Sector Overview – Healthcare REITs

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.

Terminology

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.

Healthcare REITs

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.

Healthcare-REITs-1

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.

Healthcare-REITs-2

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.

Healthcare REITs - Market Cap

Healthcare REITs – Market Cap

Healthcare REITs - P/FFO

Healthcare REITs – P/FFO

Healthcare REITs - Yield

Healthcare REITs – Yield

Healthcare REITs - 5-yr DGR

Healthcare REITs – 5-yr Dividend Growth Rate

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.

Healthcare REITs - Yield vs 5-yr DGR

Healthcare REITs – Yield vs 5-yr DGR

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).

Conclusion

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.

Further Reading

Full Disclosure: Long OHI, VTR. My full list of holdings is available here.

24 thoughts on “Sector Overview – Healthcare REITs

  1. Another excellent post. I remember considering SNH before settling on OHI. This is indeed a lucrative sub-sector and one that will only grow in time. Thanks for sharing.

    – HMB

  2. The Broke Dividend Investor says:

    I agree RM2R. I just bought some more Ventas this morning.

    In my opinion, VTR, OHI, and LTC are the three best in class. Only problem is LTC froze its dividends 2 years ago! But I guess that monthly payment makes up for it.

    • Good call with VTR. I initiated a position last month on VTR – which was my second healthcare REIT after OHI. LTC hasnt raised divs since fall 2013, but the streak isnt lost yet. As long as they raise their divs this year…they are still good. But yes, the current divs paid monthly are attractive.

      R2R

    • I was working off the SNL US Healthcare REIT Index list. I think you just gave me some more homework for another post about the Canadian space. Will run the numbers and share that in the coming days.

      cheers
      R2R

  3. Tim Collet says:

    This is an excellent overview of the U.S. healthcare REITS, but I too would love to see something similar for the Canadian REIT market, as I own a number of the U.S. REITS you have mentioned, but only Chartwell REIT in Canada, but GREAT article…thanks

    • Glad you liked it. Ive been looking into the Canadian list – just found two – CSH.UN and NWH.UN. Looks like MOB.UN merged with NWH.UN earlier this year and HLP.UN was bought out by HCN last year. Any other Canadian healthcare REITs that Im missing?

      R2R

  4. JC says:

    This is a great overview of the sector. I especially like the property type breakdown because theres a big difference brtween what each HC REIT contaibs. I also like the charts comparing all the companies together at once. I own HCP, OHI, and VTR so I’m quite bullish on the sector.

  5. Thanks for creating this R2R. I’m gonna grab 4 of these US healthcare REits and a couple Canadian ones like Chartwell, and Extendicare for my daughters portfolio. I’m moving into more Healthcare now as I see this sector a solid space. Thanks for taking the time. Keep up the hustle my friend and best wishes. Cheers!

    • Healthcare REITs are great investments, DH. They are focused on one area of the economy and I think the demographics support the investment in the area. I am not familiar with Extendicare…will have to check it out. Thx for bringing it to my attention.

      cheers
      R2R

    • HCN is a solid company – great business and well run. Same with VTR. HCP has a lot of issues that need to be resolved before being called safe. But theres a potential for a huge reward that comes with the risk.

      Happy investing!
      R2R

  6. Tim Collet says:

    I follow Brad Thomas for US REITS, and own a number of the REITS he follows, including HCP, which does have a few issues as R2R has suggested, but the risk reward seems well worth taking…

  7. Nice overview, I’m putting OHI on my watch list. I looked for a healthcare REIT closer to home but the only thing I could find in my country was one with a market cap of barely 175 million EUR and illiquid trading.

    • There are a few US-listed healthcare REITs which have exposure to the European market. HCN, HCP and VTR have some exposure UK. HCP is also looking to expand in continental Europe as per the plan from the management. The other company that might interest you is MPW – they have a pretty big operation in Germany.

      cheers
      R2R

  8. Great writeup on healthcare REITs. The aging Baby Boomers definitely make it a safe play. I bought LTC sometime ago, but now I am setting my sights on either OHI or HCP. I’m trying to decide which works best I’m terms of yield, dividend growth, and P/FFO. This post is one of the things I’m going to have up when it comes time to make a decision.

    Every time I see OHI, I read it as Ohio. Am I the only one? I can’t be the only one.

    Sincerely,
    ARB–Angry Retail Banker

    • Hey ARB,
      LTC has quite a record there and its a company that looks interesting, although I havent dived into their financials and read up in detail yet. They havent raised their dividends since 2013 though, so if they dont raise their dividends this year, the streak will be lost. OHI is in a great spot – great growth company and also yields very well. It does look like Ohio, doesnt it 🙂
      HCP has some issues with the HCR Manor problem…so look out for that before you make a decision.

      Best wishes
      R2R

  9. R2R,

    Thanks for the review of healthcare REITs. It pointed out several important points of information that any investor should consider. Thanks again for posting.
    Dennis McCain.

  10. Pingback: Recent Buy

Leave a Reply

Your email address will not be published. Required fields are marked *