Daily Gains Letter

How to Profit from Aging Baby Boomers and Real Estate

By for Daily Gains Letter | Feb 22, 2013

















220213_DL_whitefootA REIT (real estate investment trust) is a company that owns and, for the most part, operates income-producing real estate. REITs are a great way for individuals to invest in real estate without actually having to own real estate.

It’s also a great way to generate income from guaranteed dividends. To be a REIT, a company must by law distribute at least 90% of its taxable income to shareholders annually in the form of dividends.

REITs pay out almost all of their taxable income to shareholders, so investors have historically looked to REITs for reliable and significant dividends—which are typically four-times higher than those of other stocks, on average.

Because REITs pay out at least 100% of their taxable income to investors, they don’t pay any corporate tax. Most states also don’t require REITs to pay state or income tax. Taxes are paid by shareholders on dividends and any capital gains.

Having said that, investing in a REIT only makes sense if the real estate market is doing well. While the U.S. housing market is beginning to heat up, the rally is still young. And many investors are still justifiably wary of stepping back into real estate after seeing home values evaporate following the Great Recession.

Because REITs operate commercial properties in every major metropolitan area across the country, it’s important to find which kind of REIT is best suited to your investing needs.

Overall, REITs outperform the markets. Between 1971 and 2010, publicly traded REITs provided compound annual total returns of 12%. During that same time frame, the S&P 500 returned 10%, the NASDAQ returned 8.4%, and the Dow Jones returned 6.8%. (Source: “The REIT Story,” REIT.com, February 2011, last accessed February 21, 2013.)

Not all REITs are created equal. If you’re looking for a dividend yield and capital growth—check out health care. Over the last year, health care REITs have outperformed all of the other REIT sectors—returning 25.9% year-over-year. During the same time period, the shopping center sector returned 23.9%, the industrial sector returned 23.8%, and self storage returned 19.5%. In last place was the apartment sector at just 6.3%.

Healthcare Realty Trust Incorporated (NYSE/HR)

Healthcare Realty Trust invests in, develops, and manages medical office buildings, physician clinics, surgical centers, and specialty outpatient and inpatient rehabilitation facilities. It owns about 200 properties in 28 states worth approximately $2.9 billion.

Having recently hit a new 52-week high on February 19 of $26.08, Healthcare Realty is trading at an increase of 33.2% year-over-year and 8.1% year-to-date. The company also provides an annual dividend near 4.6%.

During the fourth quarter of 2012, Healthcare Realty acquired five facilities for $87.6 million. The buildings total approximately 288,000 square feet and have an average occupancy rate of 98%. (Source: “Healthcare Realty Trust Reports Normalized FFO of $0.31 Per Share for the Fourth Quarter,” PRNewswire, February 20, 2013.)

LTC Properties, Inc. (NYSE/LTC)

LTC invests in health care and long-term care facilities. Its portfolio includes more than 80 assisted living centers (homes for elderly residents not requiring constant supervision) and about 60 skilled nursing facilities in some two-dozen states.

The company has a market cap of $1.2 billion and provides an annual dividend yield of 4.8%. Year-over-year, the company’s share price has climbed 30%; year-to-date, its share price is up 9.5%. Trading near $39.00, LTC recently hit a new 52-week high.

The company also announced an active fourth quarter, with $121 million worth of acquisitions, and full-year transactions totaling $224 million. (Source: “LTC Announces Fourth Quarter Transactions Totaling $121 Million,” Businesswire, December 18, 2012, last accessed February 21, 2013.)

Omega Healthcare Investors, Inc. (NYSE/OHI)

Omega Healthcare invests in health care facilities throughout the U.S. It owns more than 475 skilled nursing facilities, assisted living facilities, and other specialty hospitals in 33 states.

The company has a market cap of $3.1 billion and provides an annual dividend yield of 6.5%. The company recently hit a 52-week high on February 19 of $27.91, and it is currently trading at an increase of more than 41% year-over-year and 15% year-to-date.

During fiscal 2012, Omega completed $510 million in new investments. During the second quarter of 2012, it increased its quarterly dividend to $0.42 per share, increased it again in the fourth quarter to $0.44 per share, and in January 2013, it increased its dividend for a third time to $0.45 per share. (Source: “Omega Announces Fourth Quarter 2012 Financial Results; Adjusted FFO of $0.58 Per Share and $250 Million of New Investments for the Fourth Quarter,” Omega Healthcare Investors, Inc. web site, February 11, 2013.)

All three of the above mentioned health care REITs are financially solid companies operating in a lucrative, expanding field. Furthermore, each company maintains an active acquisition strategy, further diversifying their operations and revenue bases.

Diversification is key when it comes to retirement investing, and holding a health care REIT might be the perfect addition for risk-averse investors looking for a steady income and capital growth.

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