4 Healthcare REITs On The Crest Of The Silver Tsunami

seekingalpha05-04

The aging Baby Boomer generation presents a significant opportunity for investors due to its large size and increasing healthcare needs.Businesses are targeting the Baby Boomer market to capitalize on...

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And who can blame them? There’s enormous opportunity here! I know some people find the “silver tsunami” term insulting. But as someone who isn’t getting younger himself, I just don’t see the automatic offense. The Baby Boomer generation is enormous, with some 76 million U.S. births recorded between 1946 and 1964. Compare that to the 52.5 million babies born into the preceding Silent Generation and the 65 million for Gen X. For that matter, the Greatest Generation – those born between 1901 and 1924 – came in at about 63 million. Millennials number 72.24 million. And Gen Z, I believe, comes in at about 68.6 million. Generation Alpha, meanwhile, is still in the process of making a splash. So we don’t know how big it will get. Though, considering the down slide since 1964, not to mention current DINK (dual income, no kids) trends… I’m not betting on it even coming close to eclipsing the baby boomers. Hence, the “tsunami” reference. This graying (or gray) group is a force of nature in size alone. And while I can understand being annoyed at the commercialization of the term, this is Economics 101. Businesses identify and then target their most likely customers. It’s how they work. As for me, I’m interested in identifying and targeting the most likely businesses to benefit off this silver tsunami trend. Baby Boomer Facts and Figures The Baby Boomer generation is now aged about 60-78. And while each of its members is unique, they are marked by some fairly reliable generalizations. For instance, a recent MSN article that compared Baby Boomers to Gen Z categorized them as being more likely to:  Have a strong work ethic Respect authority, value privacy, and prefer stability Be financially conservative Possess practical skills Be patient and resilient Appreciate more formal attire.  In which case, there’s a lot to like and respect about them. Part of these traits come from the time they were born in – before instant gratification was quite so instantaneous. As the article concludes: “… it’s clear that the fabric of generational identity is woven from the threads of historical context, technological advancements, and societal evolution. While certain characteristics may seem less prominent in newer generations, it’s important to recognize that each generation brings its own strengths and perspectives to the table, shaped by the unique challenges and opportunities they encounter.” That and the simple, constant passage of time. The older we get, the more we (hopefully) learn about ourselves and the world around us. And the more we learn, the fewer mistakes we (hopefully) make. Aging isn’t always a bad thing, contrary to what our looks-obsessed culture likes to tell us. Though it does, admittedly, come with more likely health issues and therefore more frequent trips to the doctor. Here’s a short list of those unfortunate possibilities:  Hearing loss Cataracts and other vision-related problems Osteoarthritis Osteoporosis Heart disease Dementia Stroke.  As the University of Southern California notes, “This generation is living longer yet experiencing higher rates of obesity, diabetes, high cholesterol, and hypertension.” Which means more opportunity to spend money on medical treatments for those issues. How to Put That Healthcare Money Back Into Your Pockets According to CBS News, “a pair of prescription-grade hearing aids can cost anywhere from $1,000 to more than $8,000…” According to Ability Central, the average cost of cataract surgery is “around $3,500 per eye before insurance, although those costs can reach $7,000 or more.” And according to Bookimed.com, “The average price for [an] osteoarthritis diagnostic and treatment is $10,066.” Get the picture? Aging is expensive. That’s why it makes for a pretty big business. Last June, the Los Angeles Times reported that:  “Annual U.S. healthcare spending will reach nearly $7.2 trillion in 2031, growing faster than the country’s economy through the start of the next decade, according to a government estimate. “Health expenditures are projected to rise to 19.6% of gross domestic product, up from 18.3% in 2021, according to an analysis published… in the journal Health Affairs. The figures tally both government and private spending.”  And: “Spending on Medicare, the health program for older and disabled people, is expected to rise faster than in the private sector, averaging 7.5% a year. The gains are due in part to the last wave of enrollment by the baby boomer generation, researchers said.” Now, a lot of that spending goes to pharmaceutical companies, which I’m not recommending today. The same goes for hospitals and doctors’ offices, many of which are private. But there are a number of real estate investment trusts, or REITs, that make money by renting out specialized space to healthcare providers. They might not be licensed medical specialists themselves, but they know how to cater to those who are. Their properties include specialized facilities that doctors and their peers can’t do without. This makes these REITs mission-critical providers well worth considering. Some of them, that is to say. Healthpeak Properties, Inc. (DOC) Healthpeak is a real estate investment trust (“REIT”) that specializes in developing, acquiring, and managing properties in the healthcare sector, with a specific focus on healthcare discovery and delivery. The company has a diversified portfolio of healthcare properties which primarily consist of laboratories, continuing care retirement communities (“CCRC”), and outpatient medical facilities. Additionally, the company owns hospitals which are included in its outpatient medical segment. DOC’s lab properties contain both laboratory and office space and are mainly leased to biotech, pharmaceutical, and medical device companies. The company’s lab properties are strategically located in markets that are well-known for drug discovery and scientific research, such as San Francisco, San Diego, and Boston. DOC’s outpatient medical segment is made up of outpatient medical buildings as well as hospitals. The company’s outpatient properties normally have examination rooms and physicians’ offices. These facilities may also include diagnostic centers, rehab clinics, and outpatient operating rooms. DOC’s final segment, its continuing care retirement communities, or CCRC, include various senior care units such as assisted living, independent living, skilled nursing, and memory care. The company’s CCRCs are owned through RIDEA structures, which on a basic level allows DOC to participate in the cash flows from the operations of a healthcare property, so long as a third party, such as a taxable REIT subsidiary (“TRS”), manages the day-to-day operations. At the end of 2023 the company’s portfolio consisted of interests in 477 properties that generated a total portfolio adjusted net operating income (“NOI”) of $1.2 billion. The company’s largest segment is labs which made up 51.3% of its portfolio adjusted NOI, followed by outpatient medical and CCRC which made up 37.6% and 9.3% respectively. DOC – IR The company recently released its 1Q-24 operating results and reported total revenue during the quarter of $606.6 million, compared to $525.7 million in the first quarter of 2023. Nareit funds from operations, or FFO, in 1Q-24 was reported at $162.2 million, or $0.27 per share, compared to Nareit FFO of $230.4 million, or $0.42 per share in 1Q-23. FFO as adjusted, was reported at $277.5 million, or $0.45 per share, compared to FFO as adjusted of $231.9 million, or $0.42 per share in the first quarter of 2023. During the first quarter, the company executed 1.4 million SF of new and renewal leases for its outpatient medical properties and executed 155,000 SF of new and renewal leases for its lab properties. Additionally, in March, the company closed on its merger with Physicians Realty Trust and expects merger-related synergies of ~$45.0 million during the first year. The company is in solid financial shape with a net debt to adjusted EBITDAre of 5.2x and a long-term debt to capital ratio of 44.27%. Its debt has a weighted average interest rate of 3.8% and a weighted average term to maturity of 4.9 years. Plus, the company has roughly $3.0 billion in liquidity and minimal debt maturities in 2024. DOC – IR Over the past 10 years, the company has had a negative AFFO growth rate of -2.87%. Analysts expect AFFO to remain flat in 2024, but then to increase by 7% in 2025 and increase by 6% the following year. The company pays a 6.34% dividend yield that well covered with a 2023 AFFO payout ratio of 78.43% and its stock trades at a P/AFFO of 12.38x, compared to its average AFFO multiple of 16.45x. We rate Healthpeak Properties a Strong Buy. FAST Graphs  Omega Healthcare Investors, Inc. (OHI)  OHI is a healthcare REIT that is in the business of providing capital to the long-term healthcare industry through multiple channels. Omega provides capital to healthcare operators by acquiring properties through sale-leaseback (“SLB”) transactions, which are typically long-term and structured on a triple-net basis. In addition to acquiring an ownership or equity interest, the company also provides capital through mortgage loans, which generate interest income. OHI’s investment strategy enables the company to generate multiple income streams, including rental income from its owned properties and interest income from its mortgage loans. The company derives the majority of its revenues through rental income, which made up 86.91% of its total revenues in 2023. BamSEC.com The company’s primary focus is on skilled nursing facilities (“SNFs”) and assisted living facilities (“ALFs”). In addition to its core property types, and to a lesser extent, the company will invest in independent living centers, acute care and rehabilitation facilities, and medical office buildings (“MOBs”). SNFs provide daily services including nursing, housekeeping, nutritional and medication management, activities, and rehabilitation. ALFs also provide services to seniors which include assistance with normal activities of daily living, such as housekeeping, medical reminders, and laundry. ALFs are less hands-on than skilled nursing facilities and allow more independence and privacy for their residents. At the end of 2023, the company’s real estate portfolio was made up of 891 healthcare properties that were managed by 74 healthcare operators across 42 states and the United Kingdom. The company’s owned real estate includes the following:  591 Skilled Nursing Facilities 188 Assisted Living Facilities 19 Independent Living Facilities 19 specialty facilities, and 1 medical office building.  The company’s real estate loans, which are primarily secured by a first mortgage lien or subordinate lien, consists of the following:  45 Skilled Nursing Facilities 7 Assisted Living Facilities 2 specialty facilities, and 1 Independent Living Facility.  In addition to its operating properties, the company holds 17 facilities that they intend to sell. OHI – Form 10-K On the company’s March 2024 Investor Presentation, it lists 862 properties leased to 69 operators, so it appears that the company has disposed of 29 properties since the end of 2023. OHI – IR Omega has an investment-grade balance sheet with a credit rating of BBB- from S&P Global and Baa3 from Moody’s. The company’s debt metrics include a debt to adjusted Normalized EBITDA of 4.96x, an adjusted total debt to adjusted book capitalization of 57.6%, and an adjusted fixed charge coverage ratio of 3.8x. Almost all the company’s debt is fixed rate and its debt maturities are well-staggered, with roughly 8% of its debt maturing in 2024. Additionally, the company has ample liquidity, with $1.45 billion available under its revolving credit facility as of its latest update. OHI – IR Since 2014 OHI has had a blended average AFFO growth rate of just 1.15%. This considers forward earning projections. In 2014, the company generated $2.85 per share in AFFO, compared to AFFO of $2.62 per share in 2023. The company had solid growth from 2014 to 2016, nearly growing AFFO by double digits each year. It went through a rough patch the next several years, with AFFO falling from $3.42 per share in 2016 to $2.70 per share by 2018. More recently, the company has struggled, with AFFO per share falling by -12% in 2022 and by -5% last year. Analyst expect AFFO to remain flat in 2024, but then to increase by 6% in both 2025 and 2026. Omega has paid a consistent dividend since 2003; however, the company has not increased its dividend since 2020 when it was increased to $2.68 per share. While the dividend has remained level since 2020, the company’s AFFO has fallen from $3.09 per share in 2020 to $2.62 per share in 2023. This has put its AFFO payout ratio at an uncomfortably high level. In 2022, the company had an AFFO payout ratio of 96.75%, which increased to 102.29% by 2023. If analysts' estimates are correct and AFFO increases by 6% over the next two years, then Omega’s AFFO payout ratio would improve to ~96% by 2025. There are 13 analysts looking at OHI in 2025, so I’m comfortable with the consensus. However, there is a more than reasonable chance that the company will pay out more than it earns in 2024, which could put some pressure on its dividend. OHI – IR Omega pays a high dividend yield of 8.71% but as just mentioned, its AFFO payout ratio is currently unsustainable. If the company can return to growth as analysts expect, I think it will continue to maintain its dividend at $2.68 per share over the next several years. Currently, the stock is trading at a P/AFFO of 11.73x, compared to its average AFFO multiple of 11.31x. We rate Omega Healthcare Investors a Spec Buy.  FAST Graphs  Healthcare Realty Trust Incorporated (HR)  HR is a healthcare REIT that is internally managed and specializes in acquiring and operating a portfolio of healthcare properties. The company’s portfolio primarily consists of medical outpatient buildings, the majority of which are located in or around leading hospital campuses. The company has a market cap of approximately $5.4 billion and a 40.3 million SF portfolio made up of 688 healthcare properties located across 35 states. 93% of its portfolio consists of outpatient medical facilities, and 72% of the company’s properties are located on or adjacent to a hospital campus. By gross leasable area (“GLA”), the company’s largest market is Dallas with properties totaling 3.8 million SF, representing 9.4% of the total portfolio GLA. Its next two largest markets are Houston at 2.4 million SF, representing 6.0% of the total portfolio GLA, and Denver at 2.0 million SF, representing 4.9% of the total portfolio GLA. HR – IR Out of its 688 properties, 655 are consolidated properties which includes operating properties, properties under construction, redevelopments and land held for development. The additional 33 properties are held through an unconsolidated JV. The company has 653 operating properties which are primarily made up of medical office / outpatient buildings which account for 630 of its operating properties. The company’s medical office / outpatient properties totals 35.7 million SF and has an 87.1% occupancy rate. In addition to its core-outpatient facilities, HR has 15 inpatient facilities totaling 934,000 SF with an occupancy rate of 89.9% and 8 office properties totaling 1.6 million SF with an occupancy rate of 96.2%. In total, the company has 653 operating properties with an average occupancy of 87.5% as well as a 43% interest in 33 properties held through an unconsolidated JV with an occupancy of 87.2%. BamSEC.com Healthcare Realty Trust has an investment-grade balance sheet with a BBB credit rating from S&P Global and a Baa2 rating from Moody’s. The company has a net debt to adjusted EBITDA of 6.4x, a net debt to enterprise value of 44.2%, and an EBITDA to interest expense ratio of 3.33x. HR – IR Since 2014 the company has had a blended average AFFO growth rate of 0.61%. The company has gone through a particularly rough patch since 2017 with the following AFFO growth rates:  2017 AFFO: no growth  2018 AFFO: fell by -4% 2019 AFFO: increased by 1% 2020 AFFO: fell by -4% 2021 AFFO: fell by -3% 2022 AFFO: increased by 5% 2023 AFFO: fell by -14%.  Analysts expect AFFO to fall by -1% in 2024, increase by 1% in 2025, and then increase by 9% in 2026. However, even if these projections are correct, that would leave 2026 AFFO at $1.26 per share, compared to $1.28 per share in 2014. The erosion of earnings has elevated the company’s AFFO payout ratio to a level that now exceeds 100%. Since 2017 the AFFO payout ratio has been steadily increasing, going from 84.86% in 2017 to over 100% by 2021. The AFFO payout ratio of 465.90% in 2022 can be disregarded as it is the result of a special dividend paid that year. However, no special dividend was paid in 2023, and the company had an AFFO payout ratio of 107.91% last year. This could spell trouble for the company’s dividend, as the company is currently paying out more than it makes. Once again, if analyst projections are on the mark, then the dividend would be covered by 2026, but barely with a 2026 estimated AFFO of $1.26 per share compared to a dividend of $1.24 per share. In my opinion, there is an elevated risk that this company could cut its dividend within the next 2 years.   FAST Graphs Currently, HR pays an 8.71% dividend yield and trades at a P/AFFO of 12.43x, compared to its normal AFFO multiple of 19.49x. We like the discounted valuation, but caution investors about the possibility of a dividend cut down the road. We rate Healthcare Realty Trust a Spec Buy. FAST Graphs Global Medical REIT Inc. (GMRE) GMRE is an internally managed healthcare REIT that specializes in the acquisition and management of healthcare facilities which are leased to regional and national healthcare delivery systems as well as physician groups. The company looks to invest in decentralized parts of the healthcare delivery system, such as medical office buildings or medical outpatient facilities because it believes trends in its markets are moving away from centralized hospitals. It also targets small or mid-sized healthcare properties that are located in secondary markets and that provide essential services to an aging population. Some of the healthcare facilities it looks to acquire provide services such as rehabilitation, oncology treatment, orthopedics, and cardiovascular treatment. Outside its core investments, the company will opportunistically acquire hospitals and long-term care facilities if there is an attractive risk / return profile. The majority of GMRE’s healthcare facilities are leased to a single-tenant on a triple-net basis, but the company has expanded its portfolio to include some multi-tenant properties that have modified gross leases. When measured by annualized base rent (“ABR”), 55% of its portfolio consists of triple-net leases, 37% consists of absolute-net leases, 6% consists of modified gross and 2% consists of gross leases. At the end of 2023, the company’s portfolio had gross investments of ~$1.4 billion in real estate, which included 185 properties totaling 4.7 million SF that were leased to 269 tenants across 34 states in the U.S. Medical office buildings (“MOBs”) make up the majority of GMRE’s portfolio and generated 68.2% of the company’s annualized base rent (“ABR”) last year. Inpatient rehabilitation facilities make up 18.6% of the company’s ABR, surgical hospitals make up 3.8%, and “other” healthcare properties make up 9.4% of the company’s ABR. GMRE’s “other” category includes healthcare facilities such as an acute care hospital, a long-term care hospital, a freestanding emergency department, and a behavioral hospital. By state, the company’s largest geographic concentration is in Texas which makes up 18.7% of its ABR, followed by Florida and Ohio which make up 10.6% and 8.6% respectively. GMRE’s portfolio generated roughly $110 million of annualized base rent in 2023 and had rent coverage of 4.2x, a leased occupancy of 96.5%, and a weighted average lease term (“WALT”) of 5.8 years. GMRE – IR GMRE has a stable balance sheet with a net debt to EBITDA ratio of 6.09x, a long-term debt to capital ratio of 51.65%, and a fixed charge coverage ratio of 2.76x. The company’s debt is 85% fixed rate and carries a weighted average interest rate of 3.83% with a weighted average term to maturity of 2.9 years. Plus the company also has ample liquidity, with borrowing capacity of $294 million under its credit facility. GMRE – IR We don’t have as much history on GMRE, but the company has operationally performed well since 2019, especially given the backdrop of covid and its aftermath. Since 2019 the company has had a blended average AFFO growth rate of 3.16% with AFFO increasing from $0.75 per share in 2019 to AFFO of $0.91 per share in 2023. The company had a particularly solid performance in 2020 and 2021 when its AFFO per share increased by 17% and 8% respectively. AFFO growth moderated in 2022 when it increased by 3% and in 2023 AFFO per share fell by -7%, to $0.91 per share. Analysts expect AFFO to fall by -1% in 2024 but then increase by 9% the following year. GMRE pays a 10.36% dividend yield; however, it has an elevated AFFO payout ratio at 92.31%. Currently, the dividend has adequate coverage, but it’s something to keep an eye on. Given analysts’ projections, AFFO in 2025 is expected to reach $0.99 per share, which would represent an AFFO payout ratio of ~85.9%. Currently, the stock is trading at a P/AFFO of 8.93x, compared to its normal AFFO multiple of 14.09x. We rate Global Medical REIT a Spec Buy. FAST Graphs Data Duel (I hope you're enjoying our new \"data duel\" feature. Let us know your feedback, please. 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