Why Income Investors Should Consider Healthcare REITs

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 projected 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 the major healthcare REITs.

High-Yield Healthcare REIT: Welltower

Welltower WELL operates in these 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.

Welltower reported its fourth-quarter 2023 results on February 13. For the quarter, it reported a 15% increase in revenues to $1.75 billion against Q4 2022. Revenue primarily came from resident fees and services of $1.26 billion (up 15% year over year) and rental income of $404 million (up 9%). 

Normalized funds from operations (FFO) rose 31% to $529.6 million. Normalized FFO per share (FFOPS) climbed 15.7% to $0.96. For the quarter, Welltower reported same-store net operating income (SSNOI) growth of 12.5%, driven by year-over-year SSNOI growth of 23.7% 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 2.2%, 2.8%, and 5.2%. During the quarter, it completed $3.0 billion of pro rata acquisitions and loan funding. The full-year 2023 results show a bigger picture. Revenue grew 13% to $6.64 billion.

For the year, Welltower completed $5.9 billion of pro rate gross investments. Welltower provided an initial guidance for its 2024 FFOPS: $3.94 to $4.10. Welltower’s strategy of shifting its focus towards more promising sub-segments of the healthcare real estate industry, such as OM and growing its Seniors Housing Triple-Net portfolio, should better stabilize Welltower’s performance versus peers that are focused on the less promising skilled nursing sector.

The current payout ratio of about 61% for 2024 should better protect its dividend going forward. 

WELL shares currently yield 2.6%.

High-Yield Healthcare REIT: Omega Healthcare Investors

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 fourth-quarter and full-year earnings on February 7, and results were better than expected on both the top and bottom lines. Funds from operations in the fourth quarter came to 68 cents, which was a penny ahead of expectations. Earnings were down from 71 cents in Q3, and down from 73 cents in the year-ago period. Revenue soared 65% year over year to $239 million, and beat estimates by $33 million.

The trust noted some of its restructuring tenants continue to negatively impact results, but that they are holding up better than expected. Omega also said it expected first-quarter and second-quarter earnings this year to continue to be impacted, but that results should improve materially in the second half.

Future growth will be fueled in large part by Omega’s investments. Omega completed $249 million in new investments in Q4, consisting of $167 million in real estate loans, $51 million in real estate acquisitions, and $31 million in capital renovation and construction projects. Overall, the trust issued guidance of $2.70 to $2.80 in FFO per-share for 2024.

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 8.6%.

High-Yield Healthcare REIT: Ventas

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 trust 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 mid-February, Ventas reported financial results for the fourth 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 4.5% over the prior year’s quarter and FFO per share rose 4%, from $0.73 to $0.76. Ventas reiterated that its senior housing business has entered a multi-year growth cycle. It also provided positive guidance for 2024, expecting FFO per share of $3.07-$3.18.

Due to an improved business outlook, we expect its FFO per share to grow at a 6% average annual rate over the next five years.

We expect Ventas stock to generate annual returns of approximately 11% a year, consisting of 6.0% expected earnings-per-share growth and its 4.1% dividend, while the stock appears slightly undervalued right now. Ventas is currently trading at a P/FFO of 14.0, which is slightly lower than its 10-year average P/FFO of 14.7. If the REIT trades at its average valuation level in five years, it will enjoy a 1.0% annualized gain thanks to P/FFO expansion.

Still, this is an attractive potential return along with a solid dividend yield.

VTR shares currently yields 4.2%.

At the time of publication, Ciura had no positions in any securities mentioned.