Yield-hungry Canadian investors might look south to a special class of American real estate investment trusts that focus on the health care sector. They might wish to hurry, however, as an earnings surprise by one of the industry's biggest players has seen shares rise across the already richly priced sector.
Chicago-based Ventas Inc. reported funds from operations - the standard REIT earnings metric - of 71 cents a share Thursday, 2 cents above consensus. It also raised its 2010 earnings guidance. As the second-largest U.S. health care REIT by market capitalization, and the first major player to report, investors seem to feel it augurs more good news from the sector, as it and several other top REITs rose 2 to 3 per cent in Monday's trading.
The sector has trailed the more economically sensitive REITs in 2010 because they were already well-valued. The health care REITs were seen as a refuge, compared to others centred on residential or commercial sectors, in the recent downturn.
"In general, they did not decline as much as other REITs, and they came back dramatically," said Stifel Nicolaus analyst Jerry Doctrow. That made valuations earlier this year "relatively rich" by historical standards.
Of course, underperformance is relative among REITs; the three health care players in the Standard & Poor's 500 - Ventas, HCP Inc. and Health Care REIT Inc. - have seen year-to-date gains ranging from 6 to 20 per cent. There are a half dozen other REITs in the S&P 500 that have posted gains of 20 to 40 per cent so far in 2010. (The MSCI U.S. REIT index is up in the mid-single-digits year to date.)
Compared to other types of income investing, the yields can be very attractive. Stifel Nicolaus analyst Jerry Doctrow
The end result is that the largest players in the health care REIT sector are trading at or near 52-week highs. At the same time, however, they're maintaining some the healthiest dividend payouts of any major American companies.
Of the S&P 500, just 31 companies offer a dividend yield of 5 per cent or more, and HCP and Heath Care REIT are among them. Ventas is just behind, with a yield exceeding 4 per cent. "Compared to other types of income investing, the yields can be very attractive," Mr. Doctrow said.
U.S. health care REITs tend to invest across the country, not on a regional basis, and the largest are also the most diversified. Mr. Doctrow said smaller, "pure-play" REITs include Omega Healthcare Investors Inc., which focuses on skilled-nursing facilities; Medical Properties Trust Inc., which has a hospital focus; and Cogdell Spencer Inc., which primarily owns medical office buildings
Sketches of the three biggest players, all S&P 500 members:
The Long Beach, Calif.-based REIT is, at nearly $11-billion (U.S.) in market cap, the most valuable of the health care REITs. It posted $1.2-billion in revenue in the past twelve months.
Morgan Keegan's analyst team, led by Robert Mains, says HCP is the best-diversified health care REIT and uses a range of financing techniques from direct ownership to mezzanine debt investments and institutional joint ventures. (As of March 31, HCP had interests in 677 properties, with 257 senior housing facilities, 251 medical office buildings and the rest spread among life sciences, hospital and skilled-nursing properties.
"As a result, despite being the largest health care REIT, we expect it to be one of the fastest growing," the Morgan Keegan analysts say, rating it "outperform" and projecting 5 to 7 per cent long-term growth in funds from operations and funds available for distributions. The company reports earnings Tuesday.
Ventas owns 599 properties, the bulk of which are senior housing or skilled-nursing facilities. It closed a $381-million deal July 1 to buy Lillibridge Healthcare Services Inc., adding interests in 96 medical office buildings. It has a market cap of roughly $8-billion and $961-million of revenue.
The Morgan Keegan team says Lillibridge's impact on Ventas's earnings "is not as large as might be expected" of a $381-million acquisition, but by developing scale in the office building area, they expect future acquisitions "more accretive than they would be otherwise."
Health Care REIT Inc.
Toledo, Ohio-based Health Care REIT is one of the more acquisitive players in the sector, with nearly $900-million in investments in the first six months of 2010. At June 30, it had 625 properties, two-thirds of which were senior housing or skilled-nursing facilities. It has a market cap of $5.6-billion and revenue of $581-million.
During its first-quarter earnings report, Health Care REIT revised upward its acquisition guidance by $200-million, to an upper bound of $1.1-billion. The analyst team at Raymond James noted at the time that while management "has a long track record of finding accretive acquisitions," an environment "with very competitive asset pricing and few 'distressed' opportunities available" made them "somewhat wary that the company may be extending itself into lower-yielding and less-accretive properties to meet its growth targets."
The company releases its second-quarter earnings after the market closes Wednesday.
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