Healthcare REITs Have Worked: Now What?
Earlier this year, I shared an idea for income-oriented investors who were concerned about the deteriorating economy and the impact it might have on their investments. I suggested looking at the Healthcare REITs, as they were less likely to suffer from concerns about the ability of tenants to pay. The group has performed exceptionally, down about 7% as you can see in the table below. When I reviewed the group in late January, it was down a little over 2%.
So, what now? If one owns them, one should feel very fortunate in most instances. At this point, I am generally cautious on this group for two reasons:
- They could lag significantly any rally
- They could fall absurdly if economic conditions continue to deteriorate.
The first scenario isn't necessarily a reason to sell at all, but one should be aware that investors in the REIT universe have some terrific choices if they are willing to assume some risk. The typical REIT has fallen over 13% (the median of the 61 REITS in the S&P 1500). Other types of high-yielding investments have fared even more poorly (MLPs come to mind). The second scenario concerns me more, as I have seen so many strange occurences as investors liquidate without abandon. I wrote this weekend about a massive bond ETF, AGG, trading at a significant discount to its NAV (which isn't supposed to happen!). The point is that investors are nailing anything that they can, and the fact that this group is down "only" 7% seems like it could be an invitation for liquidity seekers. I wouldn't argue with anyone for selling one of these to buy JNJ, for instance. Additionally, while most of the group seems to have a decent balance sheet, the financial situation could impact the ability of these companies to roll over debt. Also, the operating conditions could worsen as Medicare and other types of reimbursements come under pressure. Ultimately, in a very bearish scenario, the underlying assets could diminish in value.
The other scenario, and perhaps the most likely, is that ultimately these companies on average will remain nice safe havens during generally challenging economic times ahead. The valuations relative to book value are low, providing somewhat of a margin of safety. As I indicated in the original article, a few of these names seem to have too much debt. MPW wasn't on the original list - that one looks to be in some trouble (sitting on some vacant hospitals). On the flip side, NHI and LTC appear to be extremely underleveraged. I looked a little further into NHI and discovered that the former chairman attempted to buy the company for $34 in 2007. Finally, BMR is the one I know best, having owned it earlier this year. I am contemplating adding it back, as it has been absolutely pounded since doing a secondary offering of stock to replace a short-term borrowing mechanism. The company has a very diversified base of tenants, primarily biotech (most of which are quite established). It would seemingly avoid what I believe could be a big risk to some of the other REITS: Medicare reimbursement. On the other hand, it does have some exposure to VC-funded biotech companies.
Disclosure: No position
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