The stock market has been quite volatile for the last few months. This is a welcome event for someone who's still in the portfolio accumulation phase. Why? When you're in the portfolio accumulation phase, you want to purchase as many stocks on discount as possible. The volatility allows for such opportunity. During the portfolio accumulation phase, you do not want to see a prolonged bull market because that means you'll end up purchasing stocks at hyped-up valuations. The ideal case is to encounter a bear market during your accumulation phase, then encounter a bull market when you're retired and using your portfolio as the retirement income. This is a perfect example of buy low, sell high.
I'm happy to see the volatility continuing. Unfortunately we're almost maxing out on our tax-sheltered accounts, so the next step might be start purchasing stocks in our regular taxable accounts. We are also planning to start saving money toward next year's TFSA and RRSP contribution rooms. Future purchases for rest of the year may slow down a bit, but we'll have to see.
As you may know, the energy sector has taken quite a beating the last few months. We would like to continue buying stocks in the energy sector to take advantage of the depressed sector, however, we also would like to continue adding stocks in other sectors that we believe have good growth potentials. This is where the healthcare sector comes into place. As the baby boomers age, healthcare related businesses will become more and more attractive to invest in. Major healthcare tycoons like Johnson & Johnson and Abbott Laboratories comes up in mind as good companies to invest in. Another good place to look into is in the healthcare REITs sector.
Healthcare REITs hold properties that are related to healthcare businesses, such as senior housing facilities, medical office buildings, and hospitals. As the general population ages, there will be more demands for these healthcare facilities. Furthermore, many seniors no longer live in close proximity to their kids' families, making the need for senior housing facilities a necessity for some of them.
With that in mind we recently added
30 shares of Omega Healthcare Investor (OHI)
16 shares of Ventas (VTR)
We already hold OHI in our dividend portfolio, so this was to add to our existing position. VTR is a new position for us.
From Google Finance: Omega Healthcare Investors, Inc. (Omega) is a self-administered real estate investment trust (REIT). The Company invests in income producing healthcare facilities, long-term care facilities located throughout the United States. The Company provides lease or mortgage financing to qualified operators of skilled nursing facilities (SNFs) and assisted living facilities (ALFs), independent living facilities, rehabilitation and acute care facilities. Its portfolio of real estate investments include over 900 properties located in 41 states and operated by 81 different operators. Its portfolio includes healthcare facilities and mortgages on healthcare facilities. It also offers fixed-rate mortgage loans.
Recently OHI merged with Aviv in a $3 billion deal that further strengthened OHI's position in the healthcare REIT sector. The combination of the two companies means OHI is now a leading skilled nursing facilities REIT in the US.
OHI has had a great dividend history, having raised dividends for 13 straight years, with a 10 year annualized dividend growth rate of 10.9% and a 5 year annualized dividend growth rate of 11%. The dividend growth in the last few years has slowed down to about 8% but considering the higher starting dividend yield of 6.1%, an 8% growth is still pretty solid. When you compare the dividend to the adjusted funds from operations (AFFO), the payout ratio went from about 80% in 2004 to about 70% in 2014. Considering the dividend payout has grown by 10.9% in 10 years, the lower payout ratio means OHI managed to grow its earnings at a higher rate than the dividend payout rate. This is a great indicator of a good management. If you look at OHI on Google Finance you'll notice that the PE ratio is 22.28, quite high for your usual dividend growth stocks, as we typically want to target a stock with PE ratio of 20 or lower. However, PE ratio is not a good number for measuring REITs, rather, we should take a look at the Price/Funds from operations (P/FFO) ratio. OHI's P/FFO ratio is roughly 12.5, which is in the middle range compared to other healthcare REITs. The stock price has dropped significantly from its 52 week high of $45.46. The current price level is very close to the 52 week low. Considering we're holding OHI for the long term, we decided to take advantage of the lower stock price, and add some shares to our existing holding.
One thing I really like about OHI is its lease and mortgage expiration schedule. When you look at their quarterly results and annual reports, I noticed that the weighted average lease maturity is 13 years. About 89% of OHI's portfolio expiration will not occur until after 2020, and very few will expire in the near term. 2018 is the only abnormality, with 6% of the leases expiring in that year. This should be considered as a great news, meaning the company will be able to maintain its solid earnings moving forward.
From Google Finance:
Ventas, Inc. is a real estate investment trust (REIT). The Company has a portfolio of seniors housing and healthcare properties located throughout the United States, Canada and the United Kingdom. The Company operates through three segments: triple-net leased properties, senior living operations and MOB operations. The triple-net leased properties segment invests in seniors housing and healthcare properties throughout the United States and the United Kingdom and lease those properties to healthcare operating companies under triple-net or absolute-net leases that obligate the tenants to pay all property-related expenses. The senior living operations segment invests in seniors housing communities throughout the United States and Canada and engages independent operators, such as Atria and Sunrise, to manage those communities. The MOB operations segment, acquires, owns, develops, leases, and manages MOBs throughout the United States. It invests in seniors housing and healthcare properties.
Earlier this year, VTR acquired privately owned Ardent Medical Services for $1.75 billion. Ardent is a premier provider of health care services and one of the ten largest for-profit hospital companies in the US. Just recently, VTR announced it would re-organize its portfolio by spinning off most of its nursing facilities to create a new company called Care Capital Properties (CCP). The spin off is expected to complete in August 2015. VTR shareholders will receive 1 share of CCP for every 4 shares of VTR, meaning we should expect 4 shares of CCP once this transaction is completed. Furthermore, it is expected the spin-off will result in a combined 10% dividend increase in both companies.
Recently VTR reported strong quarterly earnings, with net income increased by 2.4% and AFFO up 5% year over year. The occupancy rate is quite strong at 90.8%. VTR is expecting its AFFO to grow between 5 - 6% moving forward. VTR has a strong dividend growth history, with a 10 year annualized dividend growth rate of 8.6% and a 1 year annualized dividend growth rate of 8.4%. At current dividend yield rate of 4.7%, this kind of dividend growth rate is very solid. VTR has a P/FFO ratio of 14 which is in the mid-high range compared to other healthcare REITs. Just like OHI, the stock price has been seeing a downtrend recently. The price has bounced back slightly since the recent earnings call but still about 20% off the 52 week high price. For long term investors like us, this provides a great investing opportunity (man I fee like I'm repeating myself a lot here).
Both OHI and VTR share similar risks. Although the healthcare REIT sector is still quite fragmented, there are a few competitions out there. OHI and VTR can be considered as competitors when it comes to senior nursing facilities.
Another risk is the impending interest rates hike in the US. This could create some volatility in the stock price. However I believe the current stock prices for OHI and VTR already have the impending interest rate hike priced in, as we saw in the recent downward trend in the REIT sector. Furthermore, considering the economies outside of the US are in somewhat of a turmoil, the Fed may not raise interest rates until later half of 2016. It is also very possible the interest rates hike will get delayed further. I expect the REIT sector to recover from the downward trend in the near future.
I believe we purchased shares of two solid companies with a lot of future growth potentials. As the world population ages, I really like what the healthcare REIT sector can provide.
These purchases will add $116.56 into our annual dividend income.