“HIRAs — Funding Retirement with Healthcare Trusts?”

By Travis Johnson, Stock Gumshoe, November 2, 2007

This one comes in from Rob Fannon’s Medical Investor, another publication of Stansberry and Associates — we’ve seen a few of his teasers before, with actually some quite good results on their ideas for “SNiP Investments” and a few others. This time, as with so many Stansberry ads, there’s again an invented term to juice the teaser.

Today, our invented term is “HIRA” — he refers to this as the Healthcare Investor Retirement Account, which is evocative but perhaps designed to make you think that this is something like an IRA — which is, of course, a bit of a stretch.

The HiRA companies, which in fairness they do disclose in the email ad, are Trusts — they are income producing investments that are related to healthcare property.

Now, those of you who have been around the block a few times will probably immediately recognize these as healthcare REITs — Real Estate Investment Trusts that happen to invest in healthcare-related properties. There are many sectors in the REIT world, including everything from office buildings to timber land to apartments and warehouses and even college student housing, so it shouldn’t be surprising or odd that there are quite a few REITs that invest specifically in hospitals, medical offices, and nursing homes.

The argument in the teaser is that these are uniquely positioned to help you profit — so there’s a quote from the Wall Street Journal that these investments are “The antidote for queasy investors seeking safe havens during a stomach-turning economic environment.”

And there’s some other stuff thrown in there that sounds a bit better than it really might be — like “HiRA returns are subsidized by federal law.” It’s true that REITS must pay out most of their income to shareholders to maintain their untaxed status, and that much of healthcare is at least indirectly subsidized by the government through Medicare, but saying the returns are subsidized is perhaps a bit strong.

We also get the standard mouth-watering paragraphs — about individual investors who have pocketed incredible sums like $7,800 a month from these companies. It’s not a bad idea to just ignore the dollar amounts any time the advertisers do this — without knowing how much that person has invested, they’re meaningless. I could easily make $7,800 a month in risk-free coupon payments from Treasury Bonds if I started with $2 million … if I start with $50,000 or $100,000, though, I’m not going to do anywhere near that well with HiRAs or any other steady dividend payer.

But these are dividend-paying trusts, so they will generate some income. And the ad teases us that there are three in particular that we should look at, so let’s take a gander at some clues and see what we can find.

First, they do offer the tantalizing prospect of monthly checks — which is what some folks, especially those who live off of their investments, really like. This works because they’ve chosen three different healthcare REITs that happened to have staggered dividend schedules, so one of them is due to make quarterly dividend payments each month.

So which three companies are they?

They call them the “3 biggest trusts in America,” which is probably significant but there are only about a dozen of these companies.

Here are the clues:

Healthcare Trust #1

$7.1 Billion market cap.

Owns “270 Senior Housing Facilities, 265 Medical Office Buildings, 41 Hospitals, 64 Skilled Nursing Facilities, and 29 Other Healthcare Facilities … [for a total of] 669 total properties located in 44 States”

They doubled their property holdings last year.

And, they “own the research labs of biotech giants Amgen and Genentech.”

Their total dividend payments for 2006 were $349.2 million.

This one, according to the trusty Thinkolator 4000, is …

Health Care Properties (HCP)

This is by far the biggest healthcare REIT, and it does indeed own that broad array of properties. That doesn’t mean, however, that they’re immune to downdrafts — they happened to release their earnings after this email started circulating, and by roughly matching analyst estimates they were rewarded with a 10% haircut (so the market cap is now down to about $6.7 billion).

The current yield is a bit over 5%, which in this world of vastly lowered REIT yields sounds relatively decent … but remember, five years ago it was hard to convince any investor to buy a REIT with a yield under 7%, so there’s no guarantee that REITs can sustain themselves in the market at the historically low yields many of them have now, healthcare or no.

Healthcare Trust #2

This one’s about half the size, with a market cap of $3.6 billion.

It owns “208 Assisted Living Facilities, 233 Skilled Nursing Facilities, 47 Retirement Centers, 89 Medical Office Buildings, 18 Long-term care hospitals, for a total of 595 total properties located in 37 States”

“Payouts have increased 850% since 1970”

Total dividends payed in 2006 were $186.7 million.

This one looks like it has to be Health Care REIT (HCN)

Wildly clever company name, eh?

This one has been around for as long as any of them, since 1970. They have done a fair amount of acquiring, so it’s hard to nail down an exact match for their numbers of facilities, but those given in the teaser come very close to matching what the company provides on their website for recent numbers.

Interestingly enough, the company reports on their website that their market capitalization is $5.9 billion … not sure how they’re doing their math, the market cap is about $3.4 billion right now according to the stock market. I think they must be referring to the enterprise value, which is over $6 billion at the moment (and consists, for those unfamiliar with the term, of total market capitalization plus net debt). Like almost all REITs, they’ve got plenty of debt (REITs can’t grow through reinvestment of earnings, since they have to pay them out as dividends, so they grow by issuing additional equity or borrowing money).

So again, one of the larger REITS in this space, and with a pretty nice distribution across the various types of properties in the healthcare business. And a good nationwide distribution, though they’re wildly underrepresented in California and Arizona, considering their customer base (their concentration is otherwise in the usual suspect states that are packed with retirees — Texas, Florida, North Carolina, but not nearly as concentrated as I would have guessed).

The yield on this one is a slightly stronger 6%

Healthcare Trust #3

Market Cap: $6 Billion

195 Skilled Nursing Facilities
42 Hospitals
251 Senior Housing Facilities
22 Other Healthcare Facilities

510 total properties located in 43 States and Canada

Notable: Owns major hospital systems in Chicago, Boston, Denver, Phoenix, Las Vegas, Houston, Tuscon, Detroit, New Orleans, San Diego, Indianapolis and L.A.

2006 HiRA Payouts: $167.9 MILLION

This one pretty well has to be …

Ventas (VTR), the faster-growing, lower-yielding member of this trio.

Ventas is one of the larger companies in this sector, the second largest based on market cap. They are a fairly aggressive grower, too, in particular with their recent acquisition of the Sunrise Senior Living REIT.

So … what do I know about any of these companies? Not a whole heck of a lot. Ventas yields 4.4%, which scares me off a bit because I still have that old fuddy duddy belief that REITs should have high yields — and 4.4% doesn’t count as a high yield in my book. That means, of course, that I haven’t bought any REITs in a long time, and in fact I sold several way too early in the REIT bull market of the past few years because I thought their yields had gotten unsustainably low (General Growth Properties and ProLogis, both of which I sold in 2005 if you want to check up on my past mistakes). Currently, the only REIT I own is Rayonier, which is primarily a timber play.

If I were you, and had some interest in the sector, I’d compare Funds From Operations for all of these (that’s the standard metric for REITs, a more accurate performance measure than earnings), assess their growth strategies, and look at their potential to grow the dividend. All of them are at least large and relatively insulated from the performance problems of any particular hospital or nursing home operator, which can’t be said of all of the smaller REITs.

It’s certainly true that health care investing is considered by many to be a good bear market safe haven, and that many people believe health care REITs, with their steady yield that’s generally higher than the average REIT, are a good idea these days. A recent article from Forbes, which compared all three of these specific companies and includes a brief discussion of the political risk inherent in these investments thanks to the vicissitudes of Medicare and Medicaid reimbursements, and an older one from Kiplinger’s might get you started on your own research. Though these teased companies are three of the largest healthcare REITs, the entire sector is only 12 or 13 companies, so you could also look into some of the small caps if you’re feeling adventurous.

Oh, yeah, and don’t forget: these are real estate companies, albeit ones that are sheltered from the regular commercial and personal real estate markets, and they rely to some degree on the market’s interest in real estate equity and debt in order to fund their growth … any guesses as to how excited the market is about real estate at this moment?

Best of luck to you, and let us know what you think about these investments.

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3 Comments on "“HIRAs — Funding Retirement with Healthcare Trusts?”"


January 22, 2008 1:58 am

Passing through and wanted to say hello

January 25, 2008 2:45 pm

I found your blog by accident but am glad I did

John Masters
January 27, 2008 12:20 am

Please keep these excellent posts coming