We know that the U.S. population is aging. 10,000 Baby Boomers turn 65 every day. Maybe that’s more than you thought. Maybe that’s less. But in absolute terms, it’s a lot of people requiring specialized housing (with long-term care option on site, for example) and a statistic that grows as the years go by. This yields very attractive economics in the demand for senior housing, which exceeds the current supply.
Companies that specialize in senior housing, assisted living and medical office buildings or a mix of the above all stand to benefit immensely.
They already have been, in fact. A number of healthcare REITs have been sporting mouth-watering dividend yields over 7%.
Compared to 10-year U.S. Treasury Notes yielding just over 2%, these opportunities look mighty fine — especially with the healthcare industry demand and supply so skewed in the supplier’s favor.
Take this statistic in for measure:
In 2010, the number of seniors in the U.S. totaled 40 million, representing 13% of the population. By 2030, the number is expected to reach 71 million, or 19.7% of the population.
Many will not be able to be completely independent, rendering precisely the need that healthcare REITs fill.
Healthcare REITs to Buy: Senior Housing Properties Trust (SNH)
Dividend Yield: 8%
At a $4.6 billion market cap, Senior Housing Properties Trust (NASDAQ:SNH) is on the larger side of the well-diversified healthcare REITs universe.
That diversification extends to both property type and geographic mix. The largest slices of its $8.6 billion investment portfolio are in medical office buildings (41%), independent living centers (28%) and assisted living centers (21%) scattered across 42 states. The tenant mix is similarly attractive as is the fact that there is little exposure to government reimbursement, allowing SNH to better manage its cash cycle.
Overall positive macro environment aside, SNH’s asset categories have shown strong performance. Its senior living portfolio has a weighted average occupancy rate of 85.1% (some hotels would kill for this), indicating that its product and value proposition resonates throughout communities in the entire U.S. From a financial metrics standpoint, weighted average rent coverage is at 1.27x, so the cash generation abilities look very healthy for the existing portfolio and with ample expansion opportunities ahead, investors can expect similarly strong fundamentals.
So long as management continues to do what they’ve been doing successfully so far, investors need not worry about the high yield faltering. The yield will be supported by ever growing FFO as SNH focuses its growth strategy where demand is highest (private pay senior living communities and medical office buildings). Actively managing the existing assets and selectively growing it will leave SNH with a best-in-industry portfolio.
Healthcare REITs to Buy: Medical Properties Trust, Inc. (MPW)
Dividend Yield: 7.5%
Medical Properties Trust, Inc. (NYSE:MPW) is a highly acquisitive healthcare REIT focused on hospitals. As of February this year, it had 136 general acute care hospitals, 79 inpatient rehabilitation hospitals, and 17 long-term acute care hospitals in its portfolio.
In May, MPW announced a $1.4 billion transaction to purchase ten acute care hospitals and one behavioral health facility that are to be operated by Steward Healthcare (backed by the private equity fund, Cerberus).
To the benefit of shareholders, the acquisition was immediately accretive to FFO. Normally it takes a few years for synergies from a transaction to work their way through to the bottom line, so this is a particularly well-selected and well-executed transaction that is expected to close in the fourth quarter of this year.
This brings the grand total to 31,226 beds across five countries (MPW also has select international exposure with operations in Germany, the U.K., Spain and Italy) and 29 states in the U.S.
Second-quarter earnings showed that MPW is on-track to over deliver in FFO per share and dividend growth on the back of an active hospital real estate market. Opportunities to further add long-term value shareholders remain as consolidation continues and exceptional operating partners are brought on.
Healthcare REITs to Buy: Sabra Health Care REIT Inc (SBRA)
Dividend Yield: 7.9%
Sabra Health Care REIT Inc (NASDAQ:SBRA) recently completed the merger with Care Capital Properties, Inc. (formerly traded on the NYSE under the ticker CCP) in an all-stock transaction. The accretion to adjusted FFO — driven by cash synergies of $15 million — may even offer the option to bump up the dividend, which is already at almost 8%. If you’re not convinced yet, read on.
From a scale and geographic diversification standpoint, Sabra now stands to become a dominant healthcare REIT in a business where scale reigns and the players with the lowest cost of capital can deliver higher returns to shareholders. The resulting entity will have 559 investments in 43 states and Canada.
As Sabra optimizes the Care Capital portfolio, the economics of the combined business should be enhanced. The strategy to really maximize value involves divestitures of non-strategic investments, transition of non-performing facilities to new tenants, lease restructurings and improve operating metrics. The market has yet to factor in just how transformative this merger could be for the longer-term competitive positioning of Sabra.
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.
