Powerful demographic trends underpin healthcare real estate trusts (REITs), a sector which includes a wide range of properties from medical facilities to senior living centers. Several leading newsletter advisors and contributors to MoneyShow.com suggest long-term plays on an aging population and the increasing demand for health-related facilities.
Chloe Lutts Jensen, Cabot Dividend Investor
Community Health Trust (CHCT) is a REIT that owns healthcare facilities in non-urban areas. Its buildings include clinics, medical offices, mental health facilities, ambulatory surgery centers and specialty properties like dialysis and endoscopy centers.
Its properties are leased to healthcare providers under long-term leases, providing plenty of visibility in regards to future revenues. Most revenues currently come from the Midwest, the South and Texas. Management chooses to focus on non-urban markets in part because there's less competition there, so acquisition prices are lower.
While the future is bright, the past is short; founded in March 2014 by industry veteran Timothy Wallace, the REIT came public in May 2015. So the company's history is thin. However, what track record it does have is good. Technically, the REIT is pulling back toward its 50-day moving average, currently around $30.
The stock hit a new all-time high August 14 after reporting revenue growth of 39% in the second quarter. Management also increased the dividend 0.6%, to 40.25 cents per quarter. As a result, the REIT currently provides a yield of 5.2%. The current pullback presents a good opportunity to buy this healthcare REIT for high yield and short-term to medium-term growth.
John Freund, BullMarket
We own two healthcare REITs in our high yield portfolio: Welltower (WELL) , yielding 5.2%, and Ventas (VTR) , yielding 5.3%. The macroeconomic picture for all senior nursing facilities is constructive given the influx of 10,000 baby boomers reaching retirement age per day for the next 19 years.
As the boomer population ages, demand for senior housing will skyrocket and upscale properties will wield most of the pricing power. This is a generation who demands service and high-quality living standards. Further, technology is creating efficiencies in healthcare, real estate and the junction between those sectors is where these REITs operate.
Welltower operates in large, urban areas with rapidly graying populations that will provide an endless stream of tenants as the boomer generation continues to reach retirement age. It has increased its dividend 12% over the past four years and has maintained 120% dividend coverage from its normalized FFO over the last seven quarters. That translates into a stable, dependable dividend.
Ventas is better diversified with only 50% of its properties in pure senior housing while the rest are medical office buildings, life science centers and other niche healthcare real estate. The company has grown funds from operations 10% a year since 2001 and expanded its dividend 8% a year over that period, so the payout is actually becoming more affordable as a portion of overall cash flow.
Welltower and Ventas are the two best REITs in the business. Stable dividends, strong short-term and long-term growth potential and enormous macroeconomic upside makes these two excellent names to add to a high yield portfolio.
Ben Reynolds, Sure Dividend
Omega Healthcare Investors (OHI) is the largest publicly traded REIT in the U.S. dedicated to owning and operating skilled nursing facilities (SNFs). Its portfolio consisted of 963 operating facilities that are spread over 41 states and in the United Kingdom.
Last year was difficult for Omega due to problems related to two tenants, most notably Orianna Health Systems. Omega is not entirely out of the woods; 2018 is expected to be a difficult year as well. We expect the company to return to growth over the long-term. It continues to reshape its property portfolio, as Omega sold 47 assets in the second quarter, and transitioned 14 Orianna facilities to existing operators.
Despite Omega's portfolio issues, the company should deliver satisfactory growth over the long run. Growth will be driven by industry tailwinds, specifically the aging U.S. population. The population of 85-year-old people in the United States is expected to grow by ~50% in the next 15 years. Occupancy rates are rising at such a strong pace that by 2025 Omega's occupancy will exceed 100%. Omega continues to cover its distribution with sufficient cash flow.
We expect Omega will generate funds from operations (FFO) per-share of $3.04 in 2018. The company currently pays an annual distribution of $2.64 per share. Even when including the potential FFO decline for 2018, the forward distribution payout ratio is approximately 87%.
Omega Healthcare's average distribution yield over the past 10 years is 6.8%. The current distribution yield is 8.4%, which indicates the high level of negative sentiment. In addition, shares of Omega trade for a price-to-FFO ratio of 10.3, a valuation that we believe is too low. Valuation changes, expected FFO growth, and the 8.4% distribution yield result in 16.7% expected returns for Omega each year.
Jim Powell, Global Changes & Opportunities Report
For most people, the best real asset to finance their retirement needs is rental housing. Not only does rental housing have a long history of rising in value during periods of inflation, so do the rents they generate. I realize that many investors don't want to be a landlord who must deal with tenants and maintenance problems. Investors who would prefer a more liquid investment should consider a real estate investment trust.
I continue to recommend Senior Housing Properties Trust (SNH) , which invests in retirement apartments, hospitals, nursing homes and assisted living facilities. Senior Housing is paying a 8.3% dividend. In addition, Senior Housing's real estate holdings have much greater potential to appreciate.
When interest rates and inflation first begin to rise after remaining flat for many years, REITs often drop in price. However, they will usually play catch-up a few months later. Don't rely upon bank deposits or fixed income investments to finance your retirement. Tangible assets such as REITs, including our recommended Senior Housing Properties Trust, are much safer bets.
Brett Owens, Contrarian Outlook
No matter what happens with the Affordable Care Act, we can be sure of one thing: healthcare spending will keep spiking higher. Aging baby boomers are an unstoppable megatrend. According to recent numbers from the Centers for Medicaid and Medicare Services, the nation will spend 5.5% more on healthcare every year through 2026. By then, we'll be dropping $5.6 trillion on it annually.
Our play on retiring boomers is Physicians Realty Trust (DOC) , which has 249 medical-office buildings, 96% of which are rented out to doctors, hospitals and healthcare systems. One thing I love is its long tenant list, with no one client chipping in more than 6% of annualized base rent. That means the REIT avoids getting stuck with a big, trouble-prone tenant, a problem that's beggared healthcare REITs in the past.
Here's another plus: its tenants specialize in the services elderly folks need most, like orthopedic surgery and oncology, so you can bet its buildings will stay full. Which brings me to the trust's dividend, which clocks in at a gaudy 5.5%. And before you ask, yes, that payout is safe, accounting for a manageable (especially for a well-run REIT like this) 86% of FFO. The real kicker is that you can buy in at just 16-times FFO. That's a smoking deal, given the REIT's top-notch portfolio, price upside from the "gray wave" that's surging our way, and its superb 5.5% dividend.
Gordon Page, The Income Investor
Extendicare (Toronto: (EXE) ; OTC: (EXETF) ) is a leading provider of care and services for seniors throughout Canada. The company operates a network of 120 senior care and living centers (67 owned and 53 managed), as well as providing home health care operations through ParaMed. It employs 23,700 people.
Caring for seniors is not an exciting business, but it is well positioned demographically. As the population ages, more people are going to need assisted support, either in retirement residences or in their own homes. Extendicare has been providing these services for 50 years.
The company can rely on steady income to fund its dividend, and the yield is a very attractive 5.7%. There is not much upside potential to the stock in the short term, but for those interested in cash flow, that should not be a serious problem.
The stock can be volatile at times. Over the past five years, it has ranged from a high of over $10 to a low of close to $6. It is currently in the middle of that range. As with most high-yielding dividend stocks, Extendicare is sensitive to interest rate risk. Obtaining qualified staff, especially personal support workers, is an ongoing problem.
There is also some political risk. Regulation of nursing homes in Canada is a provincial responsibility, and governments provide significant funding. A cutback in a provincial budget could negatively impact Extendicare's revenue. The shares pay a monthly dividend of $0.04 each ($0.48 per year). Good income, with limited growth potential; that's Extendicare in a nutshell. We rate the stock as a Buy.
