Real Estate Benefits From Healthcare Reform

By Sham Gad | March 26, 2010 AAA

With the historic passing of health care reform this week, all eyes are on the insurance companies which will likely benefit in one way or another from the 32 million additional Americans who will need coverage. With a government health care option squarely off the table, insurance companies look set to take on additional insured over the next several years. While the provision that no one can be denied coverage due to pre-existing conditions has many worried about the profitability of such customers, the law of large numbers should work to the insurers advantage.

Find Value Elsewhere
While most attention may lie on insurers and drug companies, health care real estate should not be ignored. With more people having insurance, that increases the volume of visits to doctors who will have to expand their facilities to meet the growing volume. This may create great opportunity for companies which are in the business of owning health care properties, like senior living homes, medical centers and the like. As a bonus, many of these publicly traded names operate as real estate investment trusts for taxation purposes. In order to qualify for the favorable taxation laws, REITS pay out distributions like dividends. So investors are getting paid while they wait. (For more, see The REIT Way.)

Take your Pick
The big health care REIT play is HCP (NYSE:HCP) which has a market cap of over $9 billion and owns interests in 527 facilities nationwide. The shares yield 5.5% and trade at 1.8 times book value. Yet like all things real estate, income is down year over year as more vacancies plagued the entire industry. Ventas (NYSE:VTR), another larger name, operates senior housing facilities, hospitals and medical office buildings. It's holdings include over 200 nursing facilities, 41 hospitals and 139 senior housing facilities. Shares yield 4.4% and trade for three-times book value. (For more, see Digging Into Book Value.)

Yet, the best opportunities may reside in the small cap space, at least from a valuation standpoint. Medical Properties Trust (NYSE:MPW) yields over 7% and commands a 28% net margin. At current prices, it trades for a more reasonable 1.3-times book value. The company assets include surgery centers, hospitals, doctors offices, and other specialty condition centers. The company is an acquirer, developer, and financier of healthcare facilities. Its current portfolio includes 24 owned healthcare facilities. Cogdell Spencer (NYSE:CSA) is a $300 million operator of medical offices and ambulatory surgery centers. Shares yield over 5% and trade for 1.5-times book value. Despite a weak 2009, the company has a strong future. Its 61 properties have a 92% occupancy rate and most are located "on campus" or part of an overall hospital system.

The Bottom Line
Despite passage, healthcare reform is far from conclusion. Yet the stage has been set for growth and a need to develop infrastructure for over 30 million new patients. Now is the time to begin exploring healthcare REITS for the long-run. (For more, see Investing In The Healthcare Sector.)

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