With the Federal Reserve’s rate increases on pause, the search for yield continues with pace. Add to that, speculation that there may even be a rate cut by the end of the year, and it becomes clear that investors, especially those who need that dividend must find companies that have growing and stable cash flows to sustain and increase yields over time.
With global growth slowing as well, it is critical that the companies are not cyclical or prone to severe revenue declines in the face of an economic downturn. The phrase “demographics is destiny” continues to be relevant.
The U.S. population is aging. No surprise there. By 2029, more than 20% of the total U.S. population will be over the age of 65. This group will increasingly need to find healthcare facilities to support their needs.
The trend of higher demand for specialized healthcare facilities and services is a secular one, and healthcare spending is a category that individuals simply cannot cut regardless of the economic environment. Healthcare REITs are primed to benefit.
Senior Housing Properties Trust (SNH)
Forward Dividend Yield: 13.2%*
Market Capitalization: $2.8 billion
Now trading near its 52-week low and giving up the gains during the v-shaped recovery, Senior Housing Properties Trust (NASDAQ:SNH) provides an attractive entry point sporting a 13% yield.
That yield just cannot be ignored in the current low-rate environment. There has been some weakness in the senior housing sector, but the diversity of its portfolio, especially in medical offices and life sciences, balance out the risk of a particular property type. SNH also has significant geographic diversity, with properties across 42 states and no more than 16% of real estate value in any one state.
The major overhang on the stock has been the concern over Five Star Senior Living’s (NASDAQ:FVE), which owns 184 of 304 total senior living centers. Five Star is the fourth largest senior living operator in the nation and still has a $100 million credit facility to draw on.
In the meantime, SNH has worked with FVE to temporarily defer certain rent payments, which is better for the long-term relationship and outcome on both sides. This seems like an idiosyncratic risk overblown to the downside, giving opportunistic buyers a great window to pounce.
Welltower Inc. (WELL)
Forward Dividend Yield: 4.5%
Market Capitalization: $31 billion
Welltower Inc. (NYSE:WELL) has been strategically expanding and acquiring with great success. The company has improved the quality of assets in its portfolio and the portfolio mix. They have restructured low performing assets, selling off when appropriate, and taken those funds to purchase properties across senior housing, outpatient medical, and health systems.
In 2018 alone, WELL completed more than $4 billion of accretive investments. WELL’s efforts to diversify and reinvest at higher rates of return are paying off. The Company increased current year guidance for net income attributable to common stockholders to $2.70 to $2.85 per share, while reaffirming their previously announced 2019 normalized FFO attributable to common stockholders of $4.10 to $4.25 per share.
As management continues to make accretive changes, I expect the quality of cash flow to improve along with private pay percentage to increase. This all bodes well for long-term value creation.
Physicians Realty Trust (DOC)
Dividend Yield: 4.8%
Market Capitalization: $3.4 billion
For those looking for a pure play on the medical office sector, Physicians Realty Trust (NYSE:DOC) is the dividend stock pick for you.
Their focus allows them to build deep relationships with physicians, hospitals and health systems, which management views as a strategic advantage. With 252 properties and 95.7% leased, the portfolio hums along, producing steady FFO per share. DOC knows their business and has their finger on the pulse of future trends. As such, they understand the future in the medical office building (MOB) lies off-campus.
Prices are lower and to accommodate rapidly increasing demand, they will see higher usage. Given this continued shift toward outpatient, DOC is poised to benefit. Additionally, management has been very successful in improving profitability.
EBITDA margins are up from 57% in 2015 to 70% over the last twelve months. It’s an impressive feat with runway ahead. As DOC further consolidates the portfolio via strategic disposals, there is room for that metric to continue upward.
*Dividend and market capitalization figures courtesy of Morningstar
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.
