Health care is an industry that is poised to explode over the next few decades. There are a number of driving factors behind this industry growth.

First, the population of the United States is rapidly transition to an older demographic. Over the next 20 years, the proportion of the country’s 85+ age group is expected to double.

Welltower

Source: Welltower

Older demographics spend significantly more money on healthcare than their younger counterparts. On a per-capita basis, the 85+ year demographic spends almost eight times as much on healthcare than the 19-44 year bracket.

Welltower

Source: Welltower

Savvy investors will be thinking about ways to profit from this trend.

One method would be to purchase healthcare stocks. These could be manufacturers of medical devices like Abbott Laboratories (ABT); pharmaceutical companies like AbbVie (ABBV); or a more generalized healthcare conglomerate like Johnson & Johnson (JNJ).

For income-oriented investors seeking high yields, there is a better way….

Purchasing healthcare REITs will give beneficial exposure to this demographic shift without as much regulatory uncertainty and with higher potential for current income.

Why Invest in REITs?

 For dividend investors, REITs have a number of attractive characteristics. The most notable is their dividend requirements.

REITs are legally required to pay 90% (or more) of their earnings as distributions to unitholders. While this makes it more difficult for REITs to realize rapid business growth, it generally drives high yields that benefit investors looking for current income.

There are currently four large health care REITs whose size differentiates them from the rest of the industry. These REITs are:

  • Welltower, Inc. (HCN); $24 billion market capitalization
  • Ventas, Inc. (VTR); $22 billion market capitalization
  • HCP, Inc. (HCP); $14 billion market capitalization
  • Omega Healthcare Investors, Inc. (OHI); $6.3 billion market capitalization

This article will discuss the investment prospects of each company in detail.

Welltower Business Overview

Seasoned investors will recognize Welltower by its previous name. The company went by the name of Health Care REIT until the name change in September of 2015.

The trust was founded in 1970 and is currently one of the largest REITs (healthcare or otherwise) in the United States. By enterprise value, their $41 billion places them 6th among all REITs and 1st in the health care REIT segment.

Welltower

Source: Welltower Investor Presentation, slide 5

Welltower’s U.S. property portfolio is well-diversified across geographical segments.

Welltower

Source: Welltower Investor Presentation, slide 17

The company also has sizeable property portfolios in Canada and the U.K.

Since inception, the trust has an impressive record of increasing dividend payments to shareholders. Welltower has grown dividends at a 5.7% CAGR over the long term, and has paid steady or increasing dividends every year since 1992 (a streak of 25 years).

Welltower

Source: Welltower Investor Presentation, slide 17

The company will likely soon be added to the Dividend Aristocrats List (25+ years of rising dividends).  It is currently a member of the Dividend Achievers List (10+ years of rising dividends).

You can see all 272 Dividend Achievers here.

Welltower’s growth prospects stem largely from the ongoing transformation of their property portfolio. The trust is looking to build up two segments of its business. They are growing seniors housing because this business is exposed to less regulatory risk than life science, hospitals, or outpatient medical business.

Welltower is also looking to expand its private pay asset base, which are real estate assets where the tenant pays all costs (and is not subsidized). These assets are generally more profitable for the REIT.

Welltower

Source: Welltower Investor Presentation, slide 13

Over the past decade, Welltower has grown funds from operations (FFO) per share from $2.97 in 2006 to $4.55 (expected) in 2016, which is good for a CAGR of 4.4%.

I expect Welltower to continue growing FFO per share at a rate of 3%-5%, which combined with their dividend yield of 5.2% is good for long-run expected total returns of 8.2%-10.2%.

Ventas Business Overview

 Ventas is a large U.S. healthcare REIT with a diversified operations base. Their reporting segments include:

  • Senior Housing Operating Portfolio (“SHOP”)
  • Senior Housing Triple Net (“NNN”)
  • Medical Office
  • Life Science
  • Skilled Nursing
  • S. Acute Care Hospitals
  • Loans
  • International Hospitals
  • Specialty Hospitals

Compared to the other REITs on this list, Ventas has the most diverse operating base.

Welltower

Source: Ventas Investor Presentation, JP Morgan Healthcare Conference, slide 24

One of Ventas’ main goals when developing their portfolio is to seek out regions where there exists a high barrier to entry. The trust’s method of achieving this is to purchase assets in high cost-of-living coastal cities, where real estate is priced at a premium.

Welltower

Source: Ventas Investor Presentation, JP Morgan Healthcare Conference, slide 26

Ventas has done a great job at compounding business metrics over time. The trust has grown dividends at an 8% CAGR since 2001, and their FFO has been on a similar positive trend.

Welltower

Source: Ventas Investor Presentation, JP Morgan Healthcare Conference, slide 7

Over the past ten years, Ventas has grown FFO per share from $2.44 in 2006 to $4.10 (expected) in 2016, which is good for a CAGR of 5.3%. Over the long-run, I expect Ventas to continue growing at a similar rate, say 4%-6%.

This combines with the trust’s dividend yield of 4.8% to yield expected total returns of 8.8%-10.8% over the long run.

HCP Business Overview

HCP is a healthcare REIT with operations in three main segments:

  • Senior Housing
  • Life Sciences
  • Medical Offices

HCP’s business model is much simpler than say, Ventas, which has many more operating segments. HCP’s competitive advantage comes from their very high quality portfolio (which they call ‘best-in-class’).

Welltower

Source: HCP Investor Presentation, NAREIT Investor Forum, slide 5

 HCP’s business strength is evident in their dividend history. With 31 consecutive years of dividend increases, HCP is the only REIT to be a Dividend Aristocrat (elite stocks with 25+ consecutive dividend increases).

You can see all 50 Dividend Aristocrats here.

HCP investors should be aware of some notable changes the company has decided to make with regards to their real estate portfolio.

Namely, the company has divested of their ManorCare assets (which are a group of skilled nursing and rehabilitation centers, assisted living facilities, memory care comminutes, and outpatient rehabilitation clinics).

Note:  HCP reduced its dividend when it spun-off ManorCare.  This does not technically count as a dividend reduction due to the spin-off (allowing HCP to stay a Dividend Aristocrat), it did reduce shareholders income from HCP.

The ManorCare assets were spun-off as a separate entity, named Quality Care Properties, which is structured as an independent, publicly-traded REIT. The spinoff was completed on October 31, and investors should have seen QCP units deposited directly into their brokerage accounts.

The reason for the divestiture was profitability (or lack thereof). The ManorCare assets were barely able to cover their fixed costs

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