Ranking the Big 4 Healthcare REITs

Dividend Stocks

Income investors often look to real estate investment trusts, or REITs, as these stocks usually have very high yields. Looking more specifically at a certain part of the REIT industry, we feel that the corner of the industry devoted to healthcare REITs is very attractive for income investors.

The population continues to get older in the U.S., with those over 80 expected to make up more than half of the country’s population by 2030. Many of those people will require housing and medical treatment as they age.

Combine this fact with a shortage of healthcare properties, and the economic outlook for the major healthcare REITs is very promising.

This article will rank the largest four healthcare REITs by total return potential over the next five years.

These top funds are:

  • Welltower (NYSE:WELL)
  • Healthpeak Properties (NYSE:PEAK)
  • Omega Healthcare Investors (NYSE:OHI)
  • National Health Investors (NYSE:NHI)

Healthcare REITs: Welltower (WELL)

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Welltower has three business segments: senior housing, triple-net leases and outpatient medical.

Welltower’s funds from operation, or FFO, have barely budged over the last decade. The growth rate is just 0.4%, but much of this is due to trust’s habit of issuing shares to fund acquisitions, something very common amongst REITs. Adjusted for share count, FFO has increased 8.6% since 2011.

However, the COVID-19 pandemic hurt the trust’s business. Welltower is selling properties it doesn’t view as central to its future. Our estimated FFO growth rate through 2026 is just 1.2%.

Prior to pausing its dividend growth in 2018, Welltower had increased its dividend for 14 consecutive years. This was no small feat, especially considering the increase in the share count. The trust was forced to cut its dividend, with shareholders receiving nearly 30% of the dividend in 2020 that they did in 2019.

The stock currently yields 3.2%, a significant premium to the average yield of 1.4% for the S&P 500.

Welltower trades around $75. We expect the trust to produce FFO of $2.94 for 2021, giving the stock a price-to-FFO ratio of 25.9. This implies that valuation reversion could be a sizeable impediment to total returns if the stock were to trade with our FFO multiple target of 13.5.

We forecast valuation to be a 12.2% headwind to annual returns through 2026. Therefore, we view this particular stock as significantly overvalued.

In total, we expect that Welltower will lose 7.3% per year over the next five years. We rate the stock as a sell, and it is the least attractive healthcare REIT today. We believe a low FFO growth rate and decent sized yield will be more than offset by valuation reversion.

Healthpeak Properties (PEAK)

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Healthpeak Properties, formerly known as HCP, is the largest healthcare REIT in the country. The trust operates more than 620 properties, including those used for life sciences, senior housing and medical offices.

Healthpeak Properties has undergone a momentous restructuring of its business over the past few years, divesting more than 150 properties over this period of time. This has led to several declines in its funds from operation, or FFO, which decreased at a rate of 3.6% since 2011.

The trust does have some positives working in its favor. First, Healthpeak Properties remains the largest name in its industry even after selling non-core assets. The trust also receives nearly all of its revenue from private payer sources, meaning that it doesn’t depend very much at all on Medicare and Medicaid. Therefore, we anticipate FFO growth at 5% annually through 2026 off of our expected FFO of $1.58 per share in 2021.

Healthpeak Properties has cut its dividend three times since 2016, so growing income from the trust is no guarantee. That said, shares yield 3.7%.

With shares trading around $33, Healthpeak Properties trades at 20.9 times FFO estimates. For context, the stock has a price-to-FFO of 15.3 since 2011. Reverting to this valuation would reduce annual results by 3.1% for the next five years.

We expect Healthpeak Properties to offer a total return of 5.6% per year over the next five years as a 5% FFO growth rate and 3.7% dividend yield are partially offset by a low single-digit valuation headwind.

Healthcare REITs: Omega Healthcare Investors (OHI)

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Omega Healthcare Investors Inc. (OHI) operates two business segments, skilled nursing and senior housing. Skill nursing contributes the vast majority of revenues.

A growing need for healthcare services for aging populations will be a tailwind, though Omega isn’t as diversified as other names in this space as it has an overreliance on skilled nursing facilities. The trust did weather the COVID-19 pandemic rather well as it collected nearly all rent due in the most recent quarter.

Omega’s FFO has compounded at a rate of almost 6% over the last decade but much of this growth occurred in the first few years. We feel that the trust is likely to grow its bottom-line at a rate of 2% per year through 2026 given choppy recent results.

What likely makes Omega an attractive investment is its sizeable dividend yield, which stands at 7.1%. Even with a slight dividend reduction last year, Omega’s dividend has compounded at a rate of more than 5% since 2011.

With Omega trading around $37, the stock is trading at 11.4 times our FFO estimate of $3.25 for 2021. The stock has traded with an average price-to-FFO ratio of 12 since 2011. Valuation could add 1% to total returns annually over the next half-decade.

We forecast that Omega can provide a total return of 10.1%, driven primarily by a 7%+ yield with low single-digit contributions from both FFO growth and multiple expansion. We typically reserve our buy recommendations for stocks offering at least 10% annual returns. Therefore, we rate Omega as a buy.

National Health Investors (NHI)

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National Health Investors owns and operates independent living facilities, medical office buildings and senior living housing properties. The trust uses a variety of funding methods, such as joint venture and sale-leasebacks, to acquire assets.

National Health is one of the more diversified healthcare REITs, which affords the trust some protection in case of difficulty in one area of its business. The variety of investment methods also allows for National Health to be creative when finding attractive properties for purchase. We believe that the trust will be able to grow its FFO by 5.5% through 2026 due to its business model.

Unlike the other names on this list, National Health has not been forced to reduce its dividend. In fact, the trust has increased its dividend for 19 consecutive years. The dividend has a compound annual growth rate of 5% over the last decade, and the stock yields 5.9%.

We forecast that National Health will produce FFO of $5.50 in 2021. With shares trading around $75, National Health has a price-to-FFO of 13.5. We have a targeted price-to-FFO of 13.8 for 2026, which would imply a small addition of 0.4% to total returns from an expanding multiple.

Total returns for National Health are expected to be of 11.8% due mostly to FFO growth and dividend yield, though an expanding multiple will also be a factor. At the current price, National Health is not only a buy, but the trust is our favorite name in the healthcare REIT space.

On the date of publication, Bob Ciura did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Bob Ciura has worked at Sure 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 bachelor’s degree in Finance from DePaul University and an MBA with a concentration in investments from the University of Notre Dame.