Healthcare REIT have significantly underperformed the overall market in the past 12 months due to the impact of the coronavirus crisis on their business. However, investors should not dismiss these stocks, especially as the broader market doubled its low last year and is now trading at a high valuation level.
While healthcare REITs are currently suffering from the pandemic, they are benefiting from a strong secular trend, namely the aging of the American population.
Therefore, investors with a long-term perspective should take advantage of the cheap valuation of these stocks now. In this article, we will analyze the perspectives of three health IPFs that have high dividend yields above 5%.
Here are three high performing healthcare REITs to consider:
Omega Health Investors (NYSE:OHI)
LTC Properties (NYSE:SLD)
LTC Properties (NASDAQ:SBRA)
High Yield Healthcare REITs: Omega Healthcare Investors (OHI)
Omega Healthcare Investors generates over 80% of its revenue from skilled nursing facilities and the remainder of its revenue from senior housing developments. It is the largest owner of skilled nursing facilities in the United States, with 954 properties.
Omega has been strongly affected by the coronavirus crisis, its occupancy rate having fallen by 11% between the start of the pandemic and January-2021. However, thanks to the massive deployment of vaccines, the business landscape has improved this year. The contagion rate within skilled nursing facilities has fallen by around 95% since the peak of the pandemic while occupancy has improved by 3%.
The first signs of a recovery were evident in Omega’s latest earnings report. Its revenues were up 0.4% from the quarter last year while its operating funds per share increased 5% from $ 0.81 to $ 0.85. It is also remarkable that the REIT received 98% of its rental income in the second quarter and 99% of its rental income in July. With its ongoing recovery from the pandemic, Omega is on track to increase its operating funds per share by 5% this year.
As soon as the pandemic subsides, investors will focus on the strong secular trend that supports Omega’s business, namely the aging of the US population. Baby boomers started turning 75 in 2016, while the population aged 65 and over is expected to grow from 17% of the total US population in 2020 to 21% by 2030 and 22% of by 2040. This trend will greatly benefit Omega’s business, as there will be increased demand for skilled nursing facilities.
Better yet for the REIT, the growth in demand for these facilities will exceed the supply of these facilities due to the Certificate of Need (CON) and moratorium restrictions on beds. The certified facilities have remained stable for many years without any new net supply. Overall, Omega has promising long-term growth prospects.
Notably, Omega has increased its dividend for 17 consecutive years and currently offers a dividend yield of 7.8%. Omega’s payout ratio is around 78% as expected for 2021, which is reasonable in the REIT universe. In addition, Omega has well-staggered debt maturities. It also has long-term leases with its operators, with an average term of 9.0 years.
Also, given that lease expiries are minimal until 2026, Omega is expected to enjoy reliable cash flow over the next five years. As a result, its 7.8% dividend should be considered safe in the absence of a major recession.
LTC Properties (LTC)
LTC Properties invests in senior housing and skilled nursing properties. Its portfolio consists of approximately 50% housing for the elderly and 50% specialized nursing facilities. The REIT owns 180 properties in 27 states with 30 operating partners.
LTC Properties is facing a strong headwind due to the pandemic, which has put operators of REIT properties under great pressure. In the second quarter, operating funds per share of SLD properties fell 25% and missed analyst consensus by 11%. Senior Lifestyle, operator of certain properties, did not pay its lease obligations during the quarter and thus negatively affected the REIT’s results.
However, as soon as the effect of the pandemic begins to wane, LTC Properties will benefit from the aging of the American population. This growth is the result of the aging of the baby boomer generation and the constant increase in life expectancy thanks to sustained advances in medical science.
LTC Properties has most of its properties in the states with the highest expected increases in the 80+ cohort over the next decade. Also, given that this age group has by far the greatest purchasing power, the growth of the population in this category will greatly benefit LTC Properties in the long run.
LTC Properties has increased its dividend at an average annual rate of 3.7% over the past decade and now offers a dividend yield of 6.5%.
In addition, LTC Properties has been shown to be more vulnerable to the pandemic than Omega Healthcare Investors. Therefore, while LTC Properties has the financial power to maintain its dividend, the dividend carries a bit more risk, especially in the event of a prolonged pandemic.
High Yield Healthcare REIT: Sabra Health Care REIT (SBRA)
Sabra Health Care REIT owns approximately 470 properties, which are primarily qualified nursing / traditional facilities leased to operators under triple net leases, which require the tenant to pay all property taxes, building insurance and property taxes. maintenance.
Like other healthcare REITs, Sabra has been affected by the pandemic. In the second quarter, its operating funds per share fell 5% from the quarter last year. Due to the continued impact of the pandemic on its business, Sabra is set to announce an approximately 10% drop in its operating funds per share this year.
On the positive side, the REIT has received 99.8% of its expected rental income since the start of the pandemic. Although he offered minimal rent deferrals, he made no permanent concessions. In addition, it has received material financial assistance from the government, as its facilities are considered critical.
As soon as the coronavirus crisis disappears from the horizon, Sabra is expected to return to growth mode thanks to the aforementioned secular tailwind of the aging US population. The 75 and over cohort is expected to be the fastest growing segment of the population, while average life expectancy is expected to increase from 79.4 years in 2015 to 81.7 years by 2030.
Due to the pandemic, Sabra reduced its dividend by 33% at the start of last year. Nevertheless, it still offers an attractive dividend yield of 7.4%. The REIT has a reasonable payout ratio of 75%, a strong interest coverage ratio of 5.2, and it has reduced its leverage ratio (net debt to EBITDA) from 5.69 in 2018 to 4.84. Therefore, its reduced dividend should be considered safe in the absence of a prolonged pandemic.
Healthcare REITs have been in disgrace lately due to the impact of the coronavirus on their operations. These temporary headwinds generally present great investment opportunities. Those who believe the pandemic will abate soon will be heavily rewarded by locking in the attractive returns of the above three healthcare REITs.
Omega’s nearly 8% dividend yield makes it the most attractive of the 3 healthcare REITs here, thanks to this REIT’s superior resilience during the pandemic as well as its superior track record.
As of the publication date, Bob Ciura does not have (directly or indirectly) any position in any of the stocks mentioned in this article. The opinions expressed in this article are those of the author, subject to the publication guidelines of InvestorPlace.com.
Bob Ciura worked at Secure dividend since 2016. He oversees all content for Sure Dividend and its partner sites. Prior to joining Sure Dividend, Bob was an independent equity analyst. His articles have been published on major financial websites such as The Motley Fool, Seeking Alpha, Business Insider and more. Bob received a BA in Finance from DePaul University and an MBA with a concentration in Investments from the University of Notre Dame.