Best REIT Dividends: Healthcare

According to data complied by Bloomberg, healthcare real estate investment trusts (REITs) are anticipated to produce the highest dividend payout in the REIT industry in first quarter 2011 buoyed by better-than-expected year-over-year revenue growth with accretive results from over $11 billion acquisitions announced in 2010.

This marks a strong back-to-back performance for healthcare REITs, which recorded an impressive 69% increase in dividend payouts in 2010 – the largest in the industry, as revealed by data by SNL Financial, a premier multisector-focused financial information and research firm.

Solid dividend payouts are arguably the biggest enticement for REIT investors as the U.S. law requires REITs to distribute 90% of their annual taxable income in the form of dividends to shareholders. According to SNL Financial reports, about 59 U.S. REITs had cut or suspended their dividends in 2009 – the biggest since 2000. The current dividend yield for the Bloomberg REIT Healthcare Index is 5.3%, followed by 3.8% for industrial landlords, 3.1% for office owners, 3.1% for apartment companies, and 1% for hotels.

Healthcare REITs usually leases its facilities under “triple-net” master lease agreement, under which the tenant pays all taxes, insurance, and maintenance for the properties, in addition to rent. This insulates the companies from short-term market swings that may adversely affect the operations of a particular facility, and provides a steady revenue stream. Healthcare is relatively immune to the economic termoils faced by office, retail and apartment companies.

Consumers will continue to spend on healthcare while cutting out discretionary purchases. The healthcare industry is the single largest industry in the U.S. based on Gross Domestic Product (GDP). An aging Baby Boomer generation’s demand for assisted and independent living facilities should also increase in the coming years.

Consequently, healthcare REITs are well poised to retain their growth curves and simultaneously benefit the shareholders with stead pick up in dividends.

In concurrence with a steady revenue growth, healthcare REITs had announced $11.25 billion worth of acquisitions in 2010, led by $6.1 billion purchase by HCP Inc. (HCP), the largest medical REIT in the U.S. HCP acquired ownership interests in 338 post-acute, skilled nursing and assisted living facilities from HCR ManorCare Inc., a leading privately owned provider of skilled nursing facilities.

The properties are located in some of the premium markets of the country typified by high barriers to entry and enables HCP to secure a long-term source of rising income that would be accretive to earnings.

In another such noteworthy deal, Ventas Inc. (VTR), a leading healthcare REIT, had acquired full ownership of all the real estate assets of Atria Senior Living Group, the fourth largest operator of assisted living properties in the U.S., for $3.1 billion.

With the deal, Ventas will own 118 high-quality seniors housing assets in the premium markets of the New York metropolitan area, New England, Boston, and California. The portfolio includes approximately 13,500 units, with a median community age of 12 years and an average occupancy rate of over 87%.

Ventas expects Atria properties to generate approximately $640 million of revenues in 2011, with net operating income (after management fees and operating expenses) in the range of $186 million to $196 million. The portfolio has excellent growth prospects, and the transaction is expected to break even for Ventas in 2011 and become accretive in 2012 and thereafter.

While HCP’s next dividend is expected to increase to 47.5 cents per share from 46.5 cents, Ventas is forecast to raise its dividend to 55 cents in first quarter 2011 from 53.5 cents according to Bloomberg estimates. The Bloomberg dividend forecasts are based on 7 parameters, which includies company guidance, regression analysis, and put-call parity from the options market.

The Bloomberg projections had a global accuracy rate of 88% in fourth quarter 2010, compared with 76% for market analysts. Going with this trend, we can vouch that healthcare REITs will emerge as the undisputed leaders in dividend payouts in the industry in 2011.

We presently have a Neutral rating on Ventas, which currently has a Zacks #2 Rank that translates into a short-term Buy recommendation indicating that the stock is expected to outperform the overall U.S. equity market for the next 1–3 months. However, we have an Outperform recommendation and a Zacks #1 Rank (short-term Strong Buy rating) for HCP.

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