Plaehn's Picks among Healthcare REITs

08/22/2016 10:00 am EST

Focus: REITS

Tim Plaehn

Investment Research Analyst, Investors Alley

Tim Plaehn is a leading income expert. Here, the editor of The Dividend Hunter discusses the market for real estate investment trusts as well as a trio of well-positioned ideas in the specialized healthcare REIT market.

Steve Halpern: Joining us today is industry leading income expert Tim Plaehn, editor of The Dividend Hunter. How are you doing today, Tim?

Tim Plaehn: Doing really well, Steve.

Steve Halpern: Now, for our listeners who may not be familiar with the REIT sector, could you just share a brief explanation of what these investment vehicles are and their benefits to income investors?

Tim Plaehn: Yes, REIT stands for real estate investment trust and these are companies whose business is either to own or finance real estate properties.

I tend to focus on the equity REIT, which are ones that own different types of real estate and they're formed under a special part of the tax code, where they're required by law to pay at 90% of the income out as dividends.

Most REIT intend to be higher yield stocks with attractive dividend yields and the better ones will grow those dividends over time, so they're very nice investments for income focused investors.

Steve Halpern: Now, you've been a fan of REITs for a long time and they've done particularly well in the recent interest rate environment, but you recently noticed that it's becoming harder to find the high quality REIT that still offer attractive yields. Could you expand on this dilemma?

Tim Plaehn: Yes, well over the last six months, there's been kind of a flight quality by investors, which has caused them to discover that commercial real estate is a very good place.

Yields are still attractive, but they were very attractive earlier this year. High quality companies owning commercial property, we'd all like to own an office building or two.

They kind of discovered there are more and more worries in the world about where to invest, the REITs became a popular place for conservative income folks and investors, which drove up share prices.

The mathematical converse of that is you now have currently lower yields than you were able to find five or six months ago.

Steve Halpern: Now, to find recommendations within the overall REIT market, you maintain a database that allows you to track and compare a wide variety of REIT based on their yield and their dividend growth potential. Could you walk us through this screening process you use to pick out those that you believe are going to be the biggest winners?

Tim Plaehn: Yes, I maintain a big spreadsheet and it tracks dividend yield, how much the dividend has been increased by over the last 12 months and I also track things like when typically doing the year they announce dividend increases.

For part of my writings, I will sort that database in different ways looking for different factors and in this case, I sorted for highest yield from REITs that are continuing to grow their dividends and then just started at the highest yield, worked down, make sure there are no surprises and put together a list of five stocks that look attractive based on a yield base.

Steve Halpern: Now interestingly, from among the stocks that pass this screen, there are three REITs that happen to be involved in the healthcare sector and before we look at the individual REIT, could you just share a general overview of the healthcare REIT sub-sector?

Tim Plaehn: Healthcare is one of the largest REIT sectors, because healthcare is a very large portion of our economy and REITs owns everything from office buildings to hospital to senior living facilities to rehab facilities.

So there's a broad range of sub-properties underneath the healthcare sector. REITs are very big players in the healthcare-related real estate space.

Steve Halpern: Now, one REIT that you like within this area is called Medical Properties Trust (MPW). What's the story here?

Tim Plaehn: MPW kind of stands apart. Just in general the large healthcare REITs end up owning a lot of assisted living space, but Medical Properties Trust is different. It owns hospitals.

It owns general and acute care hospital and inpatient, they're all hospitals basically and emergency rooms, so they're really focused in that part of the healthcare sector.

Steve Halpern: Now, you are also a fan of Omega Healthcare Investors (OHI). Could you share your thoughts on this play?

Tim Plaehn: OHI owns skilled nursing facilities, which is kind of a very separate group of healthcare — skilled nursing facilities. The risk involved is they tend to get a lot of their revenue from government programs like Medicare and Medicaid, but Omega Healthcare really has been a class of the group that focuses on those types of properties.

One nice thing about them, is that they have been increasing their dividend every single quarter and they've done it for over four years now, which is a nice thing to have versus the typical REIT, which just increases its dividend once a year.

Steve Halpern: Now finally, a name that might be less familiar to many investors, is Sabra Health Care (SBRA). What's attractive about this situation?

Tim Plaehn: Sabra just kind of popped to the top of my list when it came to the yield and they own a diversified portfolio of skilled nursing facilities, senior housing facilities and then a couple of hospitals.

They've been growing their dividends since they went public in 2010. Even though it's a smaller REIT, they've got a pretty good track record going. The yield is still in the 7% range, which is not a bad income in today's environment.

Steve Halpern: Again, our guest is income expert Tim Plaehn of The Dividend Hunter. Thank you so much for your time today.

Tim Plaehn: As always, always good talking to you Steve.

Editor’s Note: Tim Plaehn will be a featured speaker at the San Francisco MoneyShow, August 23-25. He will offer workshops on total return as well as building a retirement portfolio generating 6%+ yields. To register, click here.

By Tim Plaehn, Editor of The Dividend Hunter

Related Articles on REITS