- Healthcare REITs own and operate a portfolio of healthcare-related real estate, like medical buildings, hospitals and senior living communities.
- REITs provide investors with a simple vehicle to gain exposure to real estate without owning property.
- REITs must follow specific rules and repay 90% of their profits to shareholders are dividends.
- 5 stocks we like better than Healthcare Realty Trust
One lesson markets have taught over the last few years is that stocks can get volatile immediately. Investors frequently look toward companies with inelastic products and services when major indices are wobbling.
Utilities and consumer staples are two of the most commonly selected sectors for investors seeking stability, but real estate investment trusts (REITs) are another area where investors can lean if markets get choppy. And one area of the REIT market expecting growth is the health care REIT.
This article will explore how healthcare REITs work (especially the American healthcare REIT) and explain why healthcare infrastructure could significantly boost in the coming decades.
What is a Healthcare REIT?
What are healthcare REITs? A real estate investment trust, or REIT, is a company that owns income-producing properties. REITs can be public or private, and many own and operate the properties in their portfolio. Much like the broader market, REITs can invest in various sectors, from large-cap businesses to personal dwellings.
A healthcare REIT is a company that invests primarily in healthcare-related facilities and properties, such as hospitals, doctor’s offices and nursing homes. The healthcare industry is vast and complex, and that trend should increase as our population ages.
How Do Healthcare REITs Work?
Some REITs invest in commercial spaces like malls and retail, others in multi-family homes or apartment buildings. But while the real estate usage varies, each REIT has some similarities due to the unique structure of the underlying security.
Here’s how REITs work in the United States. In 1960, Congress altered the Cigar Excise Tax bill to allow the formation of real estate investment trusts, which enabled retail investors to add real estate to their portfolios without owning property or going through expensive intermediaries. The SEC has several rules regarding what is and isn’t a REIT, but the two most important ones for investors are:
- REITs must hold at least 75% of all assets in real estate or cash (i.e., Treasuries).
- REITs must return at least 90% of annual taxable income to investors via dividends.
In addition, the company must have at least 100 shareholders, and at least 75% of its income must come from rent, mortgage payments, property appreciation or other real estate-related sources. Of course, the company also gets to write off its dividend payments each year, so REITs frequently pay out 100% of income as dividends and ultimately eliminate their corporate tax bill. REITs are often a win-win for companies and investors due to their unique tax treatment and ability to allow investors to add real estate exposure to their portfolios without the hassle of property management.
Types of Healthcare REITs
You can break down healthcare REITs by property type or category. The different categories include equity, mortgage or mixed REITs. Mortgage REITs have different risks than equity REITs since they supply loans and hedge against interest rate and credit risk with derivatives.
In most cases, healthcare REITs fall into the equity categories, but make sure you understand how the company works before investing. REITs can be public and private, but we’ll discuss public REITs available on major exchanges like the NYSE for this article.
Nursing Home REITs
Nursing homes are in the “custodial care” business, which means they provide the highest level of attentive care outside a hospital. Not to be confused with assisted living centers, nursing homes offer round-the-clock care and help with basic facilities like dressing, bathing and eating. Nursing home REITs own properties uniquely constructed to handle this acute level of care.
You probably don’t need a financial advisor designation to determine what real estate a hospital REIT invests in. Hospitals are large, capital-intensive structures where patients don’t stay long-term and often rely on Medicare and Medicaid payments. As such, hospital REITs like the $6 billion market cap Medical Properties Trust Inc. NYSE: MPW have lagged the sector and tend to be volatile.
Senior Care REITs
A senior care REIT invests in properties like senior living communities and assisted living facilities, which may sound similar but have very different care levels. Senior living centers and communities are usually self-sufficient properties for people 55 and up. Assisted living facilities have full-time staff, including doctors, nurses and orderlies who provide services to disabled people or elderly adults who can no longer live independently. Some senior living REITs combine properties from both types, and some properties include both independent and assisted living.
A medical REIT invests in doctors’ offices, outpatient centers, lab services, research and life sciences and other types of medical real estate. In many businesses in the medical industry, renting a property from a REIT is more efficient, which handles the financing and maintenance of the building. This allows the medical company to focus more on its mission, and the REIT healthcare uses the extra capital to expand its portfolio.
How to Invest in Healthcare REITs
Investing in publicly-traded health care REITs is as simple as buying any other public company or ETF. Plenty of companies trade on the major US exchanges like the New York Stock Exchange or NASDAQ, and you only need to buy a single share to get started. Here’s how to make an investment in healthcare REITs:
Step 1: Plan your healthcare REIT investment.
Investing in REITs requires a plan just like any other stock investment. What’s the purpose of adding healthcare real estate exposure to your portfolio? Are you holding these assets in a retirement account or a taxable brokerage account? And how much capital are you planning to put into a REIT? You need to understand the answers to these questions before buying any assets.
Step 2: Research different companies.
The healthcare REIT sector isn’t vast, but there are plenty of companies to choose from, and they all have different properties in different locations. Are you looking for a specific property type, like a senior living community or assisted living facility? What places would you prefer for the real estate? Research the purpose and portfolio of each company or look through the prospectus of any REIT ETF you consider.
Step 3: Buy your REITs (or REIT ETFs).
Once you’ve done due diligence on the companies or funds that fit your criteria, you must select the assets you want to buy and add them to your portfolio. Like any typical stock, you can buy publicly traded REITs through your brokerage account. If you’re looking at private REITs, you must go through an intermediary. Determine how much you want to invest in each company or fund and execute your trade.
Step 4: Track your investments, adding or reducing when needed.
Once you’ve added healthcare REITs to your portfolio, you must manage your account and keep your allocation aligned with your goals. Healthcare REITs aren’t the most volatile asset class, but it’s still important to keep an eye on your investments and rebalance your portfolio if your healthcare REIT holdings become too overweight or underweight. Setting rules ahead of time will keep you from making an emotional decision should you experience higher-than-expected gains or losses.
Pros and Cons of Healthcare REITs
Are healthcare REITs a good investment? Like any asset, these stocks have benefits and drawbacks that investors must know before investing capital. Here are a few pros and cons of healthcare REIT investing:
The benefits include:
- High dividend payouts: Since REITs must return at least 90% of profits to shareholders, dividends are a consistent source of income for investors.
- Growing market: The baby boomers are aging, and the need for medical and senior care facilities should skyrocket in the coming decades. In a recent JP Morgan survey, 91% of healthcare executives anticipate revenue holding steady or increasing in 2023.
- Easy exposure to real estate: Managing a property can sometimes be tedious and even difficult. By investing in a REIT, you don’t need to concern yourself with the day-to-day operations of a house or building but can still benefit from rent payments.
The downsides include:
- Dependence on government programs: Many medical businesses depend on income from Medicare, Medicaid or other federal programs.
- Tenants: Unlike some types of commercial real estate, medical buildings like hospitals or labs are built for specific purposes. Finding replacement tenants should a move occur can be difficult and time-consuming.
- Interest rates: Since most properties are financed, REITs have heightened sensitivity to interest rates. Rising rates increase borrowing costs, which means REITs must use more capital to service debt payments in high-rate environments.
Largest Healthcare REITs
Healthcare REITs don’t have a massive market sector, but plenty of large-cap companies are in their ranks. Here are five of the most prominent healthcare-related REITs trading on public exchanges on our healthcare REITs list, including the largest healthcare REIT, Welltower.
Welltower Inc. NYSE: WELL is the largest healthcare REIT on major U.S. exchanges, with a market cap of over $40 billion and properties in the United States, Canada and the United Kingdom. Welltower invests mostly in senior housing and outpatient medical facilities.
Ventas Inc. NYSE: VTR has a market cap of nearly $20 billion and has a vast portfolio of healthcare estate throughout the United States, Canada and the U.K. Ventas owns and operates over 1,200 properties, including REIT senior living communities, hospitals, life science and research centers and medical office buildings.
Healthpeak Properties Inc. NYSE: PEAK is a $12 billion-market-cap company based in the United States. It owns three types of healthcare real estate: life sciences, medical office buildings and continuing care retirement communities.
Omega Healthcare Investors
The Omega Healthcare Investors NYSE: OHI REIT invests in skilled nursing facilities, assisted living facilities, independent living communities, acute care centers and medical office buildings. The company has a market cap of over $7 billion and properties in 42 different states, plus a handful in the U.K.
Healthcare Realty Trust
Healthcare Realty Trust Inc. NYSE: HR is another $7 billion U.S.-based REIT focusing on outpatient medical facilities and services. The company currently owns over 700 outpatient care properties in 35 different states.
Sabra Healthcare REIT
The Sabra Healthcare REIT NASDAQ: SBRA has a $3 billion market cap and a diverse medical real estate portfolio. Sabra owns and operates buildings and facilities performing skilled nursing, senior housing, behavioral health and more. The company has 396 properties across the United States and Canada.
Healthcare REIT ETFs
While there are no ETFs geared specifically toward healthcare REITs, you can invest in healthcare ETFs with exposure to companies that own property. For example, the iShares Residential and Multisector Real Estate ETF NYSE: REZ holds many healthcare REITs in its portfolio, like Welltower, Ventas and Healthpeak Properties. Research exactly how much exposure various REIT ETFs have to the healthcare industry before buying.
Healthcare REITs Offer Intriguing Upside
The healthcare industry is expecting growth, which means new facilities and senior living communities will be needed in the future.
Healthcare REITs offer steady dividends in a sector primed for growth, but everyone has different goals and healthcare REITs may be more appropriate for some investors than others. Despite strong tailwinds, healthcare REITs aren’t a slam dunk — you need a long-term view for this asset class.
There’s no doubt that demographics favor healthcare real estate. However, you should consider holding these companies until you need senior living facilities yourself.
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