By BOB O'BRIEN | MORE ARTICLES BY AUTHOR Shares of HCP have a 6.2% yield, along with capital appreciation potential.
INVESTMENT DECISIONS BASED purely on demographic trends can be fraught with peril.
But it's hard to ignore the 76 million baby boomers that are aging, and becoming increasingly dependent on our health-care system. Or the 8,000 Americans who turn 60 each day -- an age when medical treatment, nursing care and hospitals become an increasingly vital part of their lives.
An investment in companies that own the bricks and mortar of those hospitals, medical-office buildings, nursing facilities and retirement homes isn't simply a demographic story, however.
Like virtually all real-estate investment trusts, health-care REITs throw off a big chunk of cash each year in the form of dividend payments. And because of the shuttering of the credit markets for part of last year, many players in the sector are only now ready to resume their former levels of acquisitions and purchases to add to their portfolios of properties, making them compelling capital-appreciation stories for 2010.
Case in point is HCP (ticker: HCP), one of the nation's largest and most diversified health-care REITs. The company's portfolio includes some 223 assisted-living facilities, 184 medical-office buildings, 48 nursing homes, 18 hospitals and 94 life-sciences properties, as well as the debt of companies that operate hospitals and nursing homes.
The number that really jumps out, though, is the $1.84-per-share a year that HCP pays out in dividends. That's roughly 85% of the company's funds from operations, one of the conventional yardsticks used when valuing real-estate trusts.
That translates to a 6.2% dividend yield, the highest in the sector. That's almost 250 basis points higher than what the 10-year Treasury is returning.
It's also about 50% more than what the average corporate bond is yielding currently, and with little of the market risk associated with those bonds, since most analysts believe that HCP's payout level is rock solid.
''These are some very attractive dividend yields,'' says Mark Biffert, the health-care REIT analyst at Oppenheimer & Co. "And I really like the underlying diversity of their portfolio.''
Like a number of analysts, Biffert has a Market Perform rating on the stock, in large measure because of valuation. Of the 17 analysts actively covering the stock, just three continue to rate the stock a Buy. The overwhelming majority -- 13 analysts -- have the equivalent of a Hold rating on the stock. But it also would suggest that there is a pretty considerable wall of worry for the stock to climb, if the fundamentals show further improvement.
''This is a company with an opportunistic mindset,'' says Richard Anderson, a REIT analyst at BMO Capital Markets. ''We'd be looking for some activity from the company.''
Health-care REITs have multiple avenues for growth. In terms of organic expansion, there's the prospect of annual rent increases and improved performance from operating assets. ''At the end of the day, you want to be the best operator,'' Anderson adds.
But, more importantly, health-care REITs like HCP have a capital-appreciation story to tell, as well. After the meltdown of Lehman Brothers in the fall of 2008, access to credit became an increasingly difficult proposition. Companies focused more on bolstering their balance sheets. As a result, many REITs found it difficult to add to their portfolios of properties.
Now that credit markets have unlimbered, REITs have better visibility in terms of purchasing properties. ''HCP will do deals, I'm willing to bet,'' Biffert says.