Monday, April 12, 2010

OHI, HCN, MPW Health Care REITS


REITS or real estate investment trusts are considered low growth high yield investments. But how do you choose the right one for you? If you want to invest in real estate without managing tenants, marketing and finding reliable maintenance companies a REIT could be a very viable option for you. After a little research health care REITS seemed to have the most consistent dividend yields over the past four years so this article will focus on health care REITS


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Selection Process
I began the selection process by selecting the top six health care REITs by market cap and then collected their beta, dividend yield and the 10 year Treasury bond yields. I then calculated the required return for each security, their respective dividend growth rates and their fair value estimate by discounting their cash flows. The results are below.

For the market return, although historically investors use ten percent I used seven percent. I think it is appropriate since we are in a bear market and the annualized return for the past ten years is much lower than that. If you have a problem with this, recalculate the fair value prices for yourself. The risk free rate I used was four percent. If the required rate of return was too low, below 7.4% I set the default at 8%

Winners
Omega Healthcare Investors (OHI)
Report price: 20.10
Current yield: 6.37%
Fair value estimate: 28.97
Fair value return: 44.11%



Health Care REIT (HCN)
Report price: 45.63
Current yield: 5.96%
Fair value estimate: 62.90
Fair value return: 37.84%



Medical Properties Trust (MPW)
Report price: 10.94
Current yield: 7.31
Fair value estimate: 12.13
Fair value return: 10.83%


(NOTE)
After my report MPW announced a public offering of 26 million shares at a discount of 9.75 per share. This changes every aspect of my valuation as dilution will occur.  I estimate a maximum dilution of around 32% this brings the fair value down to 8.37 and the dividend yield down to 4.97%. The maximum dilution will occur if no revenue is derived from the public offering.


5 year comparison of stock returns

Losers
HCP, VTR, NHI all of these stocks had a lower fair value estimate than their current price even with dividend yields around 5%.

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