Welltower Preferred: In the Sweet Spot

03/02/2016 9:00 am EST

Focus: STOCKS

Benjamin Shepherd

Analyst, Breakthrough Tech Profits, Global Income Edge and Personal Finance

With the Fed likely to take a gradual approach to raising rates, we think a sweet spot now is preferred stocks, notes Benjamin Shepherd in Personal Finance.

Welltower (HCN)—formerly known as Health Care REIT—is one of the largest owners of healthcare properties in the US, with over 1,400 nursing facilities, hospitals, senior housing facilities, and medical office buildings.

Like so many other healthcare companies, Welltower has been riding a strong tailwind as Americans age, driving demand for healthcare services higher.

That has created more demand for healthcare properties that typically must be built to specific guidelines, pushing rents higher for some time now.

In fact, the REIT’s book of property investments grew more than ten-fold over the past decade.

As a result, the REIT’s revenue also grew steadily, even in recession years, though net income did take a hit in 2009 and 2010.

Welltower’s dividend not only wasn’t cut in those years, it was increased, thanks to the REIT’s prudent management.

Given its strong history and the uncertain global economy that we’re facing, we’re adding Welltower 6.5% Series I Cumulative Convertible Perpetual Preferred (HCN-I) to our portfolio.

With a 6.5% ($3.25) fixed annual yield, the preferred shares currently yield 5.8%, thanks to strong demand for the shares.

Because the Fed is likely to hit the pause button for rate hikes over the coming months, investors are showing more interest in preferred stocks, especially those issued by such strong companies.

The preferred shares are convertible at any time at the holder’s option into 0.846 common shares of Welltower.

The REIT also has the option to convert the preferred into common shares after April 20, 2018, if the price of the common shares exceeds 130% of the conversion price ($59.10) for 20 of any 30 consecutive trading days.

But I see little risk of that occurring, as it makes more financial sense to let the shares ride. Buy Welltower 6.5% Series I Cumulative Convertible Perpetual Preferred under $62.

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