Generally speaking, healthcare real estate investment trusts (REITs) took a beating in 2020 thanks to the coronavirus pandemic. However, now that the world is starting to deal with the global pandemic via successful vaccines, investors can now refocus on the long-term prospects for the sector. That basically means demand growth as the baby boomer generation continues to crest into retirement -- a period when medical needs increase materially. For those looking at the healthcare REIT niche in May, three names worth a deep dive are Omega Healthcare Investors (NYSE: OHI), LTC Properties (NYSE: LTC), and Healthpeak (NYSE: PEAK).
1. The government was reliable
One of the big knocks against nursing homes is that, despite being a need-based service, the payer is normally the U.S. government via the Medicare and Medicaid systems. This opens up nursing home operators to political issues that can have a material impact on how much they get paid.
However, in 2020, the tables turned, with Uncle Sam proving to be a highly reliable payer at a time when other senior housing assets (assisted living, for example) were seeing private-pay clients move out so they could avoid a group setting during the pandemic. This helps explain why nursing home-focused Omega Healthcare (nursing homes are 83% of its business) was able to extend its streak of annual dividend increases to 18 years despite the headwinds.
The REIT's dividend yield, meanwhile, is a very generous 7% today. That's an incredible five times what you'd get from an investment in an S&P 500 Index fund. What's particularly interesting here is that the adjusted funds from operations (FFO) payout ratio in the fourth quarter of 2020 was a solid 83%. So the dividend is well-covered, noting that some other well-regarded healthcare REITs were forced to cut their dividends last year.
Investors looking for a high-yield healthcare REIT focused on an area with a payer that comes through in good times and bad should strongly consider looking at Omega today.
2. Half and half
If Omega's focus on nursing homes is too much exposure to one area for you, you might want to look at LTC Properties. This REIT's portfolio is split roughly evenly between nursing homes and assisted living facilities. Uncle Sam covers about 40% of the landlord's rent roll, with the rest coming from private-pay sources.
But LTC Properties is fairly conservative and uses a net lease model, which means its tenants are responsible for most of the costs of the properties they occupy. The REIT simply collects rent. Some of the larger healthcare REITs actually operate some of their properties (they really hire this function out), and their results ebb and flow with the performance of the properties. That was bad news in 2020 for more aggressive players that were directly hit by the coronavirus pandemic, but LTC Properties didn't skip a beat.
It's been working with its tenants, so it's not like LTC Properties was able to completely sidestep COVID-19. However, the REIT did maintain its dividend right through the year at the same level it's maintained since 2018. And the FFO payout ratio was a very reasonable 73% in the fourth quarter, backed by a 98% rental collection rate. In other words, LTC Properties' conservative approach is performing very well for investors during tough times. This is why this REIT's 5.3% dividend yield is worth examining today.
One more thing worth noting here is that LTC Properties pays monthly, so it's kind of like replacing a paycheck.
3. Changing its stripes
The last name up is a completely different story, being that Healthpeak has cut its dividend. But that's because it has chosen to shift from a diversified REIT to one that's focused on medical office and research assets. There's a good reason for this, given that its senior housing assets struggled in 2020, with the properties it operated witnessing a net operating income (NOI) decline of 27.5%. That's brutal, though its net lease assets in the same space actually grew NOI 1.4% for the year.
However, you need to compare that to its medical office space, which grew NOI 2.2%, and medical research operations, which expanded by 6.2%. So Healthpeak is basically refocusing its business around its best assets. The dividend cut was basically a reflection of the fact that it was slimming down its portfolio.
This is a fairly recent change, so 2021 will be something of a transition year, and investors need to go in understanding that. However, if history is any guide, the company's new focus should help it become a more growth-oriented company in the years ahead. While the 3.5% yield isn't exactly huge, if a growing business translates into a growing dividend, as is likely, investors should end up well-rewarded.
Three ways to play
There are a lot of ways to add some healthcare exposure to your REIT portfolio, but this trio of names offers some of the most interesting options. Nursing home-focused Omega is a high-yield name with an incredible dividend track record. Conservative LTC Properties offers a mix of private and public pay, with a focus on net lease properties, an approach that's been consistent even during tough times. And Healthpeak is a repositioning play, as it looks to focus on its fastest-growing assets. If you take the time to dig into these names, you might just find that one or more is a good fit for your portfolio in May.