Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Coronavirus: UK Parents Demand ALL Schools OPEN September, 7 Million Children Abandoned by Teachers - 9th Aug 20
Computer GPU Fans Not Spinning Quick FIX - Sticky Fans Solution - 9th Aug 20
Find the Best Speech Converter for You - 9th Aug 20
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
NATURAL GAS BEGINS UPSIDE BREAKOUT MOVE - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Investing in Housing Market REITs Instead of Property: Our Pick

Housing-Market / US Housing Apr 26, 2013 - 01:56 AM GMT

By: Don_Miller

Housing-Market

I get a lot of questions from readers about holding real estate as an investment. Indeed, many are in response to another newsletter editor who was recently advocating that the only way for retirees to make decent income was to own property.

Personally, I wouldn’t hold physical property in our portfolio for three reasons.

First, it’s very illiquid; that makes it an instant failure on our Five-Point Balancing Test.

Second, you won’t get yield from a property for three to five years, but will instead pay to own it.


And third, depending on the size of your portfolio, an investment in physical real estate could throw off your balance. Allocating too much of a portfolio to a single industry is never a good idea. With a piece of property worth $100K, $200K, or more, you can suddenly find your retirement very dependent on the outcome of a single asset class.

However, at the same time, it’s hard to ignore that something is happening in real estate. The post-crash taboo around it is starting to disappear as prices increase. Are we so bullish on real estate that we would buy properties in Las Vegas? No, we’re not there; but at the same time, we wouldn’t mind dipping our toe into the shallow end of the pool with some more conservative opportunities.

Furthermore, rather than invest in physical properties directly, we’d rather invest in real estate investment trusts (REITs), which are traded on stock exchanges like any other stock. REITs are corporations that buy, sell, and rent real estate for their shareholders.

To be considered a REIT, 75% of a corporation’s income must come from real estate in some form. Furthermore, REITs can deduct their dividend payments from taxable income. Here are a few more of their key advantages over physical property:

·         First, there’s the liquidity. You can buy shares this morning, change your mind, and sell them by the end of the trading day. Try that after signing a purchase agreement and the checks have gone through on physical property.

·         Second, REITs are required to pay out 90% of their net income to their shareholders or they lose their special tax status. Where physical property doesn’t usually provide yield right away, REITS will start paying right off the bat.

·         And last, you can invest to match your portfolio, whether that’s purchasing only $1,000 or $1 million worth of shares.

These are some of the advantages of REITs, but there are drawbacks as well. I asked our senior analyst, Vedran Vuk, to find us a REIT worth adding to the portfolio. His pick is a little more conservative than most REITs, but its great way to pick up steady dividend income with capital appreciation potential as well.

HCP Inc. (HCP) – BUY

As just noted, we’re not looking to dive into the Florida condo market nor to start flipping houses in Vegas. Nonetheless, we still want to dip into the real-estate market... just not in the deep end of the pool.

Healthcare REITs are a more stable area in the real-estate investment world. While they took a hit in 2008 like many other real-estate investments, many bounced back a lot quicker than other REITs. Along with being more defensive, healthcare REITs offer a unique opportunity for retail investors. While most of us could afford a single-unit investment property or even an apartment building, only the wealthiest could even think about investing in a hospital or a retirement home on their own.

While researching the choices in the healthcare sector, HCP stood out. From the firm’s core operating principles, you can quickly see why:

1.    Opportunistic investing;

2.    Portfolio diversification;

3.    Conservative financing.

Opportunistic Investing

HCP only invests when a good opportunity presents itself. In a recent earnings call, an analyst asked why HCP was making fewer acquisitions than many others (although the company is still making plenty). One of the executives answered that you don’t swing at every ball the pitcher sends your way. That’s our perspective as well. It’s not just about hitting home runs, but knowing when not to swing as well.

Portfolio Diversification

This item is very important to us too. Since this is our entrance into the real-estate sector, we don’t want to put our whole bet on a single part of the country. The map below shows the concentration of properties. While some places like California aren’t our favorite locations, within a diversified portfolio with strong allocations in Texas, Pennsylvania, Ohio, and Florida, among other states, the portfolio is diversified enough to mitigate the risk.

In addition to geographic diversification, we don’t want to get stuck in just one type of property, such as hospitals or medical offices. With more and more healthcare regulation coming through, certain types of buildings will be more affected than others.

For example, for all of the types of healthcare properties, Obamacare will have the most negative impact on nursing homes. The impact isn’t enough to crush those operators, but I certainly wouldn’t want a portfolio of 100% nursing homes in light of the new law. With a diverse mix of properties, HCP protects itself from being exposed to any single change in legislation.

Let’s break down these individual types of properties. “Post-acute/skilled nursing” facilities are essentially nursing homes with skilled professional nurses assisting residents with continuous therapy.

“Senior housing” includes communities designed to help with the requirements of aging. They are not, however, necessarily staffed with skilled nurses. Senior housing includes assisted-living facilities, independent-living facilities, and continuing-care retirement communities. Some of HCP’s primary property operators in this space include Brookdale Senior Living and Sunrise Senior Living. The demographics pushing for these two properties are overwhelming. With 10,000 baby boomers reaching 65 every day for the next 19 years, these facilities won’t be running out of customers anytime soon.

“Life sciences” represents office buildings with modifications for pharmaceutical companies and other biotech firms. Currently, almost the entire life-sciences division is located in Mountain View, California (AKA the San Francisco suburbs). However, the company is developing a few new life-sciences projects in Durham, North Carolina.

And last, the “medical offices” classification is self-explanatory. However, note that these physicians’ offices are not scattered around remote shopping centers. Instead, 83% of them are located on hospital campuses. With an almost $21 billion market cap, HCP ownership totals in these properties are: 447 senior housing communities; 313 skilled nursing facilities; 274 medical office buildings; 108 life sciences properties; and 21 hospitals.

Conservative Financing

Perhaps even more important than diversification is the company’s conservative financing. S&P rates HCP’s credit toward the lower end of investment grade with a BBB+ rating. That’s not bad, but not perfect either.

Beyond the credit ratings, a REIT’s loan structure is a key point to take in to consideration, because interest rates are the Achilles heel of the industry. That’s why we’re putting HCP in our moderate risk category.

When interest rates rise, REITs are sometimes squeezed on two or even three fronts. First, with higher interest rates, there will be fewer buyers in the market, meaning real-estate prices will drop. Second, if the REIT wishes to purchase new properties, it will have to pay higher rates to do so. And third, if the REIT was borrowing with variable-rate loans, costs will go up regardless of what happens.

Unfortunately, there’s not much one can do about the first two factors. However, the third can be avoided by staying clear of variable-rate instruments, and that’s exactly what HCP does. 93% of its portfolio is in fixed-rate loans, with only 7% represented by variable rates.

If interest rates rise, does that mean HCP is toast? Not necessarily; REITs are not like bonds. When rates go up, bond prices must go down. On the other hand, higher rates will put pressure on REITs, but will not necessarily crush them. We could have a scenario where there’s a really strong real-estate recovery matched with rising rates – the surge in demand could possibly offset the higher rates. This is a possibility, but we wouldn’t necessarily bet on it.

When rates start to rise, we’ll likely look for the exit door. Also, be aware of the interest-rate risk in your overall portfolio. If you’re already very heavy in CORP, our PIMCO investment-grade bond fund, consider buying a little less HCP or selling a little CORP prior to adding another asset with interest-rate risk.

Some Other Benefits of HCP

The fact that the medical industry is steadily growing – in good times and bad – seems to be the obvious reason for a conservative investment in HCP. But the structure and terms of leased medical properties make them even more secure.

Think about it. Obviously, a hospital or retirement home isn’t going to sign a one-year lease like an apartment tenant. Instead, they often sign for a decade or more. Furthermore, while a tenant in an apartment building expects the landlord to handle most issues, medical buildings are often leased under triple-net leases. In short, a triple-net lease is a landlord’s dream. The tenant pays his rent, along with the property taxes, the insurance, and the maintenance of common areas.

Since the tenant takes care of so much, the actual rent is typically less than in a normal lease agreement. However, this works perfectly for medical REITs, as it takes risk off the table. If a landlord leases a property for over ten years, there’s a significant risk of unexpected costs along the way. In most cases, property taxes and insurance will be more expensive in the future, not less. However, it’s hard to predict how much more. With a triple-net lease, the landlord can enter into long-term contracts without the uncertainty of future costs.

Nearly every single property owned by HCP is leased on a triple-net basis. The only segment excluded from this is the medical-office segment, which has only 48% of properties in triple-net leases. Since these leases take a lot of the risk off long-term contracts, around half of HCP’s leases will expire in 2022 or later. It’s nice to have revenues locked in so far in advance. Below is a chart showing the lease expirations:

  

You might be thinking to yourself: “Wait, aren’t you missing one of your five points: inflation? Isn’t holding a long-term fixed lease a bad thing in the face of inflation?”

Of course, that’s right. However, HCP’s leases are written to either adjust to the CPI or sometimes to include a fixed annual increase. Here’s an example of one of its recent contract provisions to protect against inflation:

“The contractual rent will increase annually by the greater of 3.7% on average or CPI over the initial five years, and thereafter by the greater of 3.0% or CPI for the remaining initial term.”

We’ve noted our issues with the CPI before, but nonetheless this is better than nothing. If inflation is tame, real rents will actually increase. If it gets worse, they will at least adjust.

Dividends, Yield, and Pricing

Here’s a pleasant surprise to finish off our analysis. HCP is a member of the S&P 500 Dividend Aristocrats Index. To be part of this Index, a company must have consistently increased dividends for at least 25 years. HCP has done so for 27 and has no plans of stopping now. (Note also that it is the only REIT on the Index.)

As you can see in the chart, the dividend increases aren’t always very large, but they are consistent. Last year, the firm paid out $2.00. In 2013, we wouldn’t be surprised to see around $2.07 per share, which would give us a 4.5% dividend yield.

HCP has been in our portfolio for a few months now, and even before then the company was mentioned in our special report Money Every Month, but we hadn’t officially pulled the trigger at that point.

While we still think the company is a solid pick, there isn’t too much meat on the bone here under current conditions. For the stock to move upward, something new needs to happen, like another push up in the real-estate market. Looking at the trend thus far, there’s a good chance of that happening.

The good news is that the downside isn’t particularly large. The stock could retrace its steps a bit, but I don’t see it dropping 20% overnight. So put in a 20% trailing stop, pick up some regular dividends, and keep an eye on this stock.

If you’re interested in solid, stable dividend stocks then I suggest you check out our recently updated Money Every Month report. You’ll find out how easy it is to get dividend payments every month and I’ll even tell which stocks to start with. Click here to find out more.

© 2013 Copyright Casey Research - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Casey Research Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules