Three High Yield Plays on Senior Housing

03/08/2018 5:00 am EST

Focus: HEALTHCARE

Ben Reynolds

CEO, Sure Dividends

Ben Reynolds, income expert and editor of Sure Dividend, sees high yield and potential capital appreciation in real estate investment trusts that focus on senior housing and medical facilities. Here's three of his favorites.

Omega Healthcare Investors (OHI) is the largest publicly traded REIT in the United States dedicated to owning and operating skilled nursing facilities (SNFs). Omega operates approximately 1,000 properties in 42 states and the United Kingdom. 

On February 13th, Omega Healthcare Investors reported financial results for the three-month period ending December 31, 2017. The trust reported net income of $65.2 million (or $0.31 per common unit), funds from operations of $159.2 million ($0.77 per common unit) and adjusted funds from operations of $163.7 million ($0.79 per common unit).

For context, Omega reported funds from operations and adjusted funds from operations of $0.84 and $0.88 in the same period a year ago. Omega’s financial performance is depressed right now due to financial problems (and late rent payments) from several substantial tenants. Importantly, though, the company’s $0.66 quarterly dividend is still well-covered by funds from operations.

Taking a longer view, Omega is forecasting adjusted funds from operations of $2.96 to $3.06 for the full year of 2017. Using the low point of this guidance and combining it with the company’s current dividend payment implies a payout ratio of 89%. Clearly, Omega’s dividend is supported by its current financial performance despite the trust’s very high yield.

For income-oriented investors, Omega’s 10% dividend yield is very rewarding and delivers satisfactory total returns before price appreciation and business growth – both of which are likely, in our view.

Welltower (HCN) is a healthcare REIT headquartered in Toledo, Ohio. The trust invests alongside leading senior housing operators, post-acute providers, and broader healthcare systems to acquire attractive properties in premier markets. Welltower has operations in the United States, Canada, and the United Kingdom and trades with a market capitalization of $19 billion.

On February 22, Welltower reported financial results for the fourth quarter of fiscal 2017. The quarter saw Welltower deliver a net loss of $0.30 per share, largely due to depreciation charges and losses incurred on the sale of past properties. The better metric to measure is the trust’s funds from operations, which came in at $1.02 for the quarter.


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For the twelve-month period, Welltower delivered net income attributable to common stockholders of $1.26 per share and normalized funds from operations attributable to common stockholders of $4.21 per share. For context, Welltower currently pays a quarterly dividend of $0.87 per share, which implies a payout ratio of 83% using the company’s full-year funds from operations figure.

In its earnings release, Welltower also issued its preliminary financial guidance for fiscal 2018. The company expects to generate normalized funds from operations of $3.95 to $4.05 per unit for the coming fiscal year. Taking the low point of this guidance and combining it with the trust’s $0.87 quarterly dividend payment provides a forward dividend payout ratio of 88%.

To sum up, Welltower’s recent financial performance was sufficient to cover the company’s quarterly dividend payment. Moreover, the trust’s current 6.7% dividend yield is higher than its historical average, and 2018’s financial performance is anticipated to be another year of adequate dividend coverage. All said, we believe that Welltower looks attractive here.

Senior Housing Properties Trust (SNH) is a REIT that owns senior living communities, medical office and life science properties, and wellness centers throughout the United States. The company has a portfolio of more than 430 properties, with approximately 304 being senior living facilities and the remainder comprised of medical office buildings.

On February 27th, Senior Housing reported financial results for the three-month period ending December 31, 2017. The trust generated $65.0 million of net income attributable to common shareholders, or $0.27 per diluted unit.

This compares very favorably to the $42.9 million, or $0.18 per diluted unit, reported in the same period a year ago. Results on an FFO basis were not as strong. The trust’s normalized funds from operations of $59.2 million ($0.25 per diluted unit) declined by 50% from the prior year’s figure of $118.6 million, or $0.50 per diluted unit.

Senior Housing’s performance over the full-year period was not as poor. Normalized funds from operations were $1.58 per unit compared with $1.88 per unit reported in the prior fiscal year.

This has put some stress on Senior Housing’s dividend safety. The trust declared $1.56 in distributions in fiscal 2017, which equates to a payout ratio of 99% using its 2017 funds from operations figure. Surprisingly, the trust did not provide financial guidance for fiscal 2018 when it released fourth quarter earnings, so investors and analysts have no indication about whether next year’s performance will be superior to 2017’s.

In summary, Senior Housing dividend is barely covered by the trust’s underlying cash flows. An improvement in the company’s financial performance will be necessary in order for it to continue its current level of profit distributions over the long run.

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