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Published: October 23, 2009
A few months ago the nation was locked in the
throes of the financial crisis. Markets were crashing. Experts
spoke of financial calamity and depression. Hope evaporated.
This was to be a financial disaster for the ages.
Look what's happened.
The Dow Jones Average recently broke the psychologically
significant 10,000 mark. The S&P 500 is up +22% so far this year
and has risen +62% since its March lows. Job growth has yet to
follow suit, but the economic recovery nevertheless appears to
be underway.
Even so, the strength -- and duration -- of the recovery is
unknown. Certainly we all hope it will be strong and long-lived
with a rising market to match. Given the uncertainty in the
economy, however, and the fact that the markets have run so much
already, it might be time to play defense with at least part of
your portfolio.
Health care can be a great way to do just that. People get sick
no matter what kind of shape the economy is in. Even so, this
sector hasn’t performed well, largely as a result of the ongoing
health care debate in Washington. In fact, health care is the
S&P 500’s worst-performing sector this year.
One sector of health care is relatively shielded from any
affects of the proposed legislation: Health care real estate
investment trusts.
Health Care REIT (NYSE: HCN) buys, develops and leases
medical facilities. The company owns a diversified portfolio of
620 properties in 39 states. Properties include senior-living
facilities, medical office space, nursing homes and specialty
clinics.
People always need health care. And health care providers always
have to pay the rent. No part of any proposed legislation would
change that.
Two-thirds of HCN's revenue is
derived from senior living
facilities. These properties are in
demand, and that demand isn‘t going
to abate any time soon. People are
living longer, and the
fastest-growing segment of the
population is 65 or older. And an
enormous population bubble, the
"baby boomers," are hitting
retirement age.
While these senior-living properties
run the risk of some tenants losing
Medicare funding, about two thirds
of HCN's tenants are private-pay and
invulnerable to potential
entitlement-program cutbacks.
Another factor that adds to HCN’s
margin of safety is its medical
office space, which represents about
26% of revenue. Office properties
tend to be in prime locations in the
premium areas surrounding a
hospital, where doctors and other
medical professionals prefer to
locate their practices.
HCN isn’t just a steady income
stream, it’s a growing one. The
company's strong balance sheet
allows it to raise funds to acquire
new properties. In fact, some $639
million in new properties will begin
generating revenue in 2009 and 2010.
And HCN already has leased 90% of
the new spaces coming available in
2009-2011.
All of that sounds good. But the
$64,000 question is how HCN has
performed in sluggish markets.
While the S&P 500 is significantly
lower now than 10 years ago, HCN has
averaged more than +8% a year in
total return in the same period. In
the past three tumultuous years, the
S&P 500 has lost about -20%. HCN,
for its part, returned investors
about +10% a year.
The result of HCN’s desirable stable
of recession-proof properties and
its healthy financial footing is its
dividend. As a REIT, HCN is required
to pay out at least 90% of taxable
income to shareholders. The
company's stable and predictable
cash flow goes right into your
pocket.
HCN currently pays an annual
dividend of $2.72 a share in
quarterly payments of $0.68. The
last dividend represented the 153rd
consecutive quarterly dividend the
company has paid. In addition, the
dividend has been raised every
single year for the past 17 years.
HCN currently yields a solid 6.1%.
In the current real estate market,
HCN should be able to acquire new
properties on the cheap. The company
recently raised about $370 million
in a stock offering and an
additional $300 million issuing
debt. The company appears poised to
take this opportunity to expand.
HCN should forge on in good markets
and bad. Income investors should
have something in the market that
can continue to thrive even if the
economy flounders in the years
ahead.
As the stock has surged an
astounding +35% since July, however,
it makes sense to buy HCN on a
pullback below $40. -- Tom
Hutchinson
Staff Writer
StreetAuthority |
