The healthcare real estate investment trust (REIT) sector was something of a mixed bag in 2020, as the pandemic ravaged some areas of the niche but actually led to increased demand for others. That said, one thing the pandemic didn't change was the aging of the baby boomer generation, which is expected to materially boost the need for healthcare over the next couple of decades. If that sounds interesting to you, you'll want to take a look at Omega Healthcare Investors (NYSE: OHI), Ventas (NYSE: VTR), and Healthpeak (NYSE: PEAK) today.
1. In the thick of it
Omega Healthcare's primary property type is nursing homes, at roughly 80% of its portfolio. The remainder of its properties are senior housing. Both were hit hard during the pandemic, as move-outs increased (that term includes deaths), move-ins fell, and costs increased.
Luckily, Omega's focus is on triple net lease properties, which means that its customers are responsible for most of the operating costs of the assets they occupy. Omega simply collects rent, which has to be paid no matter how well or poorly an individual property is performing. That said, it's been working with tenants to help them through this period, but it has been relatively shielded from the worst of the hit. In fact, the REIT has been able to maintain its dividend despite the headwinds -- an impressive feat in the healthcare REIT niche.
The thing is, going into a nursing home isn't something people choose to do. It's something they have to do because they need the care -- and nursing homes are usually the most cost-effective way to deliver that care. As the population ages, demand should continue to increase for Omega's core portfolio.
Assuming that it can continue to work through the current headwinds with the same success it has so far achieved, more aggressive investors willing to take on a highly focused portfolio can collect a fat 7.1% dividend yield. In fact, you can take some comfort in the fact that occupancy levels already appear to be starting to turn higher again.
2. Doubling down
Ventas is one of the largest, most diversified healthcare REITs you can buy. Although it has strong office and medical research portfolios (about a third of net operating income (NOI) combined), two areas that have been doing quite well of late despite the pandemic, it also has a big contingent of senior housing in the mix (about 45%).
Ventas focuses on lower levels of care than does Omega, so occupancy levels are more impacted by the desire of residents to be in a group living facility. Still, the demand that is set to propel nursing home demand will also benefit Ventas' assets as well.
The problem here is that 26% of Ventas' NOI comes from properties it both owns and operates, known as SHOP assets in the industry. The performance of these properties flows directly through to Ventas' top and bottom lines. The pandemic was a big hit to this business and, thus, the REIT's financial results. It cut the dividend by nearly 45% in 2020. But, like Omega, Ventas' business is starting to show signs of turning around.
Seeing this, management recently inked a deal to buy New Senior Investment Group, which will increase its SHOP exposure to 31% of NOI. The overall portfolio remains fairly well diversified, but if you believe the worst of the pandemic is past, Ventas, looking to leverage itself to both the recovery and the long-term senior housing demand trends, could be right for you. The yield is roughly 3%, which is fairly modest, so the real attraction here is the mix of diversification and turnaround appeal.
3. Honing in on growth
The last name on this list is Healthpeak, which was once a peer of Ventas. However, it has decided to jettison its senior housing assets to focus on medical office and research properties. This has been the fastest-growing niche in the healthcare property space for a little while now. The decision came with a nearly 20% dividend cut to start 2021, but that's largely a function of selling a big chunk of its portfolio.
To be fair, it would be easy to argue that going from a diversified REIT to one that's focused on office properties is a worrying move. However, it does alleviate the coronavirus headwinds that are currently facing senior housing, and for some investors, that will be a very clear positive.
Meanwhile, with 140 medical research assets and 281 medical office properties, it's one of the biggest players in these two subsectors, making it a good way to gain exposure to this fast-growing healthcare niche. Better yet, Healthpeak has $1.3 billion in projects in the works to support its near-term growth and more than $7 billion worth of land that it hopes to build on in the future. So not only do investors get a healthcare REIT focused on the hot office space, but it also has notable built-in growth opportunities, too.
The yield is 3.3%, so that growth is the real attraction here. However, it isn't unreasonable for investors to think that, now that the senior housing portfolio is largely gone, the company's dividend will start growing again as the REIT builds out its office portfolio.
Three ways to play
If you're willing to bet on a senior housing rebound with a pure-play name, Omega and its fat dividend yield is probably the best call for you. If you want to temper your bets, adding notable office and medical research assets to the mix, then Ventas, which is buying more senior housing, is a good, balanced option. And if you prefer sticking with the hot office sector, then Healthpeak and its internal growth opportunities could be the pick for you. But it's highly likely that one of these REITs will fit your needs if you are looking at healthcare REITs in August. That's especially true when you consider the long-term demographic tailwind that is still set to power healthcare landlords over the next two decades or so.