Healthy REITS

06/17/2016 10:00 am EST

Focus: REITS

Jimmy Mengel

Editor, Outsider Club

Growth and income expert Jimmy Mengel sees opportunities in real estate investment trusts. In particular, the editor of The Crow’s Nest points to strong demographic trends and high yields as bullish support for the healthcare REIT sub-sector. Here, he discusses these favorable trends and highlights a trio of favorite investment ideas.

Steve Halpern:  Our special guest today is Jimmy Mengel, editor of The Crow’s Nest; how are you doing today Jimmy?

Jimmy Mengel:  Doing great, Steve; how are you doing?

Steve Halpern:  Very good.  Thanks so much for taking the time.  Today, we’re going to focus on healthcare REITs.  First, could you give our listeners an overview of the real estate investment trust sector, in general, and then explain how health facilities fit into this broader picture?

Jimmy Mengel:  Yes, absolutely.  As you mentioned, REITs are real estate investment trusts.  These are basically companies that own income-producing real estate.  

Basically, there is a landlord that charges rent to businesses to rent out these properties.  Those businesses could be shopping malls, restaurants, even self-storage facilities and apartment buildings.  

I guess in terms of our conversation today, healthcare properties like hospitals, extended-care facilities or retirement homes, most of these are run by Real Estate Investment Trusts.  What’s great about REITs, in general, is they are known for very, very high dividend payouts.  

That’s because REITs, by law, have to pay at least 90% of their pre-tax income as dividends to their shareholders.  That can lead to some really great returns for long-term investors.

In fact, the Dow Jones REIT index is the best-performing US index over the last 15 years.  That’s even considering they crashed about 70% during the great recession.  It's a really, really great place to be.  

Essentially, you get to become a landlord without any of the hassles that a landlord has to deal with; I rent a house, myself, and it’s a pain.  In the last month, I've had to repair a fence, clean up busted pipes, and repaint some walls.  

Instead of having to do all of that, it’s much more convenient to just buy a REIT and just collect the payments that way and not deal with the hassles of being a landlord.

Steve Halpern:  Now, within this overall REIT sector, as we pointed out, there are the healthcare REITs and a large part of your case for that is based on demographic trends you feel could support this subsector over the long term.  Could you expand on that?

Jimmy Mengel:  Certainly.  Though it's not fun to think about, we’re getting old.  The county is definitely getting older than it has in the past, demographically.  Let me just throw a couple of numbers at you.

Every year, about three-and-a-half million Baby Boomers are retiring, which works out to about 10,000 people every day.  In fact, Baby Boomers are leaving the workforce at one every 9 seconds.  

This is an accelerating trend.  If you kind of take that into the future, the US Census Bureau says that by 2060, 92 million Americans will be 65 or older; therefore, going into retirement, which is 20% of our entire population.  That means a lot of things.  

Obviously, it’s a demographic shift from the workforce into retirement, which is kind of its own monster there; but 70% of the disposable income in the United States is in the hands of these retiring Baby Boomers.  

It works out to something like $7 trillion in annual economic activity.  To put that in further perspective, that’s almost half of the entire US economy. It’s a huge demographic; it’s a huge shift that we really haven’t seen before.

The idea is, all right, well, we see these trends happening; what are these retiring people going to need, in order to live out the rest of their lives?

For me, as an investor, what I see is they’re going to need healthcare, they’ll need nursing facilities, hospitals; but overall, they’re going to need somewhere to live, as well.  I think that all of these trends play right into healthcare REITs.  They kind of seek to answer some of these questions.

Steve Halpern:  Let’s look specifically at some healthcare REITs.  You recommend a trio of them to play these trends you have discussed.  The first is HCP (HCP).  What’s the attraction here?

Jimmy Mengel:  Well, there are a couple attractions here.  HCP operates in all of these areas.  Senior housing, life sciences, medical offices, hospitals, skilled nursing facilities; all of the things we just discussed.  What I like about HCP is it’s kind of two-fold.  

It has the distinction of being the only REIT on the dividends aristocrat list, which basically means they’ve raised their dividend every year for the past 25 years.  I think they have even done it for 31, 32 years.  

When I'm looking at long-term dividend stocks that is something I look at very heavily, like if you have smart leadership and realistic expectations, you can continue to raise that dividend each and every year.  I just think it shows a well-managed business.  Dividend-wise, it currently pays out around 6.7%.  

The second part of it is, I think it’s trading at a bit of a discount because they’ve fallen on some hard times.  Without getting too deep in the weeds on this, they were sued last year on one of their major assets, which was called Manor Care, which was about 25% of their income.  

Manor Care was one of the nation’s largest healthcare providers and focused mainly on skilled nursing facilities.  

Long and the short, they were sued by the government for submitting false claims through Medicare and Tricare for therapy services and other services that were not medically reasonable or necessary.  Their stock took a big hit. They were losing money on this asset.  

Luckily, HCP is spinning off Manor Care into a new REIT and kind of getting it off their books.  I think in the meantime, it’s a good company trading for a lot less than it’s worth.

And as they work through some of the spinoff, I think they’ll be focusing more on their profitable, predictable businesses, like senior housing and medical office buildings that is really their bread and butter.  It’s a great dividend aristocrat and an attractive buy.

Steve Halpern:  Now, you also like Ventas (VTR); could you give us a quick look at this situation?

Jimmy Mengel:  Yes, definitely.  They’re a very similar company.  They invest in hospitals, senior housing facilities, medical office buildings; all of the things we have discussed.  

It's kind of nice because they’re a little more diversified.  They own — I think — 1,500 properties in the US, the UK, Canada, and they’ve just been solid.  

Where HCP kind of landed on all of the issues with Manor Care and kind of the skilled nursing facilities that were not being profitable, Ventas kind of pushed those off a while ago.  They are kind of a step ahead of them. Investor wise, the stock has almost doubled in the last 10 years, which you can’t argue with returns like that.

One more thing I will say, which is pretty important, is that if you’re operating a REIT, acquisitions are crucial.  You need to expand your reach, you’re collecting more rent, you need to purchase more properties.  

Ventas has been really good at doing that; they’ve had a $30 billion in acquisitions over the last 10 years and seem to be very keen on that side of the business.  

They’re throwing money at the places they know they’re going to make money.  That acquisition process is huge.  They also yield - I think - 4.5% on their dividend, which is a very generous dividend, any way you slice it.  

Steve Halpern:  Okay, we’ve only got a minute left; but, you also recently recommended Welltower (HCN), which also has international exposure.  Can you give us a very quick update on your reasoning behind this idea?

Jimmy Mengel:  Yes, that was basically the same kind of thing as Ventas; they operate in the US, UK, and Canada.  They’re also the largest healthcare REIT, based on market cap, which is always nice to have that liquidity and the amount of money on hand.  

It’s done the same thing; it’s made very true acquisitions and then diversified around the world.  I think that is kind of the lifeblood.  You want diversification and you want acquisitions and they yield 5%.  It’s a very solid company.  

Steve Halpern:  Again, our guest is Jimmy Mengel, of The Crowe’s Nest. Thank you so much for your time today.

Jimmy Mengel:  Thanks, Steve; appreciate it.

By Jimmy Mengel, Editor of The Crow’s Nest

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