A Look Inside High-Yielding Healthcare REITs (NHI, ARE, CSA, LTC, MPW, HCP, VTR)
Investors seeking high yields have likely come across the acronym REIT. And while all REITs are designed to pass the bulk of their income through dividends, the size of the dividend can vary, depending on the sector the REIT operates in.
Some of the best yields investors can find today are from healthcare REITs. A look at tickerspy’s 8 REIT sub-sector Indexes shows the Healthcare REITs Index as one of the top-three highest yielding segments. For those who are a bit confused about what a REIT is, here’s a primer on these high-yielding stocks, and what to look for before investing.
REIT stands for real estate investment trust, a business structure designed to pass the vast majority of its income to shareholders. In fact, to qualify as a REIT with the IRS, the real estate company must agree to distribute at least 90% of its income to shareholders. By adopting this structure, REITs are free from corporate taxes. By contrast, most companies pay taxes on their earnings, and those that pay dividends subject shareholders to an additional tax on that income.
While most REITs generate income by owning and operating real estate, there are exceptions, such as mortgage REITs and hybrid REITs. As Investopedia points out, mortgage REITs make and purchase loans secured by real estate, these are technically finance companies that use hedging instruments to manage their interest rate exposure. Although, these types of REITs do not operate in a traditional manner, they tend to offer very high yields. As the name implies, hybrid REITs operate and own real estate, while also having a mortgage REIT component. No matter which REIT is being evaluated, it’s always important to remember that cash is king when deciding which REIT to purchase.
A type of cash flow metric, funds from operations (FFO), is an important criterion when evaluating REITs. It is calculated by adding depreciation and amortization expenses to earnings, and sometimes quoted on a per share basis. According to Investopedia, professional analysts sometimes use a measure called adjusted funds from operations (AFFO) when gauging a REIT’s investment value. AFFO is a more precise measure of residual cash flow available to shareholders, and it is a better predictor of the REIT’s future capacity to pay dividends. AFFO does not have a uniform definition. However, the most important adjustment made to calculate it is the subtraction of capital expenditures from FFO. Therefore, investors should look at FFO or AFFO, making sure it is large enough to cover distributions.
Despite the large dividends, healthcare REITs are still subject to market downturns. As a whole, the Healthcare REITs Index is off by -2% over the last month. Based on based on current values and distributions over the last year, the Index is paying out an average of 6% annually.
Over the past six months, names like National Health Investors (NHI) and life-sciences REIT Alexandria RE Equities (ARE) are up 6% or more. Small cap medical office REIT Cogdell Spencer (CSA) has jumped 20% during the same time. Not all healthcare REITs have been as fortunate, as LTC Properties (LTC) and Medical Properties Trust (MPW) has slipped by -15% since mid-December. HCP (HCP) and Ventas (VTR), which are among the Pros’ favorites, are yielding 6% and 5% respectively. Still, since the Index’s inception in January 2008, the Healthcare REITs Index is down by -10%, while the broader market has fallen -20%. And that doesn’t include the dividends that would have been collected over that time.
It will be interesting to see how these REITs close out the year, and where yields go from here. Investors can track the Healthcare REITs Index for performance trends and a suite of other metrics at tickerspy.com.
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Five Things to Look For in a Real Estate Investment Trust (REIT) (Dividend Growth Investor, 4/9/13)
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