Dividend Growth Analysis: 5 Healthcare REITs

Includes: HCN, HCP, NHP, SNH, VTR
by: Zvi Bar

Healthcare oriented investments are often believed likely to grow as the nation ages and medical advancements continue to improve life quality and longevity. Many investors also appreciate healthcare REITs as a way to invest in hospitals, short/long term rehabilitation facilities and senior health retirement centers. Trustees also often believe that REIT exposure is necessary to maintain a prudently allocated portfolio of assets, and to ensure that there is income sufficient to meet any current obligations.

These healthcare REITs are attractive for the dividend income stream that the REIT model usually necessitates, and also with individuals who want exposure to real estate as an asset class that might appreciate after any coming inflation. Medical real estate is an interesting and highly specific industry, with varying niche sub-industries such as those mentioned above, amongst others.
This is an analysis of the relative value and dividend growth rates of healthcare REITs. The mentioned REITs all have market capitalizations of at least $2 Billion. Other healthcare REITs exist and there are competing companies that are not REITs. The discussed healthcare REITs are, in alphabetical order:
  1. HCP, Inc. (NYSE:HCP)
  2. Health Care REIT Inc. (NYSE:HCN)
  3. Nationwide Health Properties Inc. (NYSE:NHP)
  4. Senior Housing Properties Trust (NYSE:SNH)
  5. Ventas, Inc. (NYSE:VTR)
Healthcare can be highly dependent upon the economy and general employment rates. Individuals with healthcare coverage are far more likely to regularly see doctors. Any substantive development in socializing healthcare could also have unforeseen--positive or negative--impacts upon the industry. Certainly, the aging population and, specifically, the transitioning of baby-boomers into Medicare should increase the volume of healthcare provided as well as the need for new facilities.
REITs must distribute at least 90% of their taxable income in order to eliminate the need to pay income tax at the corporate level. As a result, most REITs offer a respectable yield compared to equities. Of course, some have below average yields and where there is a loss, rather than income, and/or significant debts to be paid, there should be no yield. Additionally, under the current tax laws, REIT dividends are usually subject to a higher tax as compared to traditional corporate dividends (this can change as tax laws change). For the purposes of this analysis, yield includes regular and special dividends, for a total payout yield.
HCP, Inc. (HCP)
  1. Current Yield: 5.04%
  2. Market Capitalization: $15.5 Billion
  3. Price to Cash-Flow: 20.1
  4. Price to Book: 1.8
  5. Short Position: 6%
  6. Yield Growth Analysis: HCP’s dividend has been stable and slow growing during the last 5 years. The 2006 total payout was $1.70 and was raised to $1.78 in 2007 (a 4.7% increase). In 2008, the payout was raised 4 cents to $1.82 (a 2.24% increase). In each of the last 2 years, HCP has added 2 cents to its annual payout, to $1.84 and then $1.86 (each marginally over a 1% increase). In the last quarter, HCP raised its quarterly dividend from $0.465 to $0.48. Annualized, this increase would amount to a $1.92 total payout (a 3.2% increase). Historically, HCP appears to increase the quarterly dividend once about every 4 quarters.
Health Care REIT Inc. (HCN)
  1. Current Yield: 5.44%
  2. Market Capitalization: $9.1 Billion
  3. Price to Cash-Flow: 18.5
  4. Price to Book: 2.1
  5. Short Position: 4.6%
  6. Yield Growth Analysis: HCN’s payout was volatile at the onset of the real estate crisis, but has since become stable. In 2006, HCN had a total payout of $2.8809, which it lowered to $2.2791 in 2007 (about a 20.9% decrease). HCN had two particularly lower quarterly dividends to end 2006 ($0.3409) and start 2007 ($0.2991). Subsequently, instituted a 66-cent quarterly dividend, which it raised to 68 cents in 2008, where HCN had an annual payout of $2.70 (an 18.4% increase). HCN maintained the 68-cent quarterly payout through 2009, paying out 2.72, and raised the dividend by a penny in the summer of 2010, which it maintained so far into 2011. HCN recently announced a 5.1% increase to this quarterly dividend, going forward.
Nationwide Health Properties Inc. (NHP)
  1. Current Yield: 4.4%
  2. Market Capitalization: $5.5 Billion
  3. Price to Cash-Flow: 18.3
  4. Price to Book: 2.4
  5. Short Position: 4.2%
  6. Yield Growth Analysis: NHP has had a stable and slowly rising payout over the last 5 years. In 2006, NHP paid out $1.54, which it raised to $1.64 in 2007, via a 41-cent quarterly dividend (a 6.5% increase). In 2008, NHP raised that quarterly dividend to 44 cents, for a total yearly payout of $1.76 (a 7.3% increase), which it maintained though 2009. In 2010, NHP began raising its quarterly dividend by a penny each quarter, for a total payout of $1.82 (a 3.4% increase), and NHP increased its dividend by another penny to start 2011. With the current dividend, NHP will pay out $1.92 in 2011, which would be almost a 5.5% increase.
Senior Housing Properties Trust (SNH)
  1. Current Yield: 6.18
  2. Market Capitalization: $3.4 Billion
  3. Price to Cash-Flow: 13.8
  4. Price to Book: 1.6
  5. Short Position: 1.4%
  6. Yield Growth Analysis: SNH also did not have to lower its dividends through the recent real estate crisis, but instead slowly grew the dividend. In 2007, SNH raised the annual payout from $1.30 to $1.37. The payout increased to $1.40 in 2008 (a 2.19% increase) and $1.42 in 2009 (a 1.42% increase). In 2010, the payout rose to $1.44 (a 1.4% increase). SNH last raised its quarterly dividend 2 quarters ago, from 36 to 37 cents, after maintaining it at 36 cents for 5 quarters.
Ventas, Inc. (VTR)
  1. Current Yield: 4.15%
  2. Market Capitalization: $9 Billion
  3. Price to Cash-Flow: 19.5
  4. Price to Book: 3.8
  5. Short Position: 10.2%
  6. Yield Growth Analysis: VTR was able to maintain or grow its quarterly payout through the recent real estate crisis. VTR had a $1.58 payout in 2006. In the spring of 2007, VRT raised its quarterly dividend from $0.395 to $0.475 and paid out $1.90 for the year (a 20.2% increase). In 2008, VTR raised the dividend to $0.5125, for a total of $2.05 (a 7.9% increase), which it maintained through 2009. VTR raised the quarterly dividend to $0.535 to start 2010, and paid out $2.14 in total (a 4.4% increase). VTR also raised its dividend to start off 2011, and the present $0.575 quarterly dividend would equate to a $2.30 annual payout, or a 7.4% increase.
Of the above-mentioned names, while I'm not invested in any, SNH appears interesting to me. It has the lowest price compared to both cash flow and book value. It also has the highest current yield, and one that it did not have to cut through the past difficult years. SNH primarily occupies the senior and assisted living facility sub-industry, though it also owns medical office buildings. These senior/assisted living facilities are a growing industry, which is likely to continue to see growth as baby-boomers age. It also has the lowest short interest of any REIT on this list.
Please note the reasonably high short interest on several of the other names, peaking on VTR at over 10%. Many are betting against real estate, and healthcare is believed to be especially sensitive to not only economic, but also political issues. Further, medical care is a frequent focus as to potential fraud. These short sellers are often clever, but many are also sometimes late to leave. Whether these shorts are late leavers or early arrivers is certainly open for debate.
Should you be interested in other REIT industries, please take a look at my analyses of (1) Mall REITs; (2) Hotel/Motel REITs; and (3) Mortgage REITs.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: Data is derived from Morningstar and/or Yahoo Finance. Yield is but one consideration in choosing an investment, and each investment should be considered relative to the total portfolio. None of the information in this article constitutes a recommendation for or against any investment or that it is suitable for any specific person.