A Real Estate Play That Won't Give You Ulcers

Real estate investments rarely get respect these days. Yet one group is doing very well: health care real estate investment trusts (REITs), which are publicly traded companies that invest in hospitals, nursing homes, and other health-oriented properties. In 1990, the eight health REITs averaged a total return of 21%, while REITs overall declined 15% and the stock market fell 3%. In 1991, shares of health care REITs have climbed 28%.

Why the rise? Health care is seen as a recession-proof industry: In good times or bad, people still need it. And these REITs "are not really a real estate play--they're a health care industry play," observes Rae Alperstein, an analyst with Kemper Securities Group.

As the recent stock climb indicates, health REITs "are not a total secret anymore," says John Fosheim of Green Street Advisors, a Newport Beach (Calif.) research firm specializing in REITs. But they're still good income producers, with "prospects for steady, if not spectacular, growth," says Fosheim. Many analysts see these REITs, now yielding about 9%, returning 15% to 20% in the next 12 months.

WIDE RANGE. Health care REITs rarely finance new construction. Instead, they do buy-leasebacks--that is, they purchase an existing facility, then lease it back to the original owner. Investment strategies vary: Meditrust owns a variety of facilities, from nursing homes to substance-abuse centers to hospitals, while Nationwide Health Properties is nearly 100% nursing homes. Both approaches can be profitable as long as the REIT diversifies geographically and deals with several management companies. Analysts advise sticking with the Big Four--Nationwide, Meditrust, American Health Properties, and Health Care Property Investors--which have averaged a total return of 37% over the past 12 months.

For investors willing to bet on a smaller company, there's Health Care REIT. Primarily invested in nursing homes and psychiatric hospitals, its stock has increased from 11 to 15 this year, and "I could see it at 19 a year from now," declares Donald Cassidy, a research analyst at Los Angeles broker Capital Insight. Alperstein likes Universal Health Realty Income Trust, a specialist in acute-care hospitals that has returned 52% so far this year.

Investors should keep an eye on Congress as well. Changes in medicare-reimbursement systems could hurt the profitability of these facilities. Also, health care operators themselves are now buying properties, so REITs may find it harder to get good sites, warns Robert Frank, an analyst at Alex. Brown & Sons. Still, as America gets grayer, the need for financing health care properties won't be going away.

Before it's here, it's on the Bloomberg Terminal.