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3 Healthcare REITs to Buy Now

Jul 21, 2020 by Kevin Vandenboss

Healthcare real estate investment trusts (REITs) invest in a variety of property types such as assisted living, hospitals, and surgery centers. The operators in these properties are providing services that won't be going away. This makes healthcare REITs one of the most attractive for long-term growth.

It's important to consider the changes in the healthcare industry when you're looking for a healthcare REIT to invest in. Pay close attention to the types of properties they invest in, the services that are provided within the real estate, and the strength of the operators.

Two of the more important financial pieces to consider right now are the debt-to-EBITDA ratio and the available liquidity. The COVID-19 pandemic isn't over, and it's continuing to hurt some healthcare providers. If this turns into an increase in rent deferrals, you want a REIT that's in a position to weather the storm.

You also want a healthcare REIT that's ready and able to make new investments as opportunities arise. The healthcare industry is changing, so REITs have to be able to move quickly with it.

Here are three healthcare REITs you should look at buying right now.

CareTrust Healthcare REIT

CareTrust Healthcare REIT Inc.'s (NASDAQ: CTRE) investments are focused on triple-net leased skilled nursing, assisted living, and independent living properties. This REIT has 212 properties across 28 states, with a total of 21,652 beds.

The COVID-19 pandemic has had a minimal impact on CareTrust's rental revenue. Since the beginning of the pandemic, it has received 100% of contractual rent from its top 10 operators and 99% from all of its operators.

CareTrust leases to some of the top skilled nursing and assisted living operators in the country who have the financial strength to cover any significant losses incurred from the COVID-19-related financial crisis. However, it's unlikely at this point that this will even become an issue with most of its facilities.

Approximately 75% of the beds owned by CareTrust are for long-term skilled nursing care, and the vast majority of patients are admitted through the discharge process from emergency room visits. This means that external factors don't have much effect on occupancy and revenue.

One of the main differences between skilled nursing and other assisted living and independent living facilities is that there isn't a real viable alternative. Families may decide to opt for in-home care in place of assisted or independent living, but skilled nursing facilities provide a level of care and supervision that it isn't feasible to provide in the home.

CareTrust has no lease maturities until 2026, which will only account for 3.2% of its total rent if not renewed. Only 28% of its total rent is in leases that will be maturing through 2030.

With a debt-to-EBITDA ratio of only 3.75, and no debt maturities until 2024, CareTrust's balance sheet should remain healthy for the foreseeable future.

Most of the risk exposure with CareTrust is in its top two tenants accounting for 49% of total rental revenue. Its top tenant, The Ensign Group (NASDAQ: ENSG), accounts for 32% of CareTrust's total rent alone. Any issues or major organizational changes with these tenants could have a significant impact on the REIT. However, operations in those facilities could likely be turned over to one of CareTrust's other 21 operators.

CareTrust REIT is continuing its growth with $26 million in acquisitions so far in 2020, with an initial yield of 8.7%. With the minimal impact on revenue, consistent annual revenue and FFO growth, and its share price being down roughly 20% YTD, now is a good time to pick up this REIT.

Community Healthcare Trust, Inc.

Community Healthcare Trust (NYSE: CHCT) has a diverse portfolio of healthcare properties including medical office buildings, outpatient treatment facilities, assisted living, acute care hospitals, and others.

Community Healthcare's acquisition criteria includes facilities being in non-urban areas. There are a few reasons behind this strategy, one being the returns. There is less competition for properties in these non-urban areas, providing opportunities for a higher return. The other reason has to do with a growing demand for healthcare facilities in these areas as they are typically able to provide more affordable care options, and trends are showing that patients' desires for convenient healthcare options are increasing.

The healthcare industry has already been transitioning to providing more outpatient services that previously required inpatient stays. This puts Community Healthcare Trust in a strong position because many of its properties are home to providers of outpatient treatments and procedures. If this trend continues, it's likely to have a positive effect on the REIT's property values.

Community Healthcare's valuation is a bit high, but its growth is impressive. Its year-over-year revenue growth was 29%, and FFO growth was 30%. The REIT's revenue has grown each quarter, along with its dividends. In fact, its dividend has increased 2.5% every quarter since 2015.

Despite the valuation, this is a REIT worth getting on board with. The value is improving each quarter, so long-term it should be a great buy. However, if you're going to buy Community Healthcare Trust, act quickly while the price is still down for the year.

Physicians Realty Trust

It's difficult to talk about healthcare REITs without bringing up Physicians Realty Trust (NYSE: DOC). This REIT pretty much checks off all the boxes: investment-grade rating, healthy balance sheet, growth, above 5% dividend yield, and currently priced at a discount.

Similar to Community Healthcare Trust, Physicians Realty focuses on outpatient facilities and specialty hospitals. It was ahead of the curve on the trend of patients moving away from hospitals and has taken a significant piece of market share.

While Physicians Realty did take a minor beating from COVID-19, it will likely be a major contributor to the REIT's long-term growth. Hospitals have taken a devastating financial hit from the pandemic, and hospital revenue will probably never be the same as patients are becoming more aware of the increased risk of infection during hospital stays.

This REIT has built an impressive portfolio with a strong tenant base. Approximately 59% of its rental revenue is from investment-grade tenants, and it's not going anywhere anytime soon with a weighted average lease term of 7.2 years.

Physicians Realty's portfolio has been positioned for long-term growth and stability. Over the past two years, it has used the revenue from sales of high-cap rate properties to invest in medical facilities that will provide more consistent growth for the years to come.

There's no question that the healthcare industry is changing, and it's definitely not going anywhere. An investment in real estate that's positioned to accommodate the industry changes will most likely be one you're glad you made. Physicians Realty Trust would be worth looking at anytime, but with it still being priced at a discount, you won't want to wait to buy.

Get ahead of the curve

Healthcare is an investment people have been talking about for years now, so profiting from the future growth of this industry isn't a new concept. However, the changes being seen now weren't as easy to predict. There's still a lot of big money in hospitals and senior housing, but investors will start looking a lot more closely at the specialized facilities and services once the COVID-19 dust settles. Getting into one of these REIT investments now will put you ahead of the game.

Symbol Dividend Yield Price/FFO Debt/ EBITDA
CTRE 6.12% 13.88 3.75
CHCT 4.1% 24.99 4.72
DOC 5.46% 17.5 5.76

Data source: NAREIT as of July 17, 2020.

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Kevin Vandenboss has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Physicians Realty Trust. The Motley Fool has a disclosure policy.

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