The REIT Play In Healthcare

By Aaron Levitt | Updated September 02, 2014 AAA

While you can debate the merits and implications of the Affordable Care Act all day long, the truth is that even without the bill, the demand for healthcare is rising rapidly. That’s because our population continues to age at a hurried clip. Advancements in new drug therapies are allowing us to live much longer lives, while infant mortality rates decrease substantially. That older and growing population simply will require more medical attention throughout their extended years.

And when it comes down to it, more medical attention will require more hospitals, doctor's offices and assisted living facilities.

Luckily for investors, there’s a way for them to directly participate in the need for more medical office space. Healthcare real estate investment trusts (REIT) could be one of the best long term buys for portfolios.

Growing Old Fast

As a sector, the medical and healthcare-related REITs have consequently been one of the top performers in commercial real estate over the last few years. Aside from the group’s average higher dividends, the sector managed to post average annual total returns of 14% during each of the past three years. Those hefty returns outpace broad REIT measures like the iShares US Real Estate (NYSE:IYR). This continued outperformance has been driven by the recession resistant nature of healthcare. Unlike shopping malls, factories or office buildings, healthcare is not closely tied to job growth or consumer spending.

And the outperformance should continue well into the future.

As the nation ages and medical advancements continue to improve the quality of life and longevity, the prognosis for medical related real estate continues to get better. According to the latest U.S. census report, the number of Americans aged 65 and older is expected to more than double by 2060. By then there will be nearly 92 million Americans in that age bracket (20% of the overall population). Those above 85 years of age will reach 4% of the total population by 2060. Newer hospitals and doctor's offices as well as assisted living centers for aging retirees will need to be owned and operated.

Meanwhile, the situation overseas in the developed world is looking quite similar. Europe and Japan are aging just as fast. To that end, many healthcare REITs have gone on property acquisition sprees across the pond. Owning less than 25% of all medical properties in the U.S., Europe and Canada, there’s plenty of expansion growth available. That will drive dividends and multiples higher.

Making The REIT Choice

Given the growth prospects, dividends and stability of the healthcare-focused REITs, investors may want to consider adding them to a portfolio. And now could be a good time to do that. According to RBC Capital Markets (NYSE:RY), the sector is currently trading for valuations well below its historical averages.

A good start could be industry giant and aptly-named Health Care REIT (NYSE:HCN). The firm owns nearly 1,200 senior housing, skilled nursing, hospital and medical office facilities. Additionally HCN has expanded that portfolio into Europe and Canada with a series of major property buys. The real kicker for HCN is that 82% of revenue comes from private pay sources. That means the firm's hefty 5.5% dividend isn’t tied to government reimbursement or policies. Likewise, equally as large rival Ventas (NYSE:VTR) receives only a small portion of its revenue from government sources.

Another prime choice could be Healthcare Realty Trust (NYSE:HR). The firm continues to beat on FFO projections and cash flows. That’s due to the REIT's strategy of owning medical office buildings adjunct to major hospitals. That provides HR with a very stable tenant base and higher occupancy rates. It also provides investors with a juicy 5% dividend yield. Following a similar strategy is Healthcare Trust of America (NYSE:HTA).

Already the healthcare REIT sector has higher average yields than many other property types. But even here, investors can get large payouts. Senior housing and assisted living facilities owner Senior Housing Properties Trust (NYSE:SNH) pays 7% in dividends, while medical property loan originator Medical Properties Trust (NYSE:MPW) pays 6.4%.

The Bottom Line

At the end of the day, our population is aging quite rapidly and will require plenty of medical care. That could mean some serious big bucks for the owners and operators of hospitals, doctor’s offices and assisted-living facilitates. For investors betting on healthcare, REITs could be the prescription for portfolio gains. The previous picks- along with HCP (NYSE:HCP)- make ideal selections in the sector.

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