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Coins and green plant isolated on white (Leonid Yastremskiy/Getty Images/iStockphoto)

Stock to watch: HealthLease a low-risk REIT with a fat yield Add to ...

HealthLease Properties REIT

Last close: $10.35 a unit

Trading range since August IPO: $10 to $11.79 a unit

Annual distribution: 85 cents a unit for a yield of 8.2 per cent

Analysts’ ratings: There were two buys, no holds, no sells, according to Bloomberg data. (One analyst was restricted from making a recommendation.) Target prices ranged from $12 a unit (the estimate of National Bank Financial analyst Matt Kornack) to $12.50 a unit (from Canaccord Genuity analyst Jenny Ma).

Recent history: This real estate investment trust, an affiliate of U.S. seniors housing developer Mainstreet Property Group LLC, is a pure play on North American nursing homes. It went public last June at $10 a unit, and includes a portfolio of U.S. properties as well as Canadian nursing homes purchased from Northern Properties REIT last summer.

HealthLease, which is focused on expanding in the United States, announced last week that it was buying 13 properties for $141.7-million (U.S.) in North Carolina, Pennsylvania and Virgina. That brings the number of properties it owns to 28 across five states and the provinces of Alberta and British Columbia. To help pay for the acquisitions, it did an equity financing deal last week at $10.35 (Canadian) per unit, which was below the closing price of $10.72 for the REIT last Thursday.

Manager insight: HealthLease Properties is ideal for income-focused investors because it is now offering an 8-per-cent yield with little risk, but with potential for gains as it continues to expand south of the border, says Derek Warren, a portfolio manager at Morguard Financial Corp. (The average yield for the S&P/TSX Capped REIT Index is 5 per cent.)

“It is one of the safer sources of yield that exist in the REIT space now,” said Mr. Warren, who began buying the REIT when it went public. “Usually, to get an 8-per-cent yield, you have to take on significant risk. But here you are getting a story that is not well understood.”

HealthLease has less risk than many of its peers because it negotiates long-term “triple-net leases,” under which it gets revenue from renting properties to companies specializing in running seniors’ housing but is not saddled with the risk of operating the residences, he said.

This kind of lease structure is common in the United States, he said. “Whether the building is full or empty, those operators pay a fixed amount of rent. … On the other hand, if the residents’ rents go up significantly, HealthLease does not get that.”

The REIT allows Canadian investors to gain exposure to an improving U.S. economy, Mr. Warren added. “The U.S. is coming out of recession. Their economy is picking up, and their health-care system is stabilizing under Obamacare. … We are starting to see an increase in rents and occupancies in the sector.”

He says there is a buying opportunity for investors interested in the REIT because its unit price has fallen as a result of the recent equity financing to acquire the U.S. properties. HealthLease should trade back in the $11 range over the next few months because the acquisition will increase cash flow per share as measured by funds from operations, he said.

HealthLease is a new name in the REIT world, said Mr. Warren. The three analysts covering the REIT will not be able to write about the implications of the recent acquisition because their firms were involved in the financing.

When the transaction closes next month, “they will be able to comment, and there will be more attention brought to this name,” he said.

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