Best of the Week
Most Popular
1.Crude Oil Price Trend Forecast 2016 Implications for Stock Market - Nadeem_Walayat
2.Odds of Winning Walkers Crisps Spell & Go olidays K, C and D Letters - Sami_Walayat
3.Massive Silver Price Rally During The Coming US Dollar Collapse - Hubert_Moolman
4.Pope Francis Calls For Worldwide Communist Government - Jeff_Berwick
5.EU Referendum Opinion Polls Neck and Neck Despite Operation Fear, Support BrExit Campaign - Nadeem_Walayat
6.David Morgan: There Will Soon Be a Run to Gold Like You've Never Seen Before - Mike Gleason
7.British Pound Soars on BrExit Hopes Despite Remain Establishment Fear Mongering - Nadeem_Walayat
8.Gold Price Possible $200 Rally - Bob_Loukas
9.The Federal Reserve is Not Going To Raise Interest Rates and Destroy Gold - Michael_Swanson
10.Silver Miners’ Q1’ 2016 Fundamentals - Zeal_LLC
Free Silver
Last 7 days
David Cameron Questioned on Out of Control Immigration at TEN TIMES Conservative Election Pledges - 30th May 16
Bitcoin Price Skyrockets And Is Now Up More Than 100% This Jubilee Year - 30th May 16
This Is Not The America My Parents Immigrated To In 1957 - 30th May 16
“Debt, Not The Economy, Reaches Escape Velocity” With Graham Mehl - 29th May 16
EU Referendum, Black Vote LEAVE or REMAIN? Which is Worse for Racism for Britain's Ethnic Minorities? - 29th May 16
Billionaire Gross: Jubilee Debt Relief as Prelude to New Global Economic Order - 29th May 16
Wargaming North Korea - Assessing the Threat - 29th May 16
EU REMAIN Population Forecasts - England 4.1 million Explosion, London Migration Crisis - 28th May 16
A Guide to the Trump-Sanders Debate - 28th May 16
Gold And Silver – At Significant Support. New “Story” Developing - 28th May 16
The Next Systemic Lehman Event - New Scheiss Dollar & Gold Trade Standard - 27th May 16
Energy and Debt Crisis Point to Much Higher Silver, Metals Prices - 27th May 16
Gold Junior Stocks Q1 2016 Fundamentals - 27th May 16
These Crisis Markets Are Primed to Deliver Big Gains, Platinum Never Cheaper! - 27th May 16
Operation Black Vote BrExit Warning for the Wrong EU Referendum - 27th May 16
UK Immigration Crisis Hits New Extreme, Catastrophic ONS Migration Stats Ahead of EU Referendum - 27th May 16
Many of the World’s Best Investors Made Their Fortunes This Way…And You Can Too - 27th May 16
The Ugly Truth About Stock Market Manipulation and Gold Prices - 27th May 16
Gold Price Looking Vulnerable While Gold Stocks Correct - 27th May 16
The 5 Fatal Flaws of Trading - 27th May 16
The Next Big Crash Of The U.S. Economy Is Coming, Here’s Why - 27th May 16
A New Golden Bull or Has the Market Gone Too Far Too Fast? - 27th May 16
It Feels Like Inflation - 26th May 16
Negative Interest Rates Set to Propel the Dow Jones to the Stratosphere? - 26th May 16
S&P Significant Low has Occurred – Not Likely! - 26th May 16
Statistics for Funeral Planning in UK Grave - 26th May 16
Think Beyond Oil And Gold: Interview With Mike 'Mish' Shedlock - 26th May 16
Hard Times and False Mainstream Media Narratives - 26th May 16
Will The Swiss Guarantee 75,000 CHF For Every Family? - 26th May 16
Is There A Stocks Bear Market in Progress? - 26th May 16
Billionaires Are Wrong on Gold - 26th May 16
How NOT to Invest in the Gold Market - 26th May 16
The Black Swan Spotter...Which Saw the Oil-Crash coming; now says the “Invisible Hand” will push Brent to $85 by Christmas - 26th May 16
U.S. Household Debt Still Below 2008 Peak - 25th May 16
Brexit: Wrong Discussion, Wrong People, Wrong Arguments - 25th May 16
SPX is at Strong Resistance - 25th May 16
US Dollar, Back From the Grave? - 25th May 16
Gold : Just the Facts Ma’am - 25th May 16
The Worst Urban Crisis in History Could be Upon Us - 24th May 16
Death Crosses Across The Board Are IRREFUTABLE Stock Market Sell Signals - 24th May 16
Bitcoin Trading Alert: Bitcoin Price Stays below $450 - 24th May 16
Stock Market Crash Death Cross Doom Prevails - 23rd May 16
Did AMAT Chirp? Implications for the Economy and Gold - 23rd May 16
Stocks Extended Their Rebound On Friday - Will They Continue Higher? - 23rd May 16
UK Treasury Propaganda Warns of 3.6% Brexit Recession, the £64 Billion Question? - 23rd May 16
Stock Market Support Breached, But Not Broken! - 23rd May 16
George Osborne Warns of 18% Cheaper House Prices - BrExit for First Time Buyers - 22nd May 16
Gold Bull-Phase I Continues to Confound (The Trek to “Known Values”) - 22nd May 16 r
Avoiding a War in Space - 22nd May 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Why 95% of Traders Fail

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

© 2005-2016 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

Catching a Falling Financial Knife