Health care REITs are a good way to hold a long position in the health care industry while receiving a strong dividend yield. After the mortgage bubble burst in 2008, health care REITs took a huge hit in their share prices. From an asset valuation standpoint, this was a fairly justified move since the properties owned by the trusts lost substantial value and the leveraged positions of these trusts meant worsened positions for shareholders. Since the collapse, health care REIT shares have bounced back and are trading at prices similar to those before the collapse. In this article, I evaluate the performance of three top health care REITs over the last three years and then explain how the differences in their dividend yield appeal to different investor tastes.
Health Care REIT, Inc. (HCN): 5.6% Yield / 71.1% Debt/Equity
Health Care REIT was trading around $50 before the collapse, and by March 9th, 2009, shares dropped to $27.27. However, HCN was able to maintain their dividend stream. Starting in Q2 of 2008, Health Care REIT increased its dividend from $0.66 to $0.68. The 68 cent dividend continued until third quarter 2010, when HCN increased its dividend to 69 cents. Now it has a dividend of $0.715, which means a 5.6 percent dividend yield. Those investors who believed in Health Care REIT after the financial crisis obviously gained huge returns. Today, Health Care REIT is not a bargain since it is always at risk of returning to 2009 lows, but its yield looks very consistent and very high considering how low interest rates have gone. Health Care REIT has a market cap of $9.0 billion with $6.4 billion in total debt, making it the most leveraged REIT that I discuss in this article. Since it holds similar assets to HCP and Ventas, its higher yield is mostly attributed to its high leverage and more risk. Health Care REIT is a good investment choice for young investors who can take risks due to their potential longevity along with investors who have high risk appetites.
HCP, Inc (HCP): 5.15% Dividend Yield / 50.0% Debt/Equity
Health Care Property Investors’ performance has been very similar to its two health care REIT counterparts since 2008. Their share price dropped 60 percent from September 2008 to March 2009, but it was able to maintain its quarterly dividend and then increase it over the past year. Since the collapse, HCP shares trade at the same levels that they traded at before the collapse. HCP has a total debt of $7.6 billion and a market cap of $15.2 billion, making it the second most levered health care REIT on this list. Consequently, HCP also has the second highest dividend yield at 5.15 percent. HCP is a good health care REIT choice for investors with moderate risk appetites. This could mean middle aged investors, or monthly traders who want high returns, but do not have the time to constantly manage risky investments.
Ventas, Inc. (VTR): 4.3% Dividend Yield / 32.5% Debt/Equity
Ventas shares, trading in the $45 to $50 range before the financial crisis, plummeted to $20.41 at the close of March 6th. However, Ventas still was able to pay its quarterly 51 cent dividend which it began paying in 2008. Since then, Ventas increased its dividend to $0.575 in the second quarter of 2011 and paid its third quarter dividend in two installments, totaling to 57.5 cents. Ventas has a market cap of $15.4 billion with $5.0 billion in total debt, making it the least levered REIT on this list. Its 4.3 percent dividend yield is also the lowest on this list. Ventas is a good investment for older investors, who cannot risk losing their nest eggs, low risk investors, and long term investors who need to invest in securities with low leverage to avoid parts of their portfolios hitting absolute zero.
Breaking down similar trusts like this is a good way to understand the price of leverage for current investors. With this knowledge of how much investors will pay for risk, you will be better suited to evaluate your own risk appetite and make investments that are best for your capital. In addition, when volatile markets drastically change securities prices, investors can use their understanding of leverage pricing to spot inconsistencies in the market and turn profits off of buying or selling undervalued or overvalues stocks. It is this level of analysis that will allow investors in today’s tough market to earn strong returns and avoid disaster.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.