Healthcare REITs for Healthy Gains

06/04/2015 9:00 am EST

Focus: STOCKS

Briton Ryle

Editor, The Wealth Advisory

Briton Ryle has long been a leading authority on real estate investment trusts, a sector that is a core portion of his model portfolio at The Wealth Advisory. Here, he reviews a pair of healthcare REITs for which he has just recently boosted his target prices.

Omega Healthcare Investors (OHI)

Omega Healthcare remains our favorite healthcare REIT and one of our favorite REITs in general. Of its revenues, 85% are contracted through 2020. OHI is growing faster—and growing its dividend faster—than any other healthcare REIT.

During the first quarter, Omega completed the acquisition of Aviv REIT, another healthcare REIT. Omega now owns over 900 properties in 41 states.

I had forecast 2015 earnings between $3.10 and $3.30 after the merger. Current estimates call for $3. 2016 earnings per share should hit $3.18.

Omega has hiked its dividend for 11 straight quarters, which is nice. With a 6% dividend, strong potential for 20% annual returns, and an attractive forward P/E of 14, we continue to rate Omega Healthcare a strong buy.

We note that Omega will issue approximately 40 million shares, diluting the current number of outstanding shares by about 30%. We are raising our buy under price to $42 a share. We are also raising our 12-month price target to $51.

Medical Properties Trust (MPW)

Medical Properties buys hospitals and then leases them to operators. It makes money on the spread between finance costs and rental income. The company typically aims for a 9% to 11% spread, though it recently made a deal with an 8% spread.

Our patience with the stock is paying off.  In 2013, MPW grew its FFO (funds from operations) 7% to $0.96 a share and it says FFO will be $1.25 a share in 2015 based on current holdings and absent any new acquisitions. But that secondary suggests new acquisitions are in the works...

It will do about $500 million in acquisitions this year. And earnings estimates have been rising. At $0.88, the 2015 dividend will fall a bit short of our $1 forecast, but 6.4% at current prices is still quite attractive.

The company has managed something that is very rare: pricing a secondary offering of shares. Clearly, investors who participated in this 30-million-share offering see more upside for MPW. So do we. I have raised the buy under price to $16 and our 12-month price target to $20.

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