3 Top Healthcare REITs to Buy

Providing appropriate health care requires the right real estate assets.

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One of the biggest trends that will drive U.S. healthcare over the next couple of decades is the aging of America’s population. By 2030, the number of Americans age 65 or older is expected to reach 80 million. That's double the count in 2010.

A combination of factors has Americans living longer than ever. The repercussions for the healthcare industry are enormous, since seniors need more care than younger age groups.

This trend represents an excellent opportunity for investors, particularly in real estate investment trusts (REITs) that focus on healthcare and senior housing properties. Not only should investors expect to enjoy steady -- and growing -- dividends over the next decade, but expansion should also result in appreciation.

Here are three healthcare REITs you should take a closer look at.

3 top healthcare REITs to consider

Company Name Dividend Yield Market Cap
Caretrust REIT (NASDAQ: CTRE) 3.7% $2.23 billion
Physicians Realty Trust (NYSE: DOC) 5.3% $3.2 billion
HCP (NYSE: HCP) 4.3% $17.1 billion

Data source: Yahoo! Finance. As of September 11, 2019.

Caretrust REIT

Caretrust, the smallest of the three, is a pure play on senior housing and skilled nursing homes. After being spun off of healthcare provider Ensign Group in 2014, Caretrust

  • more than doubled the number of properties it owns,
  • expanded the number of care providers it works with by almost two dozen, and
  • delivered an incredible 310% in total returns (including stock appreciation and dividends paid).

It has absolutely crushed other REITs and the broader U.S. stock market:

CTRE Total Return Price Chart

CTRE Total Return Price data by YCharts

It’s still a small player in senior housing and skilled nursing, owning just over 200 of the 10,000-plus skilled nursing facilities in the United States.

The most attractive aspect of Caretrust is that management continues to prioritize a strong balance sheet. The REIT has been quite conservative in its capital allocation to support that priority.

Caretrust has a net-debt-to-EBITDA ratio of 3.4. This is a measure of debt against earnings, and a number this low is a good sign. It also has a debt-to-asset ratio of 37% and a cash payout ratio of less than 70%. That means Caretrust retains more of its cash flow than most of its peers. It's also one of the least leveraged REITs in this space.

Caretrust currently pays a lower yield than its competitors. And you’ll pay a higher valuation. But, over the long term, I expect Caretrust to continue delivering market-beating returns and dividend growth.

Physicians Realty Trust

Like Caretrust, Physicians Realty Trust is a relatively new and specialized healthcare REIT. 97% of its properties are medical office buildings, with almost 90% of them located on the campus of or affiliated with a major medical center.

This proximity to a major medical center (or the affiliation of its tenant medical practitioners) makes these properties higher-value than other non-affiliated, non-campus medical offices.

Physicians Realty Trust hasn’t delivered the same massive returns as Caretrust since its IPO, but has still outperformed its peer group and the S&P 500 in total returns:

DOC Total Return Price Chart

DOC Total Return Price data by YCharts

Moreover, the same demographic trend that’s creating a need for more skilled nursing and senior housing will also mean more medical offices. U.S. healthcare expenditures are expected to more than double over the next two decades as the 65-plus population increases.

Physicians Realty Trust is likely to grow faster than its peers over that period, and I expect it will be a market-beating REIT worth owning.

HCP

HCP isn't just the biggest of these three REITs, with 745 properties in its portfolio -- it’s also a more diversified way to invest in healthcare. Nine-tenths of the income it earns from its property portfolio is split almost equally between medical offices, senior housing, and life science. The other 10% is a mix of other properties.

Where Caretrust and Physicians Realty Trust are small, pure-play investments to deliver growth, HCP’s scale and diversified portfolio make for an excellent all-around healthcare REIT. The nature of its property portfolio, which is spread across three very different segments of the healthcare business, gives it multiple avenues to pursue growth.

Which is the best healthcare REIT for your portfolio?

There's a case for owning all three REITs. But some factors may make one a better fit than the others. You'll need to look at the mix of investments already in your portfolio and your short- and long-term investing goals. In general, I’d categorize them as follows:

If you’re looking for the best source of predictable income right now, HCP is probably your best bet. The company cut its dividend in 2016 as it underwent some massive changes in its business, but the current payout is well supported by cash flows. And the diversified nature of its portfolio should give management multiple ways to deliver steady growth.

Physicians Realty Trust is also positioned for above-average growth over the next decade. However, what’s less apparent is how quickly -- or how much -- it will grow its dividend. Since the first dividend in late 2013, it has only raised the payout twice, and the second increase was a paltry 2.2%.

Compare that to Caretrust, which has raised its quarterly payout every year since initiation, and the payout is up 80% in total, compared to 28% for Physicians Realty Trust.

Moreover, it also has the highest debt-to-EBITDA, at about 5.7 times over the trailing 12 months, and its quarterly dividend of $0.23 per share is exactly the same as its average normalized funds from operations in the first half of 2019. In other words, it has a very narrow margin of safety for its dividend right now.

Those factors make Physicians Realty Trust a little riskier than either HCP or Caretrust. If you’re willing to take on the risk of losses if it’s forced to cut the payout, Physicians Realty Trust might be right for you.

If you’re looking for high growth but want a measure of safety, Caretrust should be high on your list. Management has demonstrated a knack for impressive growth (both in cash flows and dividends) since going public, while still retaining a lot of that cash to reinvest and keeping a strong balance sheet. It doesn’t have as high a yield as the other two, but a better balance sheet, a track record of strong growth, and the prospects to continue growing should more than make up for that over the long term.

Jason Hall owns shares of CareTrust REIT. The Motley Fool owns shares of and recommends Physicians Realty Trust. The Motley Fool has a disclosure policy.
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