Healthcare REITs are poised to benefit from the growing healthcare industry. However, the sector is exposed to leverage and interest rate risks, among other risks. Amid this, investors could add quality healthcare REIT National Health (NHI) to their watchlist for reliable income and capital appreciation. Conversely, Welltower (WELL) and Healthcare Realty Trust (HR) are best avoided now, given their weak fundamentals. Read more….
Demand for healthcare-related real estate is projected to grow in the long term, driven by growing medical needs amid the aging population and increasing prevalence of chronic diseases. But the healthcare REIT sector is very vulnerable to higher interest rates because of their long-term leases and small re-leasing spreads.
Therefore, investors could watch fundamentally sound healthcare REIT National Health Investors, Inc. (NHI) for a steady income and long-term capital appreciation. On the contrary, it could be wise to avoid struggling healthcare REITs Welltower Inc. (WELL) and Healthcare Realty Trust Incorporated (HR).
Real estate investment trusts (REITs) play an essential role in the healthcare industry. Healthcare REITs own, manage, acquire, and develop healthcare-related real estate while collecting rent on it. These properties comprise general and specialty hospitals, senior living communities, outpatient facilities, medical office buildings, skilled-nursing facilities, and research and laboratory spaces.
The demand for medical-related real estate is expected to grow significantly in the long run. In the U.S., the increasing prevalence of chronic diseases and an aging population are boosting the consumer need for medical care and treatment. With increased healthcare needs, healthcare real estate is a significant requirement.
Furthermore, REITs are better-performing sectors during the inflationary period as they are positioned to benefit from increasing rental rates on existing properties. Moreover, healthcare REITs have historically been reliable dividend payers as they are required to distribute 90% of taxable income to shareholders annually in the form of dividends.
While medical REITs are less risky than other medical stocks due to their relatively stable rental income, they are exposed to several risks. Rising interest rates have weighed heavily on the development plans of healthcare REITs. Given the industry’s use of leverage, higher interest rates increase their cost of debt.
Since March 2022, the Federal Reserve has raised its benchmark interest rate ten times in a row to a range of 5%-5.25% in an attempt to fight high inflation. While the central bank kept rates unchanged for June, it signaled two more potential rate hikes this year.
Against this backdrop, investors could consider adding fundamentally sound healthcare REIT NHI to their watchlist for dividend-based income and portfolio diversification. However, not all high-yielding REITs are worth buying. So, fundamentally weak REITs WELL and HR are best avoided now.
Let’s take a closer look at the fundamentals of these REITs.
Stock to Watch:
National Health Investors, Inc. (NHI)
NHI is a real estate investment trust specializing in sales, leasebacks, joint ventures (JVs), senior housing operating partnerships, and mortgage and mezzanine financing of discretionary senior housing and medical investments. The company’s portfolio comprises independent living, assisted living and memory care communities, skilled nursing facilities, and specialty hospitals.
In February, NHI acquired two memory care communities operated by Silverado Senior Living for around $37.50 million. The newly developed properties comprise a 60-unit community in Summerlin, Nevada, and a 60-unit community in Frederick, Maryland. Also, the company acquired an assisted living and memory care community in Chesapeake, Virginia, from Bickford.
These new additions to NHI’s portfolio are expected to boost the company’s growth and profitability.
NHI revised its 2023 annual guidance range for Normalized FFO per share to $4.37-$4.42 from $4.24-$4.30. Also, the company raised its guidance for Normalized FAD to a $186.30 million-$188.90 million range from $185.30 million-$187.90 million.
NHI’s trailing-12-month EV/EBIT of 23.36x is 31.1% lower than the 33.88x industry average. Likewise, the stock’s 12.13x trailing-12-month Price/AFFO is 15.6% lower than the 14.37x industry average.
NHI’s trailing-12-month AFFO/Total Revenue of 69.24% is 63.6% higher than the industry average of 42.33%. Also, its trailing-12-month Cash Dividend Payout Ratio of 90.05% is 41.96% higher than the 63.44% industry average.
For the first quarter that ended March 31, 2023, NHI’s revenues increased 15.5% year-over-year to $82.39 million. Its consolidated net operating income (NOI) was $69.97 million, up 1% year-over-year. Also, NAREIT FFO attributable to common stockholders was $50.55 million or $1.16 per share, an increase of 5.1% and 10.5% year-over-year, respectively.
Analysts expect NHI’s revenue for the fiscal year (ending December 2023) to increase 15.9% year-over-year to $322.36 million. The company’s FFO is expected to grow 2.4% year-over-year to $4.40. Over the past three months, the stock has gained 3.5% and 4.6% year-to-date to close the last trading session at $54.64.
NHI pays a $3.60 per share dividend annually, translating to a 6.59% yield on the current share price. Its four-year average dividend yield is 6.47%.
NHI’s POWR Ratings reflect this positive outlook. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
The stock has a B grade for Quality. It is ranked first among 15 stocks in the REITs-Healthcare industry.
Beyond what I have stated above, we have also given NHI grades for Value, Momentum, Growth, Stability, and Sentiment. Get all NHI ratings here.
Stocks to Avoid:
Welltower Inc. (WELL)
WELL invests with leading senior housing operators, post-acute providers, and health systems to fund the real estate infrastructure required to scale innovative care delivery models and improve the overall healthcare experience. This REIT owns interests in properties concentrated in major, high-growth markets in the U.S., Canada, and the United Kingdom.
On May 11, WELL announced that its operating company, Welltower OP LLC, closed the offering of $1.035 billion aggregate principal amount of 2.75% exchangeable senior notes due 2028. Welltower OP would pay interest semi-annually in arrears on May 15 and November 15 each year. This notes offering might increase the company’s liabilities.
In terms of forward non-GAAP P/E, WELL is currently trading at 119.63x, 263.9% higher than the 32.87x industry average. The stock’s 27.41x forward P/AFFO is 83.6% higher than the 14.93x industry average. In addition, its 22.96x forward P/FFO is 77% higher than the 12.97x industry average.
WELL’s revenue increased 33.9% year-over-year to $169.43 million for the first quarter that ended March 31, 2023. However, the company’s net loss widened by 282.8% from the year-ago value to $10.63 million, while its loss per share worsened by 50% year-over-year to $0.06.
WELL’s $2.44 annual dividend yields 3.04% at the current share price. Its four-year dividend yield is 3.91%.
Analysts expect WELL’s revenue for the second quarter (ending June 2023) to increase 7.6% year-over-year to $1.58 billion. However, the consensus EPS estimate of $0.15 for the current quarter indicates a 25% decline year-over-year. In addition, the company has failed to surpass the consensus EPS estimates in three of the trailing four quarters, which is disappointing.
The stock has gained 1.8% over the past month to close the last trading session at $80.15.
WELL’s POWR Ratings are consistent with this bleak outlook. The stock has an overall rating of D, translating to a Sell in our proprietary rating system.
WELL has a D grade for Quality, Value, and Growth. It is ranked #14 of 15 stocks in the REITs-Healthcare industry.
To see WELL’s POWR Ratings for Momentum, Sentiment, and Stability, click here.
Healthcare Realty Trust Incorporated (HR)
HR is a real estate investment trust that integrates owning, financing, and developing income-producing real estate properties associated mainly with the delivery of outpatient healthcare services throughout the U.S. The company has invested in more than 700 real estate properties and provided leasing and property management services to over 35 million square feet nationwide.
In terms of trailing-12-month EV/EBIT, HR is trading at 187.53x, 453.5% higher than the 33.88x industry average. The stock’s trailing-12-month Price/Cash Flow of 24.98x is 109.5% higher than the 11.92x industry average, while its 6.81x trailing-12-month Price/Rental Revenue is 25.5% higher than the 5.43x industry average.
For the first quarter that ended March 31, 2023, HR’s expenses increased 151.3% year-over-year to $326.60 million. Its net loss attributable to common stockholders was $87.13 million, compared to net income of $42.23 million in the prior-year period. Also, its loss per common share came in at $0.23, compared to $0.28 in the previous year’s quarter.
In addition, as of March 31, 2023, the company’s cash and cash equivalents stood at $49.94 million versus $60.96 million as of December 31, 2022.
HR pays a $1.24 per share dividend annually, translating to a 6.41% yield on the current share price. Its four-year average dividend yield is 10.81%.
The consensus FFO estimate of $0.40 for the second quarter (ending June 2023) indicates a 10.3% decline year-over-year. Also, the company’s FFO for the fiscal year 2023 is expected to decrease by 1.4% year-over-year to $1.63. Moreover, HR has missed the consensus revenue estimates in three of the trailing four quarters.
Over the past year, shares of HR have declined 16.5% to close the last trading session at $19.34.
HR’s weak fundamentals are reflected in its POWR Ratings. The stock has an overall F rating, equating to a Strong Sell in our proprietary rating system.
HR has a D grade for Growth, Value, Sentiment, and Quality. It is ranked last among 15 stocks within the same industry.
Click here to access the other ratings of HR for Stability and Momentum.
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WELL shares were unchanged in premarket trading Friday. Year-to-date, WELL has gained 24.23%, versus a 16.18% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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