After the recent decline in REITs, including HCN, the shares are priced for less than 16x next fiscal year's projected funds from operations. In addition, its yield has gone to over 4.8% from under 4.2% at this point to April.  HCN has more than doubled operating cash flow since the end of FY2010 and it should clock in with a 50% gain in revenues this fiscal year -- mainly driven by some recent acquisitions. Next year, analysts expect a more normalized five percent sales gain.

Summary:

For all the talk on CNBC and Bloomberg over the last few months on how a lot of investors were waiting for a pullback to deploy new cash, some investors and pundits have become skittish now that it is a reality. I am waiting for additional declines in the market before I add to my growth portfolio as I believe it is going to be a volatile summer.

However, the 15% to 20% declines in many income stocks are already providing some good entry points. I am buying yield in energy, hotel REITs as well as other selective income opportunities.

HCN fits this strategy well as it is reasonably priced now that it has pulled back. It provides an over 4.8% yield and has good long-term growth prospects, given the aging of our population and recent acquisitions. I will be looking forward to adding it to my income portfolio on the next down day.

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