A real estate investment trust is a company that owns, operates or finances real estate. The corporate structure is a pass-through entity for tax purposes as investors pay taxes and not the company. One requirement of the REIT to keep this status is that they have to pass through 90% of the company’s taxable income as dividends. This feature is attractive for investors seeking current income and it helps the REIT attract capital for investment in real estate projects or other investments.
Like stocks, REITs fall into different sectors of the economy, but are all classified as REITs. At different stages of the economy, some REITs will perform better than others. For example, you would imagine that retail commercial real estate REITs might be sweating it out right now, and healthcare REITs might be more secure.
Some considerations when evaluating a REIT are the dividend yield, the leverage of the company and the AFFO payout ratio. Similar to dividend paying stocks, it’s important to consider a company’s ability to pay the dividend from its cash flows. Adjusted funds from operations (AFFO) is the best measure for profitability or cash flow.
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Let’s look at five healthcare REITs and some of their metrics.
Healthcare REIT #1: The Geo Group Inc (GEO)
A couple days ago GEO was in the news as a subsidiary signed a five year deal with the U.S. Immigration and Customs Enforcement agency to help run their ISAP program. GEO currently pays a 16.7% dividend yield and has an AFFO payout ratio of 72%. This company is generating plenty of cash flow to pay the current dividend, but the company is more highly leveraged than the other companies on the list. This means that if borrowing cost go up, it will hurt profitability and they have higher fixed costs associated with the interest expense. The upside is for it to return to its February high near $18.
Healthcare REIT #2: Ventas, Inc (VTR)
VTR was recently upgraded by Raymond James from a Market Perform rating to a strong buy on March 25, 2020. While the upgrade didn’t cause the stock to move significantly since the announcement, it is an indication of gaining interest. VTR pays an 11.4% dividend yield and has an AFFO payout ratio of 84%. This company is generating a reasonable amount of cash flow to pay its dividend and is carrying a below average amount of debt on its balance sheet. The near-term upside for this company is the 50% retracement of the downtrend since mid-February near $50.
Healthcare REIT #3: Omega Healthcare Investors Inc (OHI)
OHI announced a $200 million stock repurchase program that will take place over the next 12 months. Frequently, companies will return money to investors in the form of buybacks that will lift the share price versus increasing the dividend. Buybacks are generally considered more temporary and many companies are eliminating buybacks right now because of the cash crunch. OHI pays a 9.8% dividend yield and has an 86% AFFO payout ratio. They have a below average amount of debt as their leverage is less than average. The upside for this company is to run to prior resistance near $40.
Healthcare REIT #4: LTC Properties Inc (LTC)
Unlike OHI, LTC announced on March 25, 2020 that they are suspending their share repurchase plan. While generally considered a negative, it is a way for companies to hold onto their cash to pay dividends, invest in the company and other investments. The company currently pays a 7.8% dividend yield with an AFFO payout ratio of 70%. The payout ratio is among the lowest of the group and they have lower leverage than the other companies on this list as well. The near-term target is $40 and is based on the 61.8% retracement level of the downtrend from February.
Healthcare REIT #5: CareTrust REIT Inc (CTRE)
CTRE announced on March 12, 2020 that they were increasing their dividend from $0.225 to $0.25 per share. That’s a 10% increase in the dividend for the year. CTRE currently pays a dividend of 6.2% and has the lowest AFFO payout ratio of 66% and is one of the lowest leveraged REITs out there. The combination of a high and growing yield, Low leverage and payout ratio makes this company the most attractive of the group. The near-term target for this company is $24, which is near the February high.