Healthcare REITs: A Healthy Duo

07/02/2015 9:00 am EST

Focus: REITS

Richard Stavros

Analyst, Global Income Edge, Utility Forecaster and Personal Finance

Now is a particularly good time to add real estate investment trusts to a portfolio, asserts Richard Stavros, contributing editor of Personal Finance.

For starters, REITs are strong income vehicles because they must pay out at least 90% of their taxable income as dividends to shareholders.

And given the Federal Reserve’s reluctance to raise rates quickly, REITs are still a superior investment compared with Treasuries and bonds.

Another bonus: Not only do REITs have high income and returns that rival those of stocks, they usually move independently from stocks, decreasing a portfolio’s overall volatility.

Healthcare REITs, which own hospitals, medical buildings, and even assisted-living communities, are the best investment within the REIT category right now—and for the foreseeable future—because the graying of America represents the best bankable demographic trend in the income-investing world.

The elderly population in 2030 will be twice as large as in 2000, increasing from 35 million to 72 million and constituting nearly 20% of the total US population, according to an analysis by Galliard Capital Management.

Midsize healthcare REITs in the $2 billion and $10 billion market-capitalization range offer the greatest balance of growth, safety, and value, and we share two with you here.

Omega Healthcare Investors (OHI)

Omega Healthcare specializes in skilled nursing facilities in the United States and is one of the most solid healthcare REITs around.

For five straight years, Omega delivered consistent annual growth in dividend revenue and funds from operations, a key measure of REIT performance.

Recently, Omega completed a merger with nursing home REIT Aviv, expanding the company’s portfolio more than 60%, from 560 to 900 properties.

The company predicts funds from operations in the fourth quarter of this year will be 10% higher than for the fourth quarter last year.

Whether that prediction pans out, Omega certainly has a stellar track record for raising dividends. In April, the company did so for the 11th consecutive quarter and currently pays a 6% dividend yield. Buy Omega up to $45.

Senior Housing Properties Trust (SNH)

In April, Senior Housing Properties Trust added 37 senior-living communities to its portfolio for $763 million. As a result, funds from operations rose 4.7% to $98.6 million or $0.45 per share.

In addition to independent and assisted-living communities, the company owns nursing homes, wellness centers, and medical office, clinic, and biotech laboratory buildings throughout the United States.

Most of SNH’s tenants are “triple net leased,” which reduces management costs and makes the trust’s cash flow steadier.

With triple net leasing, each tenant pays rent and is responsible for all taxes and insurance as well as operating and maintenance costs. The current yield is 7.7%. Buy up to $30.

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