If You're Renting Property, Make Sure You Have This Tenant
By Rob Fannon, editor, Phase 1 Investor
January 16, 2009

The price tag on President-elect Barack Obama's proposed economic-recovery plan is skyrocketing – $850 billion at last glance.

Pundits point to several big winners from the proposed boondoggle – renewable energy, public infrastructure like roads and bridges, tax breaks for American workers, and, of course, aid for struggling homeowners. But the industry to benefit the most – to the tune of $100 billion – is health care.

Some 80% of that $100 billion is slated directly for state Medicaid programs. And a handful of medical stocks are set to reap from this windfall: health care trusts.

Health care trusts are publicly traded landlords that focus exclusively on medical property. As I explained last week, the federal government practically guarantees their success. And Obama's $80 billion contribution to Medicaid is only the latest example...

Medicaid is state-delivered medical insurance for low-income families. It's the biggest line-item for state budgets (it makes up about 22% of total state spending). And as times get tough, it's the first program targeted for budget cuts.

But with unemployment and the number of uninsured on the rise, cuts to Medicaid wouldn't be politically popular. That's why the Obama administration is rushing to get Medicaid cash to states as quickly as possible... and another reason why health care trusts will continue to flourish in difficult times.

You see, nursing homes and other long-term care facilities make up a big chunk of health care trusts' business. Government dollars, primarily from Medicaid, are the largest source of funds for long-term care facilities.

Obama's stimulus check provides guaranteed backing for any health care trust that focuses on properties that provide long-term care. The companies should have no problem paying dividends, growing the business, and delivering superior shareholder returns.

One of the largest health care trusts that collects big payouts from Medicaid and Medicare is Nationwide Health Properties (NHP). Nearly 30% of its revenue comes from skilled nursing facilities, which rely primarily on government payments. And with additional properties for assisted and independent living, Nationwide Health is a pure-play on the aging demographic in America, where the number of 65-year-olds is growing four times faster than the general population.

Right now, NHP touts a healthy 7% yield. It has access to $850 million in capital and brings in three times as much money as it needs to meet its debt payments. Plus, it raised more than $90 million last year through equity funding, no small feat given the economy.

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Nationwide Health is slated to bring in just over $2 per share in funds from operations. (FFO is the rough equivalent of net income for health care trusts.) At more than 10 times FFO, Nationwide Health is a little expensive. Make your move on the stock anywhere under $20.

As you do research on Nationwide Health and other health care trusts, look for a lot of money coming in from Medicaid and Medicare. Right now, there's no better tenant that the U.S. government.

Good investing,

Rob Fannon