Showing posts with label real-estate. Show all posts
Showing posts with label real-estate. Show all posts

Monday, June 28, 2010

Four High Yield REITs for current income

One asset class that dividend investors could use in order to diversify their portfolios is real estate. The sector includes rental real estate on residential buildings, offices, malls etc. Owning a piece of rental real estate outright however comes with headaches, such as dealing with tenants and not being properly diversified. In order to avoid managing buildings and finding tenants, investors could use real estate investment trusts (REITs).

Real estate investment trusts own different types of real estate, and they offer instant liquidity to investors, since most are publicly traded. In addition to that REITs are required to distribute almost all of their earnings back to shareholders. As a result REITs are not taxed at the corporate level, but distributions from earnings are typically taxed as ordinary income. The rest of distributions from REITs are typically treated as returns of capital, which reduce your basis and would be taxable as a capital gain if you sell your shares.

Real Estate Investment Trusts offer instant diversification to investors, as most of them typically own hundreds of properties across many states. In addition to that, since they distribute all of their earnings to shareholders, their yields are typically much higher than yields on stocks. An important metric for evaluating REITs is Funds from operations (FFO). FFO is defined as net income available to common stockholders, plus depreciation and amortization of real estate assets, reduced by gains on sales of investment properties and extraordinary items.

Most REITs have rather stable revenues and as a result are able to maintain and even consistently raise distributions over time. I have highlighted four trusts for further research:

Realty Income Corporation (O) engages in the acquisition and ownership of commercial retail real estate properties in the United States. The company leases its retail properties primarily to regional and national retail chain store operators. Realty Income is widely known among its investors as the monthly dividend company. The company is a dividend achiever, which has increased its dividend for 15 years in a row by raising its monthly distributions several times per year. (analysis)

Universal Health Realty Income Trust (UHT) operates as a real estate investment trust (REIT) in the United States. The company invests in health care and human service related facilities, including acute care hospitals, behavioral healthcare facilities, rehabilitation hospitals, sub-acute facilities, surgery centers, childcare centers, and medical office buildings. The company is a dividend achiever and has raised distributions for 22 consecutive years. (analysis)

Health Care Property Investors, Inc. (HCP) operates as a real estate investment trust in the United States. The company invests in health care-related properties and provides mortgage financing on health care facilities. This dividend achiever has raised distributions for 24 consecutive years. (analysis)

National Retail Properties, Inc. (NNN) is a publicly owned equity real estate investment trust. The firm acquires, owns, manages, and develops retail properties in the United States. It provides complete turn-key and built-to-suit development services including market analysis, site selection and acquisition, entitlements, permitting, and construction management. The firm also focuses on purchasing and financing net-leased retail properties. The company is a dividend achiever as well as a component of the S&P 1500 index. It has been increasing its dividends for the past 20 consecutive years. (analysis)

While I generally find these companies attractive, each one has its own risks. Realty Income (O) has slowed the growth in distributions, and its FFO payout ratio is above 90%. In addition to that the rate of vacancies there has increased over the past few years, as the number of assets under management has increased.

National Retail Properties (NNN) has not raised distributions since 2008. The company does have a lower vacancy rate than Realty Income and in addition to that has a much lower FFO payout ratio. If the company doesn’t raise distributions by the end of 2010, it would lose its dividend achiever status.

Fifty-one percent of Universal Health Realty Income's revenues are derived from leases to Universal Health Services. UHT’s advisor is a subsidiary of UHS, and all officers of Universal Health Realty are employees of UHS, which could create conflicts of interest.

One warning statistic for Health Care Property Investors, Inc. (HCP) is the fact that average occupancy percentage for Senior Housing has dropped from 95% in 2005 to 86% in 2009. This occupancy ratio represents occupancy and unit/bed amounts as reported by the respective tenants or operators. Certain operators in HCP Inc’s hospital portfolio are not required under their respective leases to provide operational data however. The company’s focus on senior living facilities should benefit from increasing demand by retiring baby boomers. There will be a significant increase in the number of people over the age of 65 in the US over the next decade, which would be beneficial to overall healthcare facilities.

Overall, I like the stable income streams generated by real estate investment trusts. I believe that getting exposure to real estate through REITs could not only help in diversifying your income portfolio, but also boost your current yield. In addition to that most REITs also grow distributions, which provides some hedge against inflation.

Full Disclosure: Long O, NNN, UHT

Relevant Articles:

- Realty Income (O) Dividend Stock Analysis
- National Retail Properties (NNN) Dividend Stock Analysis
- Universal Health Realty Income Trust (UHT) Dividend Stock Analysis
- Health Care Property Investors, Inc. (HCP) Dividend Stock Analysis

Monday, April 26, 2010

Universal Health Realty Income Trust (UHT) Dividend Stock Analysis

Universal Health Realty Income Trust (UHT) operates as a real estate investment trust (REIT) in the United States. The company invests in health care and human service related facilities, including acute care hospitals, behavioral healthcare facilities, rehabilitation hospitals, sub-acute facilities, surgery centers, childcare centers, and medical office buildings. The company is a dividend achiever and has raised distributions for 22 consecutive years.


Over the past decade this dividend stock has delivered a total return of 16.70% per annum to its shareholders.

As a Real Estate Investment trust, the company has to distribute almost all of its net income to shareholders. An important metric for evaluating REITs is Funds from operations (FFO). Over the past decade FFO has increased by 1.10% on average. Future growth in funds from operations could come from acquisitions or increase in rents. Universal Health Realty Income Trust earns bonus rents from the subsidiaries of UHS, which are based on the excess over base amounts revenue that these facilities generate. There were no acquisitions in 2009, although the company did make a few acquisitions in 2010 and 2008.

Fifty-one percent of UHT’s revenues are derived from leases to Universal Health Services. UHT’s advisor is a subsidiary of UHS, and all officers of Universal Health Realty are employees of UHS, which could create conflicts of interest. In addition to that over $32 million dollars in long-term debt are expected to mature in 2010. The company expects to refinance almost $12 million dollars of its maturing loans, which carry market interest rates. Another portion of the debt maturing in 2010 for $7 million could be extended for an additional three years to 2013. A construction loan for almost $13.5 million at a very low rate could be extended for up to one additional year. The company also has $48.8 million of outstanding borrowings under the terms of its revolving credit agreement which matures in January 2012.

Over the past decade distributions have increased by 2.90% per annum, which was higher than the growth in FFO. A 3% annual growth in distributions translates into dividends doubling every 24 years. In 2009 the company raised quarterly distributions by 1.70%. Dividends of $2.38 per share were declared and paid during 2009, of which $1.94 per share was ordinary income and $.44 per share was a return of capital distribution.

As a Real Estate Investment trust HCP, Inc. must make distributions to its stockholders aggregating annually at least 90% of its REIT taxable income, excluding net capital gains. The FFO payout ratio is at 85%, which was the first decrease in this indicator since 2004. Overall the FFO payout has increased from 72% in 2000 to 85%, which was due to distributions growing faster than funds from operations. A lower FFO payout is preferable, as it minimizes the effect of short term fluctuations in rental incomes on the distribution rate.


Overall I find UHT Inc an attractive company for investment, with a business model that generates stable income streams in the healthcare field. I like the low Price/FFO ratio of 13, which is in the low range when compared to the past five years. This REIT yields 6.80% and has an adequately covered dividend.

I would not expect much growth in funds from operations and distributions above the rate of inflation however. I own two Real Estate Investment trusts dealing with retail properties on a triple net lease terms, so adding a healthcare related REIT would add to diversification in my portfolio.

Full Disclosure: Long UHT

Relevant Articles:

Friday, April 16, 2010

Health Care Property Investors, Inc. (HCP) Dividend Stock Analysis

Health Care Property Investors, Inc. (HCP) operates as a real estate investment trust in the United States. The company invests in health care-related properties and provides mortgage financing on health care facilities. This dividend achiever has raised distributions for 24 consecutive years.

Over the past decade the stock has delivered a total return of 18.20% per annum to its shareholders.

As a Real Estate Investment trust, the company has to distribute almost all of its net income to shareholders. An important metric for evaluating REITs is Funds from operations (FFO). Over the past decade FFO has increased by 3% on average. The fund has a diversified portfolio of healthcare properties by tenants, type of asset or geography. The major tenants include Sunrise Senior Living, Brookdale Senior Living, HCA, Tenet Healthcare, HCR ManorCare, Covenant Care In addition to that the trust has approximately 14% of total assets invested in debt issued by high-quality healthcare operators, secured by their real estate, rather than in the real estate itself.

The company’s focus on senior living facilities should benefit from increasing demand by retiring baby boomers. There will be a significant increase in the number of people over the age of 65 in the US over the next decade, which would be beneficial to overall healthcare facilities.
The company’s assets produce a relatively stable stream of income, which is predictable and resilient in times of recessions. There won’t be much growth however asides from general rate increases on its leases, unless management starts acquiring more properties. The trust routinely disposes or acquires properties in order to enhance shareholder value.
One warning statistic is the fact that average occupancy percentage for Senior Housing has dropped from 95% in 2005 to 86% in 2009. This occupancy ratio represents occupancy and unit/bed amounts as reported by the respective tenants or operators. Certain operators in HCP Inc’s hospital portfolio are not required under their respective leases to provide operational data however

In terms of lease expirations, only Medical Office properties face a steep expirations cycle of leases until 2014. For Senior Housing segment, there aren’t any major lease expirations until 2016.

The company doesn’t face any major debt maturities until 2013, when it has a total of $1.225 billion in Mortgage debt and senior unsecured notes maturing.

Analysts expect FFO to reach $2.15 and $2.24 for 2010 and 2011 respectively. HCP Inc’s leases often provide for either fixed increases in base rents or indexed escalators, based on the Consumer Price Index or other measures, and/or additional rent based on increases in the tenants’ operating revenues. Substantially all of their senior housing, life science, and skilled nursing and hospital leases require the operator or tenant to pay all of the property operating costs or reimburse us for all such costs.

Over the past decade distributions have increased by 2.50% per annum. A 2.5% annual growth in distributions translates into dividends doubling every 29 years. In 2009 the company raised quarterly distributions by 1.00%.

As a Real Estate Investment trust HCP, Inc. must make distributions to its stockholders aggregating annually at least 90% of its REIT taxable income, excluding net capital gains. The FFO payout ratio is at 86%, which was the first increase in this indicator since it exceeded 100% in 2003. Overall a lower FFO payout is preferable, as it minimizes the effect of short term fluctuations in rental incomes on the distribution rate.

Overall I find HCP Inc an attractive company for investment, with a business model that generates stable income streams in the healthcare field. I like the low Price/FFO ratio of 15, which is one of the lowest in the past decade. I would not expect much growth in funds from operations and distributions above the rate of inflation however. I own two Real Estate Investment trusts dealing with retail properties on a triple net lease terms, so adding a healthcare related REIT would add to diversification in my portfolio.

I plan on adding a small position in HCP Inc. on dips over the next month. My ideal starter yield however would be 6%, indicating an entry price of $31 however. I would not settle for a current yield of less than 5% on this investment however.

Full Disclosure: None

Relevant Articles:

Wednesday, March 5, 2008

Buying a house for $10? Where’s the catch?

I was watching CNBC over the weekend and I saw a paid advertisement about investing in foreclosed properties, where investors have supposedly bought houses for less than $1000. It did grab my attention, until I turned off the TV and thought that this is too good to be true.

I did some searching on the web and found an interesting article on people who are supposedly cashing in on foreclosures on CNN’s website. What was particularly interesting to me though, was a calculation about a couple who bought a house in 1998 for just $10. Currently the house was appraised at $250,000. This sounds like a big return on investment, doesn’t it?
Actually there’s always a catch with such “extraordinary deals”. When Mary Krawiec and Mark Peabody scooped up a nine-unit Victorian in Troy, N.Y, they had to do 9 renovations. At the time of the publication they had renovated 4 of the unit and had 5 more to go. They had to pay $2000 for a water bill including previous owner’s debts, replace the cracked rubber roof for $3,500, install new carpets, patch and paint wll and ceilings. They also had to renovate bathrooms; kitchens put new boilers and install special order thermal pane windows. The total expenses to data plus all the projected expenses totaled slightly over $71,000. CNN calculated the profit (rents minus taxes, insurance, utilities) at $52,000, which represented an annualized 27% return on investment, which definitely beats the stock market over the same period.

Forecloses have been on the rise across USA for over a year now. One might be able to scoop up properties at what might seem as bargain prices, but there’s always a catch – there is a very high possibility that the previous inhabitants of the house are behind on utilities, property taxes. In addition they might not leave the house in a perfect condition but in a very bad one because of their desperation. As usual, my advice is always to do your own due diligence before investing any money in anything.

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