Healthcare REITs provide a great investment opportunity that has caught the attention of investors over the last decade or two. The focus of these real estate companies is, as the name suggests, on healthcare. Companies in this sector hold interest in senior housing facilities, skilled nursing facilities, medical office buildings, hospitals etc. Some of these companies may hold interest in only one or two of the mentioned building types, while others may be more diversified. My Sector Overview – Utilities post generated a lot of interest from readers and I decided that a Sector Overview – Healthcare REITs would provide some good visibility for investors considering this sector.
Why Invest in Healthcare REITs
The case of investing in healthcare REITs is really strong when one simply looks at the demographics. The richest generation — the baby boomers — is now starting to retire. According to this 2010 research report from Pew Research, 10,000 baby boomers will turn 65 each day for 19 years! Baby boomers make 26% of the total US population, and considering that most of them will require long-term care as they get older (our elderly now live longer thanks to the advancement in health and medical care), the investing case is pretty sound.
The whole healthcare REIT sector is estimated to be a $1T market (yes, $1 Trillion…that’s not a typo) and only 15% of the market is exposed via publicly traded companies. So, the market is quite fragmented and consolidations, spinoffs, mergers and acquisitions can be expected to ramp up over the coming years providing shareholders with significant gains.
Senior Housing Facilities – Senior housing facilities are a special kind of care designed to provide comfort and support to people who need that extra care. These facilities include pain and symptom management as well as physical care. These facilities can include assisted living (AL) or Independent living (IL) facilities.
Skilled Nursing Facilities (SNF) – These state-licensed long-term care facilities offer 24-hour medical care provided by registered nurses (RN), licensed practical nurses (LPN) and certified nurse assistant (CNA). They also are required to have a house physician. This facility cares for the very frail residents who are totally dependent on nursing care. This facility typically has a short-term rehabilitation unit for residents needing rehab between hospital and home.
Medical Office Building (MOB) – Office and laboratory facilities constructed for the use of physicians and other health personnel. MOBs are an integral part of delivering a continuum of care, whether that’s a private development model or a partnership between a hospital and private practices. Facilities in this category include a wide variety of building types such as health and wellness centers, outpatient medical clinics, research facilities aka life sciences buildings leased by pharma companies etc.
Hospitals – an institution providing medical and surgical treatment and nursing care for sick or injured people.
Other – The other category in this article can refer to any type of facility that does not fit into the above categories, land (undeveloped) investments, other investment and/or partnerships etc.
According to SNL US Healthcare REIT Index, there are 17 companies that operate in the space.
Each of the companies below specializes in different areas or is well diversified across sectors. Following table shows the breakdown where data is available (some breakdowns are provided as percentages). Note that most companies simply lease out (triple net lease) and operate purely as a REIT company, while some companies have a mix of leasing out the properties and also manage operations or sometimes partner with others.
The sector is made up of a three megacaps ($15B+), six companies in the $2B-$8B range and the rest smaller than $2B market cap.
The healthcare REIT sector provides a broad range of investment opportunities with various varying market caps, yields, P/FFO (Price to Funds From Operations) ratios, dividend growth rates and credit rating. In order to put things into perspective, the following charts are provided.
Even with the charts above, it might be hard for investors to pick a company just based on dividend yield amount and dividend growth rate. In order to help understand and put things into perspective, I like to plot the current yield against the 5-yr DGRs. This provides me with a view to compare how companies are performing with respect to each other. Note that only companies with yield or 5-yr DGR value are included in the chart below.
The chart itself is fairly easy to understand. The x-axis represents the current yield and y-axis represents the 5-yr DGR. As a dividend growth investor with a long term investment horizon, I look for equities either high on the y-axis (good DGR) or far to the right (within reason…as being too far to the right can be a red flag). As the dividends rise, year after year, those equities will start moving to the right (when considering yield-on-cost).
Healthcare REITs provide a lucrative investment opportunity for income and dividend growth focused investors. The demographics and the sector fragmentation provide strong investment cases for the sector. As mentioned, only a handful of companies make up the sector and the ongoing consolidation, M&A, spinoffs provide great potential investment returns for investors. This article provides an overview of the sector and hopefully put things into perspective for potential and current investors. Of course, past performance does not guarantee future performance, so each company will need to be considered individually. Hope you found this article and the data useful. If you feel that some data was confusing, please make sure to leave a comment below as the feedback helps me understand and improve my future articles accordingly.
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Full Disclosure: Long OHI, VTR. My full list of holdings is available here.