Healthcare REITs are set to benefit from favorable trends. As the baby-boomer generation ages and with the average life expectancy on the rise, the senior population of the U.S. is expected to grow significantly in the upcoming years. The 75+ age group is expected to grow by 6% per year until 2030.
In addition, this age group has immense spending power, as its average net worth exceeds $640K. Thanks to these trends, healthcare spending is expected to grow by 5.4% per year until 2028.
In the meantime, the largest healthcare REITs have high dividend yields well above the S&P 500 average. Therefore, income investors with a long-term perspective should take a closer look at these major healthcare REITs.
Go to the Well for Income
Welltower Inc. (WELL) operates through the following business units: Senior Housing Operations, Seniors Housing Triple-net, Outpatient Medical, Health System, and Long-Term/Post-Acute Care. With its segments, Welltower controls assets such as post-acute care facilities, assisted living facilities, care homes, senior housing communities, and outpatient medical buildings.
Its annualized in-place net operating income (NOI) consists of 45.9% in Seniors Housing Operating (SHO), 19.0% in Seniors Housing Triple-net, 23.4% in Outpatient Medical (OM), and 11.7% in Long-Term/Post-Acute Care.
Welltower posted its second-quarter results on July 31. For the quarter, it reported a 13% increase in revenues to $1.67 billion against the year-earlier quarter. Revenue primarily came from resident fees and services of $1.16 billion (up 15% year over year) and rental income of $383.4 million (up 6%). Normalized funds from operations (FFO) rose 14% to $450.9 million. Normalized FFO per share (FFOPS) climbed 4.7% to $0.90.
For the quarter, Welltower reported same-store net operating income (SSNOI) growth of 12.7%, driven by year-over-year SSNOI growth of 24.2% in its SHO portfolio. The other segments, including Seniors Housing Triple-net, Outpatient Medical, and Long-Term/Post-Acute Care, respectively, also saw SSNOI growth of 3.1%, 3.2%, and 6.1%.
During the quarter, it completed $414 million of pro rata gross investments. Because of the change in projected net gains, losses, or impairments, and depreciation & amortization, Welltower improved its 2023 FFOPS guidance to $3.48 to $3.59.
The current payout ratio of about 70% should better protect its dividend going forward.
The shares currently yield 2.9%.
For Your Peak Income Years
Healthpeak Properties (PEAK) is the largest healthcare REIT in the U.S., with 626 properties. It was the first healthcare REIT that was included in the S&P 500. The REIT invests in life science facilities, senior houses, and medical offices, with 97% of its portfolio based on private-pay sources. It has a market capitalization of $12 billion.
Healthpeak Properties posted declining FFO for six consecutive years, until 2022. The REIT ran into trouble in 2015, when a major tenant was sued for Medicare claims fraud. As a result, the REIT incurred a $1.3 billion asset impairment charge and has been going through a major restructuring. However, Healthpeak Properties has sold several assets and has used the proceeds to reduce its debt. As a result, the REIT has received credit rating upgrades from S&P and Fitch (to BBB+) as well as Moody's (to Baa1).
In the 2022 second quarter, FFO of $0.45 beat analyst estimates by $0.02, while revenue of $545.43M beats by $9.15 million. Revenue increased 5.3% year over year. Blended Total Same-Store Portfolio Cash (Adjusted) NOI growth was 4.8% for the quarter.
The REIT has begun to recover from the pandemic, which has subsided. We also expect the trust to enter a sustainable growth trajectory, as it will leave its past issues behind. Overall, we expect 6.0% average annual growth of FFO per share for the next five years off this year's low comparison base.
With a dividend payout ratio of roughly 70% expected for 2023, the current dividend payout appears secure.
PEAK shares currently yield 5.6%.
Attractive Potential Return and a Solid Yield
Ventas, Inc. (VTR) is one of the largest healthcare REITs in the U.S., with more than 1,200 properties in the U.S., Canada and the United Kingdom. The REIT has a market cap of $18 billion.
The company sold a large portion of its skilled nursing facilities in 2017, as these facilities had been harmed by changes in medical billing procedure. As a result, these facilities now comprise just 1% of Ventas' total assets.
In early May, Ventas reported financial results for the first quarter of 2023. It continued to recover from the pandemic and enjoyed strong pricing power thanks to solid demand for its assets. Same-store operating income grew 8.1% over the prior year's quarter but FFO per share dipped 6%, from $0.79 to $0.74, exceeding analysts' consensus by $0.03, due to higher interest expense and higher operating costs.
Ventas stated that it entered 2023 with strong business momentum and reiterated its guidance for FFO per share of $2.90-$3.04 for the full year. Ventas has refinanced 70% of its 2023 maturing debt so far this year.
Ventas has grown its FFO at a 10% average annual rate since 2001. However, as the major portion of this growth materialized within 2001-2007. In fact, the REIT has failed to grow its FFO per share over the last decade. Nevertheless, thanks to an improved business outlook, we expect its FFO per share to grow at a 7% average annual rate over the next five years off this year's nearly 10-year low level, which will form a low comparison base.
We expect Ventas stock to generate annual returns of approximately 11% a year, consisting of 7.0% expected earnings-per-share growth and its 4% dividend, while the stock appears fairly valued right now. Still, this is an attractive potential return along with a solid dividend yield.
