On Sale! Which Healthcare REIT Should You Buy?

The potential for interest rate hikes may have caused the selloff in REITs in the past couple trading days. REITs are popular among dividend investors because REITs are known for their juicy yields.

The Healthcare REITs have been in a downtrend for this entire year and after the price declines, they look cheap with higher yields and total return that outperform. There are a couple of financially sound Healthcare REITs that I want to bring to your attention.

I went through a list of five Healthcare REITs and Ventas, Inc. (NYSE:VTR) and HCP, Inc. (NYSE:HCP) look particularly attractive having fallen 30% and 25%, respectively, year-to-date.

Price chart of Ventas and HCP comparing their performances

Source: Google Finance

Ventas, Inc. with a 5.9% Yield

Ventas logo

Under $50 per share, Ventas yields close to 5.9%. It has a strong balance sheet with a S&P credit rating of BBB+. Further, according to a P/FFO of 15, its fair value would be around $66 per share, implying its undervalued by 24%.

Consensus analyst estimates funds from operations (FFO) to grow at least 5% in the foreseeable future. In addition to its yield and ignoring its undervaluation, estimated returns is 11%.

Ventas has increased dividends for 6 years in a row, and its payout ratio is around 66%.

HCP, Inc. with a 6.8% Yield

HCP logo

HCP is a popular choice among dividend investors perhaps partly because the REIT has increased dividends for 30 years in a row. Its payout ratio is around 72%.

At $33 per share, HCP yields 6.8%. It has a strong balance sheet with a S&P credit rating of BBB+. Further, according to a P/FFO of 15, its fair value would be around $47 per share, implying its undervalued by 29.8%.

Consensus analyst estimates FFO to grow at least 3% in the foreseeable future. In addition to its yield and ignoring its undervaluation, estimated returns is 10%.

Omega Healthcare Investors Inc with a 7% Yield

Omega Healthcare Investors Inc (NYSE:OHI) is another popular dividend growth stock. This Healthcare REIT is different from the other two in that it owns primarily skilled nursing facilities. At the end of June 2015, Omega Healthcare is invested in 900 properties primarily located across the United States.

Omega Healthcare has increased dividends for 13 years in a row, and it has a payout ratio of around 72%. Sure, it pays a juicy yield of 7% at $32 per share; however, its balance sheet is also weaker. It has a S&P credit rating of BBB-.

In the past decade, Omega Healthcare normally trades at a P/FFO of 12.5, implying a fair value of around $38. So, the shares are discounted by around 15.8%.

In Conclusion

Personally, I would go for higher quality stocks like Ventas or HCP. Besides, they seem to be more undervalued than Omega Healthcare. So, even though the latter offers a higher yield, I’m unlikely to buy it. There is only so much capital to go around.

Have you bought any Healthcare REITs on the dips lately?

Originally, I wrote a more detailed article on Seeking Alpha that features The Buy the Dips Portfolio. You can read the article here: Healthcare REIT Sell-Off – Which Ones To Buy?

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Disclosure: At the time of writing, I am long VTR.

Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

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