Healthcare Trust of America (NYSE:HTA) is an interesting choice for investors who want to get exposure to a promising Healthcare REIT which should benefit from long-term secular demand trends and increasing cash flow streams in the years ahead.
Healthcare Trust of America invests in quality medical properties in growing urban geographic markets and, over the years, has assembled a property portfolio comprising of 14.5 million square feet in 27 states. The company was formed in 2006 and has invested more than $3.2 billion in portfolio real estate assets.
Generally, Healthcare REITs face extremely attractive long-term demand trends. Higher projected demand for senior health care and the implementation of the Affordable Care Act, which is expected to add 25 million or more people to the pool of the insured until 2020, should definitely support one of the leading investors in medical properties.
1. Secular demand trends in health care
In fact, almost all REITs within the commercial REIT sector exhibit high degrees of business cycle sensitivity, meaning they tend to do well when the economy does -- and vice versa. One exception, however, are Healthcare REITs which are exposed to favorable long-term, secular demand trends in health care which sort of lowers their earnings risk.
Since health care demand is projected to grow pretty much gradually over the next couple of decades, Healthcare REITs are likely less exposed to earnings volatility.
The Congressional Budget Office released a telling report in 2013 entitled "Rising Demand for Long-Term Services and Supports for Elderly People". In it, the CBO projects a massive increase in the share of people over the age of 65 by the year 2050.
In 2000, 12.3% of the U.S. population was 65 years or older and this percentage is expected to increase to 20.70% in 2050 while the oldest age cohort, people aged 85 and older, will see the largest increase over the next three decades.
Facing strong underlying supply/demand dynamics, Healthcare Trust of America should see a substantial boost to its earnings over the years. In fact, the company is a bet on a massive expansion of domestic health care spending primarily targeting elder citizens, which makes an investment in the Healthcare REIT inherently of long-term nature.
2. Competitive dividend yield
As usual in the REIT space, investors want to get their hands on some recurring cash.
Healthcare Trust of America does not necessarily offer the highest dividend yield when compared against other Healthcare REIT investment vehicles such as Health Care REIT, (NYSE:HCN) or HCP, (NYSE:HCP).
Both companies pay a little higher yields than Healthcare Trust of America, but both REITs also have much longer operating histories and benefit from a much longer dividend record. HCP, for instance, was founded in 1985 and Health Care REIT in 1970.
In any case, a 4.79% dividend yield is a decent yield for a fairly young company and a limited track record.
3. Competitive leverage ratios
Another point worth mentioning when it comes to Healthcare REITs: Leverage. Oftentimes REITs rely on significant amounts of debt in order to expand their portfolio reach and investors should make sure, that the company is not risking its future by over-leveraging.
Healthcare Trust of America has a total debt to EBITDA ratio of 5.3x which is higher than HCP's 4.8x, but lower than HCN's 6.4x. While ranking between those two specific competitors, Healthcare Trust of America's total debt to EBITDA ratio stays below the peer group average of 5.74x.
The total debt to EBITDA ratio pretty much determines how many years of current profitability it would take for a company to repay its total debt.
The Foolish Bottom Line
Facing higher projected demand for health care services, investors in and owners of medical properties across the country should benefit materially from higher health care spending in the years ahead.
With a dividend yield approaching 5%, investors get access to a decent cash flow return and retain more upside potential stemming from higher dividends as the long-term investment thesis plays out over the next couple of decades.
Kingkarn Amjaroen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.