The “Rabbi’s Secret” — Healthcare Cash Machines

Steve McDonald is trying to get us to subscribe to his Sound Profits newsletter by telling us that he’ll share the “Rabbi’s Secret” for making money in the markets.

Now, in my experience McDonalds rarely have Rabbis — but it sounds like this is all based on a cute nickname for a broker that worked next to McDonald years ago who McDonald says was named William Peterson, and apparently this “Rabbi” carried a black book of investing ideas what made our good editor wealthy, and reading a bit between the lines it sounds like most of the focus of the “rabbi” was on corporate bonds … which makes sense, since it sounds like Sound Profits and McDonald’s other service, The Bond Trader, are focused largely on corporate bonds and other income-focused investments, with a dollop of “safety” (if anyone really knows what that means anymore) thrown in for good measure.

We last looked at Mcdonald’s Bond Trader back in December, when they were teasing their “top secret” TD-Circ 570 strategy for investing in corporate bonds … but today, for Sound Profits they’re teasing stocks.

But not just any kind of stocks — these are high income stocks, and they’re a very particular subsector.

They call these “income distribution plans” in the teaser:

“The truth is there is no telling when the economy and the stock market are going to get better. That’s why I think it makes a lot of sense to take advantage of this income distribution plan right away.
For it enables you to capitalize on some little-known government-regulated companies that are mandated by Federal law to pay 90% of their profits to people who are on the check distribution list.

“In exchange, the companies get a generous tax break. They pay zero Federal income taxes at the corporate level, providing that they abide by all the rules. Yes ZERO! The catch–they must distribute profits to shareholders. They have no choice. If they don’t make these prescribed payments they will lose their tax-exempt status.

“Not many companies work this way. Normally companies keep most, if not ALL of their profits. This is a massive giveaway being handed out thanks to government regulations. And all, but a tiny minority of people are completely oblivious to it.”

So that’s not a shocking revelation, I expect — these are Real Estate Investment Trusts (REITs), pass-through investment vehicles that use investors’ money to buy properties (often using heavy leverage and mortgages, too, as we’ve seen for some bankrupt REITs lately).

But McDonald isn’t touting just any kind of REIT — these are related to healthcare. Here’s a bit more of the pitch:

“The Automatic Cash Machine That Churns Out Big Dividends, Safely and On Schedule

“These companies invest in medical and healthcare infrastructure. Health infrastructure is of vital importance to the U.S. government. Americans are aging and the demand for healthcare is about to skyrocket. Yet the supply of decent health care facilities is inadequate

“That’s where these companies come in. They provide the capital for healthcare infrastructure. And the government helps them do this by giving them enormous tax breaks. That’s why they can reward shareholders with huge cash payouts.

“And as my mentor, the ‘Rabbi’, used to tell me ‘Stocks are not cash. Dividends are cash. Steve, always make sure you get paid.’ This is an investment that would have made the “Rabbi” proud. Because these government-regulated companies are like cash machines.”

OK — so REITs that invest in medical and healthcare infrastructure. Got it. There are enough of these companies that “Healthcare REIT” is considered a subsector of the REIT universe by many folks (about a dozen of them, last time I checked), and they do basically do what the ad teases — they buy hospitals, medical office buildings and research labs, nursing homes and similar kinds of properties, and they lease them to tenants. Often, as the ad teases, they use triple net leases (meaning they don’t maintain or pay taxes on the property, the tenant does all that) and have some kind of rent escalator built in, but of course that can be different for every company and every deal.

We’ve looked at Healthcare REITs in this space a few times over the last couple years — it does have a nice logical sound to it, you get the relatively conservative structure of a REIT (as long as they don’t use too much leverage), and it’s in a sector that everyone assumes will be in huge demand — after all, it seems logical to assume that there probably aren’t enough hospital and nursing home beds to accomodate the baby boomers if they have the same health problems as their parents over the next 20 years. About a year and a half ago, right at the most recent top of the market, there was a pretty big ad campaign pushing these same kinds of investments as “Healtcare IRAs” with the made up “HIRA” acronym — the three companies from that ad are down around 20-30% or so since then, so they’ve probably outperformed the broad market but not exactly proven themselves to be “bulletproof” just yet.

And of course, we’re not told to go out and buy the baker’s dozen of these companies — that would be admitting that the newsletter can’t tell you anything unique and fabulous. No, they’ve picked out three of them that are the picks for Sound Profits that you should buy now, and if you’ll just pretty pretty pretty please subscribe, they’ll tell you all about ’em.

Or of course, you could just join me as we sleuth through the clues, and give each one a little bit of the ‘ol Stock Gumshoe treatment. Shall we?

“‘Cash Company’ #1: with only 198 employees it made $448 million in 2007. The company had to distribute 90% of that money to participants. It currently pays an 8.7% dividend, and sells below book value. It’s paid 151 consecutive quarterly dividends since it opened its doors in 1970. Based on data reported in Yahoo Finance, from November 1998 to January 2007 this “cash company” returned an amazing 434% in capital gains, plus 155% in dividends…Get involved now and you could collect your first “paycheck” on May 20, 2009.”

That one is Healthcare REIT (HCN) — they’re the granddaddy of the Healthcare REITs, they did indeed start trading in 1970 and they did have 198 employees in 2007. They mostly own nursing home-type facilities, including assisted living and independent living, but also do have a sizable number of medical office properties. They no longer trade below book value, but they did dip down that far briefly (book value is about $28 a share, currently the stock is about $33.50).

Compared to some REITs, the debt is not particularly terrifying — they have about as much debt as equity. The dividend was just announced for the quarter at 68 cents, which means this is the first time they haven’t done a dividend raise at this time of year since 2003 (that dividend is the same one they paid for the last four quarters). That gives a current yield of about 8.2%.

This week is prime time for talking about these companies, because almost all of them are releasing their quarterly earnings reports over