What are we looking for?
Last week my colleague Rob Belanger and I examined health care corporations. This week we are taking a look at real estate investment trusts in the same sector. According to the Harvard Business Review, our aging population will lead to massive increases in the number of people suffering from chronic, expensive-to-treat diseases, which will put severe strain on the health care system.
We started with REITs over $300-million in market capitalization, and sorted them from the largest to the smallest. We included only those with a dividend yield of more than 3 per cent.
Since we are screening trusts, we use different metrics than with stocks. One key yardstick is the adjusted funds from operations (AFFO), which is generally equal to the trust's funds from operations with adjustments made for recurring capital expenditures used to maintain the quality of the REIT's underlying assets. The price/AFFO per unit is a valuation metric and is the current unit price divided by the AFFO. A lower number is better.
The interest coverage ratio is used to determine how easily a company can pay interest on any outstanding debt. The lower the ratio the more the company is burdened by debt. The AFFO payout ratio is the dividend yield divided by the AFFO. The yield is current and the AFFO is forward-looking based on analysts' consensus estimates. The ratio shows the safety of the dividend: A low number is desirable.
What did we find?
Based in Mississauga, Chartwell Retirement Residences owns and operates 180 locations across Canada and the United States. While the company has a favourable AFFO payout number and price/AFFO ratio, it carries a large amount of debt.
Medical Properties Trust, based in Alabama, provides financing to acute care facilities that wish to acquire other facilities or expand. The company scores very well in all categories with a 4.92 per cent yield.
The highest yielding REIT and also the smallest on our list is Toronto-based Northwest Healthcare Properties. The company owns and manages 76 medical office buildings and health care facilities across Canada. Its AFFO metrics and its interest coverage are both quite acceptable.
HCP Inc., the largest REIT in our screen, owns hospitals, seniors housing, medical offices and life science properties. It has raised its dividend every year for the past 28 years and is the only REIT included in the S&P 500 Dividend Aristocrats Index.
Investors should take a hard look at this sector – which includes doing additional research.