3 Healthcare REITs to Profit From the Aging U.S. Population
Income investors with a long-term perspective should take a closer look at these healthcare REITs.
You've reached your free article limit
You've read 0 of 1 free Pro articles.
Healthcare real estate investment trusts are set to benefit from favorable trends. As the baby boomer generation ages and the average life expectancy is 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 strong spending power. Thanks to these trends, healthcare spending is projected to grow by 5% 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 the major healthcare REITs.
Don't Be the Last One to Find Out About This REIT
Omega Healthcare Investors OHI is a healthcare REIT that generates over 80% of its revenues from skilled nursing facilities, and the remainder of its revenues from senior housing developments. The trust generates about $825 million of annual revenue.
Omega posted second-quarter earnings on August 1, and results were better than expected on both the top and bottom lines. Funds from operations came to 71 cents per share, which was three cents ahead of expectations. Revenue was up 1% year over year to $253 million, and handily beat estimates by almost $46 million.
Omega also boosted guidance for this year, and we’ve upped our estimates accordingly. Net income was $117 million for the quarter, up from $62 million a year ago. FFO was $189 million, up from $155 million in last year’s Q2. During the quarter, Omega completed $221 million in new investments, consisting of $115 million in real estate acquisitions, and $106 million in real estate loans.
Omega issued eight million shares of common stock for gross proceeds of $245 million. Real estate loans interest income was $31 million, up from $28.7 million in Q1, and up sharply from $24 million in the year-ago period. Expenses fell to $150 million from $174 million in Q1, and $201 million in last year’s Q2.
The healthcare sector is much less cyclical during recessions than other sectors of the economy. During the Great Recession, Omega saw its FFO per share decrease by only 3%. It also had a strong dividend growth record, prior to 2020. The payout ratio is quite high, but that is typical for a REIT, and the dividend appears secure, provided the company’s FFO continues to grow.
OHI shares currently yield 6.4%.
Go to the Well
Welltower WELL operates through several business units: Senior Housing Operations (SHO), 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.
Welltower reported its second-quarter 2024 results on July 29. For the quarter, it reported a 10% increase in revenues to $1.82 billion against Q2 2023. About 76% of revenue came from resident fees and services of $1.39 billion (up 20% year over year).
Consolidated net operating income rose 1% year over year to $713.6 million. Normalized funds from operations rose 41% to $637.5 million. Normalized FFO per share climbed 17% to $1.05.
For Q2, same-store net operating income growth was 11.3% to $537.8 million, driven by same-store net operating income growth of 21.7% in its SHO portfolio. The other segments, including Seniors Housing Triple-net, Outpatient Medical, and Long Term/Post-Acute Care, respectively, saw SSNOI growth of 4.3%, 2.1%, and 2.7%, respectively.
During the quarter, it completed $1.7 billion of pro rata investments — $1.4 billion in acquisitions and loan funding and $251 million in development funding.
Finally, patient investors should be delighted to see the REIT raising its quarterly dividend by 9.8% to $0.67 per share. Welltower expects its average blended SSNOI growth to be 10.0% to 12.5%. As well, it increased its 2024 FFOPS guidance to $4.13 to $4.21.
The current payout ratio of about 61% for 2024 should better protect its dividend going forward.
WELL shares currently yield 2.0%.
A Healthy Idea for Income Investors
Ventas 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 August, Ventas reported financial results for the second quarter of 2024. It continued to recover from the pandemic and enjoyed strong pricing power thanks to solid demand for its assets.
Same-store operating income grew 7.8% over the prior year’s quarter and FFO per share rose 7%, from $0.75 to $0.80. Ventas reiterated that its senior housing business has entered a multi-year growth cycle. It also narrowed its positive guidance for FFO per share in 2024, from $3.10-$3.18 to $3.12-$3.18.
Ventas boasts of having grown its FFO at a 10% average annual rate since 2001. Thanks to an improved business outlook, we expect its FFO per share to grow at a 6% average annual rate over the next five years off this year’s nearly 10-year low level, which will form a low comparison base.
VTR’s expected dividend payout ratio for 2024 is approximately 58% of FFO. Therefore the dividend appears secure at the current payout level.
VTR shares currently yield 2.7%.
At the time of publication, Ciura had no positions in any stocks mentioned.