Healthcare-connected real estate investment trusts (REITs) combine the recession-resistant medical sector with the high-yield dividends that REITs are known for.
That doesn't mean everything has been rosy for these stocks this year, because rising interest rates are hitting REITs from two directions. Rising borrowing costs cut into the float between what the REITs pay in financing for their investment properties and what they earn from tenant leases, at least in the short term. Plus they make their investments less attractive to investors because higher returns are offered by income securities that aren't as risky.
However, this struggling environment, while lowering share prices for many REITs, can make them more attractive as their dividend yields increase. Global Medical REIT (GMRE 0.74%), Omega Healthcare Investors (OHI 0.07%), and Medical Properties Trust (MPW 4.61%) all offer dividends with yields of 8% or more, but only two of these companies are worth the risk.
Global Medical is well-priced and secure
Global Medical leases medical office space, focusing on smaller markets with growing demand. Its shares are down more than 53% so far this year, but its financials are healthy, so the company appears to be a bargain at its current price.
Its tenants are healthcare systems and physicians' groups, and as the healthcare industry is pretty much recession-resistant, the threat of non-payment of rent is low. Inflation costs have made it more expensive to build, but that also means switching costs are that much higher for tenants.
Halfway through the year, the company reported funds from operations (FFO) of $32.4 million, up 20.8% year over year, and FFO per share of $0.47, up 6.8% over the same period last year. Adjusted FFO was $34.4 million, up 20% year over year, and AFFO per share was $0.49, up from $0.47 in the first half of 2021.
The company raised its dividend this year by 2.4% in March to $0.21 per share, giving it a current yield of around 10.71%. This left it with an AFFO payout ratio of 42.8%, well within the safety guidelines, especially for a REIT that has grown FFO by 612% over the past five years.
My biggest concern for Global Medical, besides the aforementioned problems that higher interest rates are causing across the industry, is the average remaining lease term of its properties. As of March 31 it is a modest 6.9 years, which could cause trouble down the road.
Omega Healthcare is waiting for a turnaround
Omega Healthcare Investors' shares are up a little more than 2% this year. The REIT focuses on leasing skilled nursing facilities and assisted-living facilities, which were hit hard by increased costs and lower patient levels during the COVID-19 pandemic. Their businesses are still impacted to some degree by the aftermath of COVID-19.
Omega, in its second-quarter report, said its financial results are hampered by nonpayment of rent by a few operators and facility occupancy and profitability are still below pre-pandemic levels. However, the long-term trend for occupancy for such facilities is expected to increase with the aging of our population.
The company has kept its dividend at $0.67 per share since the third quarter of 2019, but it still yields 8.87%. Through six months, Omega reported FFO of $331 million, down 5.9% year over year, and AFFO of $368.9 million, down 10% over the same period last year. The company did report net income of $287 million through six months, up 14.6%. The company's AFFO payout ratio in the second quarter rose to 88.2%, which is only a bit high, but certainly sustainable if the company can get back to growing FFO again. Over the past five years, it has boosted FFO by a modest 103.1%.
Data by YCharts.
Medical Properties Trust: Just what the doctor ordered
Medical Properties Trust is a REIT that owns 447 hospitals in 32 states, seven European countries, South America, and Australia. Its shares are down more than 53% this year, but its finances haven't taken a hit.
The company raised its quarterly dividend by 3.5% this year to $0.29, the 10th consecutive year it has grown its dividend, giving it a current yield of around 10.48%. Its leases average a remaining 17.7 years.
Through six months, the company reported FFO of $553.9 million, up 21.3% year over year, with AFFO of $431 million, up 9.4% over the first six months of 2021. Its AFFO payout ratio is 82.8% and the company has grown FFO by 273% over the past five years, so that type of growth means the company should be able to sustain more dividend raises.
Going against the crowd
While shares of Medical Properties Trust and Global Medical are down significantly this year and Omega Healthcare's shares are up slightly, I believe Omega Healthcare is the riskier choice of the three for long-term investors. Declining AFFO and FFO puts its dividend at a higher risk and the company's slower FFO growth rate is concerning.
Medical Properties Trust and Global Medical have the type of tenants that are less likely to default in the current economic situation, and both companies' ability to grow FFO bodes well for dividend growth. At their current share prices, I believe there's a lot of upside for both.
