3 Health Care REITs To Help You Sleep Well At Night

Alarm clock in the middle of the night insomnia

BrianAJackson

This article was coproduced with Mark Roussin.

When I first learned about real estate investment trusts (“REITs”), I was a real estate developer, and I was always fascinated with the large portfolios these publicly listed companies accumulated.

Back in 2002, I purchased a shopping center from a REIT formerly known as IRT (based in Atlanta, GA) and I also sold net lease properties to Realty Income (O).

At the time, little did I know that I would one day also become a health care REIT landlord, owning a variety of REITs across property categories such as:

  • Skilled Nursing
  • Senior Housing
  • Medical Office Buildings
  • Hospitals
  • Life Science Buildings
  • Memory Care.

In my recent book, The Intelligent REIT Investor Guide, I explain that,

“The vast majority of healthcare REITs’ revenues come from independent lessees that sign long-term contracts with renewal options. Quite often, leases also contain provisions for additional rent due at specified times or based on inflation.

In addition, individual property leases with a single medical institution are often bundled together under a master lease. This makes it much more difficult for the lessee to cherry pick the best properties for renewal or to default on some but not others.”

Perhaps one of the biggest demand generators for health care real estate is the so-called “silver tsunami” in which baby boomers (those born between 1945 and 1965) are stepping into retirement age.

For that matter, the 80+ population will just about double over the next three decades, growing at an estimated annual 4% through 2040.

Although baby boomers tend to be healthier than their predecessors, they’re also much more focused on staying that way. Between that and their greater wealth levels, experts have long-since predicted they’ll be consistent healthcare customers.

As you can see below, Health Care REITs have under-performed many other property sectors year-to-date:

Health Care REITs

iREIT

In addition, this necessity-based category offers some attractive total return prospects as the average P/FFO (of 10.0x) is one of the lowest (second only to malls with a 9.7x handle) and one of the highest dividend yields (of 5.2%) – only cannabis (yielding 9.2%) and office (yielding 5.9%) is higher.

As a value investor, the health care sector just can’t be ignored and that’s why I decided to put together a listicle for three of my favorites.

At iREIT on Alpha, one of the best ways for us to sort for the best REITs to own is to utilize our “iREIT Tracker” in which we can sort a REIT based on many factors.

One of the most popular factors is our “margin of safety” screener which provides us with a meaningful difference between a stock’s current price and the iREIT buy below target.

As you can see below, we consider Omega Healthcare Investors, Inc. (OHI), Medical Properties Trust, Inc. (MPW), and Global Medical REIT Inc. (GMRE) all within our so-called “Buy Zone”.

Omega Healthcare Investors (<a href='https://seekingalpha.com/symbol/OHI' title='Omega Healthcare Investors, Inc.'>OHI</a>), Medical Properties Trust (<a href='https://seekingalpha.com/symbol/MPW' title='Medical Properties Trust, Inc.'>MPW</a>) and Global Medical REIT (<a href='https://seekingalpha.com/symbol/GMRE' title='Global Medical REIT Inc.'>GMRE</a>) all within our so-called Buy Zone

iREIT

So now let’s take a closer look at these 3 health care REITs…

Omega Healthcare Investors (8.0% Dividend Yield)

The first healthcare REIT we will discuss today is Omega Healthcare Investors, Inc., which operates in the skilled nursing sector. As of Q2-22, OHI operates a portfolio of 920 operating facilities located within 42 states and the UK (88 facilities). These properties are operated by 63 different operators.

This is a name here at iREIT that we have been pounding the table on for quite some time (shares are +11.6% YTD). At the start of May, the REIT was down roughly 20% on the year, but fast-forward to today, and shares of OHI are up 11% on the year, a 30% move in just three months.

Omega Healthcare Investors YTD price

Seeking Alpha

In fact, over the past three months, Real Estate has been the third best performing sector in the S&P 500, gaining 7.2% over that time span, trailing only Information Technology and Consumer Discretionary sectors.

The S&P 500 (SPY) during the same period, for comparable purposes, has gained 5.2%.

Investors are in a tough spot right now, deciding whether this recent bounce is the start of a new bull market or if it is just another bear market bounce, many of which we have seen in former bear markets.

Regardless, the need for healthcare facilities remains in demand. Whether we go through a prolonged recession or not, consumers will still have a need for medical care, which is why a company like OHI is a very defensive position to have in a portfolio.

Did you know that most patients discharged from a hospital are sent to Skilled Nursing Facilities.

Medicare FFS hospital discharge destinations

OHI Q2-22 Investor Presentation

As of the company’s second quarter, OHI has seen occupancy levels continue to improve from the prior year. The company ended 2021 with an occupancy rate of 75.8%, but as of mid-July, that rate has ticked up to 77.7%.

As I mentioned from the beginning, OHI is primarily a skilled nursing facility landlord. Skilled nursing facilities made up 72% of total revenue for the company in Q2 with Senior Housing making up 21%.

The company continues to see some cash flow struggles with a few of their operators.

Agemo, which is a top 10 tenant making up 5.9% of total rental revenue, is one of the struggling operators. It was mentioned in the company’s Q2 earnings call that OHI continues to have discussions with the operator regarding a restructuring agreement. The agreement is expected to involve a “material portion of Agemo’s existing Omega properties.”

In addition, it was noted during the quarter that the company made a $90 million working capital loan to one of its operators, which is expected to be paid back within the next 12 months. This is obviously not ideal and something to keep a closer eye on moving forward.

For the quarter, OHI reported adjusted funds from operations (AFFO) of $185 million, or $0.76 per share, which was up from $181 million and $0.74 per share a year ago.

Revenue during the quarter was approximately $245 million, which was down from $257 million during the same quarter in 2021. The primary reason for the fall was due to facilities sales over the past 12 months.

The outlook still remains positive for the business, especially as the population continues to age and the 65+ population in particular continues to make up a larger share of the overall population. By 2030, the 65+ age group will make up 21% of the overall population.

Omega Healthcare Investors - growing aging population provides opportunity

OHI Q2-22 Investor Presentation

In terms of the Balance Sheet, regardless of the operator struggles the company is seeing, the balance sheet still remains strong. The company has a debt to adjusted EBITDA ratio of 5.27x with the goal of bringing that below 5.0x.

Looking at the credit agencies, S&P Global and Moody’s provide ratings of BBB- and Baa3, respectively.

Although the pandemic has put a halt on dividend growth, the REIT still pays a generous annual dividend of $2.68 per share, which has been in-line with the past two years. The current dividend yields 8.0% with an AFFO payout ratio of 90.4%.

OHI AFFO payout ratio

FAST Graphs

After the company’s strong run the past three months, shares are just now reaching their normal levels over the past five years. Shares of OHI currently trade at a blended P/AFFO multiple of 11.3x, which is in-line with their five-year average of 11.4x, suggesting shares appear fairly valued.

The company continues to deal with staffing and operator cash flow issues, yet they find a way to keep performing. Once the economy begins improving, many of these issues will subside, but in the meantime, management continues to look for ways to strengthen the portfolio and in the meantime, you can collect a sizable dividend check.

Medical Properties Trust (6.9% Dividend Yield)

Another REIT that has a sizable dividend yield is Medical Properties Trust, Inc., which is a pure-play hospital REIT. Or, as the company says, it’s “at the very heart of healthcare.”

MPW shares, unlike what we just saw from OHI, have been under pressure of late. The company has been questioned about the health and reliability of their top operator, Steward, and have been hit with a short report from Risk Management firm Hedgeye.

We are not going to give too much attention to the short report in this piece, but you can easily read up on it if you so please. Instead in this piece, we are going to focus on MPW.

On the year, shares of MPW are down 30%, which is part of the reason we have now seen the dividend yield cross the 7% yield threshold.

MPW YTD price

Seeking Alpha

MPW is unique in the fact that it is an international REITs. The company has a portfolio of 447 properties that are leased out to 54 different operators. These properties lie within 32 states here in the US and throughout 10 countries overall, including Australia, Colombia, Portugal, Italy, Spain, Switzerland, and Finland.

MPW Properties

Q2-22 MPW Investor Presentation

Similar to what we mentioned about OHI, being in the healthcare sector provides a level of certainty. Regardless of what the economic backdrop is, healthcare facilities are needed. Hospitals, which is the type of property MPW owns, is a necessity.

Looking at the company’s assets, you can see that 72% is made up of general acute care hospitals. The second largest asset type is Behavioral health facilities, which make up 11.2% of total assets.

MPW asset types

Q2-22 MPW Investor Presentation

So we understand that hospitals are a necessity and MPW is one of the largest hospital landlords in the world, so what is the deal?

Where the water starts to look a little murky for investors is the exposure they have to a single tenant. As an investor, especially with a landlord, it is ideal to see diversification amongst your tenants. That is not the case when it comes to MPW.

Looking at the chart below, you can see MPW’s Q2 revenues broken out by operator. Steward, which is the operator for which the REIT has the most exposure to, made up 27.8% of Q2 revenues.

MPW operators

Q2-22 MPW Investor Presentation

This is obviously higher exposure than we usually prefer, unless the tenant is a rock-solid company. For example, if you were an industrial REIT and Amazon (AMZN) made up 28% of total revenues? You’d probably sleep fine.

In this case, this much exposure has made investors a little uneasy, especially due to the company’s lack of insight into Steward’s financial strength. The REIT has provided some insight in terms of rent coverage, but investors are hoping for more. This is really the center of what the short report is all about.

Here is a look at those metrics they provide:

MPW tenants

Q2-22 MPW Investor Presentation

Management discusses Steward on almost every conference call, but investors are currently not buying the “just trust me” talk from executives, hence why shares have fallen so hard this year.

Similar to what we saw from OHI and one of their tenants, MPW during the quarter made a working capital loan to Steward, further fueling cash flow concerns regarding the operator.

So what gives?

Is the company’s top operator in trouble or are they fine and shares are trading at exceptionally cheap levels?

At iREIT, we believe much of this is already priced into the stock leaving the risk/reward quite intriguing. Nonetheless, the risks are evident, so those must be taken into account before investing.

We will be conducting an interview with the CEO of Medical Properties Trust soon (I plan to visit him in Birmingham, AL) and iREIT on Alpha subscribers will get further insight into the company and their dealings, so definitely check that out.

As of Q2, the REIT reported total debt of $10.2 billion with an adjusted net debt/EBITDA of 6.3x. Debt levels have surged the past few years, but so has the number of properties within the portfolio.

MPW price correlated with free cash flow

FAST Graphs

Shares currently trade with a dividend yield of 6.9%, which has climbed as shares have fallen. Shares of MPW currently trade at a blended P/AFFO multiple of just 11.5x, compared to its five-year average of 16.4x, we believe the risk/reward opportunity is quite compelling at current levels.

Global Medical REIT (6.9% Dividend Yield)

A lot has changed in the world since we were hit with a global pandemic a few years back. However, the need for medical care and seeing a doctor has not. Certainly, there are some virtual options nowadays, but there is still a need for physical medical space, which is exactly what Global Medical REIT provides.

However, over the past year shares of GMRE has lagged not only the entire REIT sector, but more importantly, the medical office space sector. Here is a look at performance over the past 12 months from GMRE and some of its competitors like Physicians Realty Trust (DOC) and Healthcare Realty (HR).

GMRE vs DOC vs HR price

yCharts

Down nearly 20% over the past 12 months and down 33% on the year, it makes you wonder about a company.

So is this a company that no longer warrants a valuation in line with others in its industry, or are we looking at a bargain with plenty of upside?

Let’s take a look at the company’s latest earnings result to get a better idea. Global Medical reported adjusted funds from operations of $17.6 million, which was a 17.3% increase from Q2 the prior year.

During the quarter, the company completed five new acquisitions totaling $74.1 million, with a weighted average cap rate of 6.9%. This brings the annual number of property acquisitions up to nine on the year, as management continues to look for ways to strengthen and grow the portfolio.

Looking at the chart below, you can see the aggressive expansion the portfolio has gone under over the years as the company continues to grow.

Global Medical REIT gross portfolio growth

Q2-22 GMRE Investor Presentation

Speaking of the portfolio, the company ended the quarter with an occupancy rate of 96.5%, which is higher than its competitors Physicians Realty Trust and Healthcare Realty Trust, who had occupancy levels of 95.0% and 89%, respectively, during the most recent quarter.

Revenues during the quarter came in at $33.7 million, which was an increase of 19.2% over the prior year. This was fueled by recent acquisitions as well as lease escalators. Average annual rent increases 2.1% on a weighted average rent basis.

During the quarter, GMRE generated $25.0 million in adjusted EBITDAre for the quarter, an increase of 11.6%, over prior year.

Global Medical has 181 properties valued at $1.4 billion that are leased out to 227 tenants.

Global Medical REIT portfolio

Q2-22 GMRE Investor Presentation

The portfolio is leased out to 90% National and Regional Healthcare tenants, with LifePoint Health being the largest tenant. LifePoint accounts for 6.9% of total annualized base rent. The second largest tenant, Encompass Health, has a BB- credit rating and is the largest owner and operator of rehabilitation hospitals in the US.

Global Medical REIT top 10 tenants

Q2-22 GMRE Investor Presentation

The aging population will continue to be a tailwind for the sector moving forward and management seems just as upbeat given the acquisitions they continue to make to grow the portfolio for the long-term.

Looking at valuation, analysts expect adjusted 2023 AFFO of $1.11, which would equate to a forward P/AFFO multiple of 10.8x. Over the past five years, shares of GMRE have traded closer to a multiple of 15.9x.

Both DOC and Healthcare Realty Trust have traded at multiples of 18+, which could provide for some expansion in the coming years, making GMRE a suitable long-term investment at current levels.

GMRE stock

FAST Graphs

Looking at the dividend, given the fact that shares have fallen so much the past 12 months, GMRE currently yields a dividend of 6.9% with an AFFO payout ratio of roughly 82%.

Closing Thoughts…

As I pointed out earlier, the aging population is one of the best demand drivers for health care real estate and that’s why I am continuing to accumulate shares in the REITs that offer the best risk-adjusted returns.

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iREIT

We believe that investors should be paying very close attention to this sector that has been lagging due to the Covid-19 effects. I don’t know about you, but I want to be riding the silver tsunami wave into my own retirement with a portfolio of high-quality health care REITs that help me sleep well at night.

That’s just what the REIT doctor ordered!

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