Profit From Obamacare Implementation With Healthcare REITs

Includes: HCN, OHI, SNH, VTR
by: Zvi Bar

In 2012, the United States Supreme Court upheld the constitutionality of Obamacare, at least so far, and the nation re-elected the president. These two facts ensure that ACA implementation shall continue. Investors keen to locate methods of profiting on this implementation may want to watch healthcare REITs.

The application of the substantial plans coming to healthcare will have a significant change upon it. Not all healthcare equities reacted positively to the Supreme Court verdict. The hospitals and care providers largely appreciated, while the insurers largely declined. Under the new laws, medical device makers will be subject to an added tax, which means device prices may rise, or that the industry will have less money for R&D and/or quality.

The market also indicated that pharmaceutical companies, like hospitals, should benefit from growing Medicaid business, and comparable care covered under the ACA. More healthcare means more hospitals, more prescriptions, more ultrasound machines, more dialysis centers, and more records keeping, including more digital records management.

One additional healthcare investment that is likely to benefit from a growing healthcare business would be healthcare REITs. Healthcare REITs generally provide investors with a method of investing in the hospitals, rehabilitation facilities, and senior health retirement centers that service the nation's healthcare needs. Most healthcare REITs manage the property, and do not run the hospitals or other facilities, and are merely landlords with hospitals and related facilities as tenants.

Added business for hospitals should mean that hospitals should more easily pay their rent, including handling coming rent increases. Added business may mean expanding facilities, meaning there will be a need for the development of hospital facilities. These healthcare REITs will use such opportunities to grow their portfolio and further commit their facility tenants. Many still own vacant facilities as well as locations for development, while others will continue to acquire properties.

For several decades, medical costs have increased at a rate that outpaced inflation. If the trend continues, in the future it can be expected that investments in the businesses that service healthcare might also outpace inflation. Being the landlord to such medical services facilities may be a beneficial position. If a medical center does survive, it will have to pay its landlord rent.

Healthcare REIT exposure should also help increase the average portfolio's yield. Several of the largest publicly traded healthcare REITs offer yields well above the market's average. Additionally, beyond the income stream that the REIT business requires, medical real estate is a highly focused industry that differs from both residential and most traditional commercial real estate, making it a potentially growing and low-correlation asset allocation.

There are several large publicly traded healthcare REITs. One of the largest healthcare REITs by market valuation, currently at about $19.25 billion, is Ventas (NYSE:VTR). In the last 12 months, Ventas appreciated by about 18 percent and paid out a yield of 3.8 percent. See a recent chart for VTR:

HCP is also one of the larger healthcare REITs, with a market valuation of about $20.7 billion. In the last 12 months, HCP appreciated by about 11 percent and paid out a yield of 4.3 percent. HCP is a dividend aristocrat and is scheduled to announce a dividend increase this quarter. See a recent performance chart for HCP:

One of the highest yielding publicly traded healthcare REITs is Omega Healthcare Investors (NYSE:OHI), which has a market valuation of $2.8 billion and a yield of 7.1 percent. Omega, which is largely a long-term care facility manager, increased by about 24 percent in the last 12 months and increased its dividend last quarter, from $0.42 per quarter to $0.44. Omega increased its dividend in four of the last five years, including two increases in 2012. See a recent performance chart for OHI:

Another high yielding healthcare REIT is Senior Housing Properties Trust (NYSE:SNH). SNH has a yield of about 6.4 percent, and currently has a market valuation of about $4.3 billion. SNH, which is primarily an owner of senior living facilities, appreciated by about 11 percent over the last 12 months. Additionally, SNH increased its dividend last quarter, from $0.38 to $0.39 per quarter. See a recent performance chart for SNH:

Another healthcare REIT is named Health Care REIT (NYSE:HCN), and it is a significant player in the business, with a market valuation of about $16 billion. HCN appreciated by about 10.8 percent over the last 12 months, and provided a yield of about 4.8 percent. The company increased its dividend several times in the last five years and appears due to increase it shortly. Such an increase may be priced into the stock and the failure to do so may hurt the stock. HCN just acquired a Sunrise Senior Living (SRZ), and JPMorgan reduced HCN to neutral after the completion of the deal. See a recent performance chart for HCN:

These healthcare REITs should benefit from anything that will improve the cash flow, volume and profit margins of their healthcare service providing tenants. Many have had a decent run up since Obamacare was first drafted, and could be due for a correction. Nonetheless, the benefits from the increased safety to healthcare property demand and the future development of healthcare facilities should exist for many years.

In the near-term, the closest probable news to come is that HCP will likely increase its dividend this quarter. HCP generally has its Q1 dividend's record date in the first or second week of February, and so we should expect to hear the company announce the amount of the dividend in the next two weeks. Given that HCP has increased its dividend every year for over two decades, and that it must do so this quarter to continue the trend, many likely expect a dividend increase and will be disappointed if it does not occur. Further, if HCP does not increase its dividend, the market may take that as a sign of weakness for the industry.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.