One of the chief concerns for many investors as they enter into retirement is healthcare. According to the Center for Medicare and Medicaid Services (CMS Research), individuals over 75 spend nearly 200% more on healthcare expenditures than the average population, and generalized healthcare expenses have been rising significantly faster than the overall economy or personal incomes for more than 40 years. Facing rising healthcare costs is certainly a scary proposition. Over the longer term, broad healthcare investments such as the First Trust Health Care AlphaDEX (ARCA:FXH) should continue to do well. However, as America's population continues to live longer, they will require more medical services. More medical service equals more medical real estate. For investors, these assisted living facilities, hospitals and doctor's offices could be the best way to play our aging population.
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Big Potential from Medical Property
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. Overall, the number of Americans age 65 and older is expected to grow 36% between 2010 and 2020. That compares to just a 9% growth rate for the general population. Newer hospitals and doctor's offices for practicing medicine as well as assisted living centers for aging retirees will need to be owned and operated. For investors, there are plenty of opportunities to participate in the growth of these facilities.
There are a number of real estate investment trusts (REIT) designed to take advantage of this long-term macroeconomic trend, and so far they've been great performers. Over the past 10 years, healthcare focused-REITs have delivered annualized total returns of 19.9%. Over the same time period, broad REIT measures like the Vanguard REIT Index ETF (ARCA:VNQ) only returned an average of 11.4% per year. In addition, these healthcare REITs pay higher overall dividends than their wide reaching real estate twins. The average medical property firm currently yields 5%, while the Vanguard ETF currently yields 3.32%.
The main reason for their outperformance has been the recession resistant nature of healthcare. Unlike shopping malls, factories or sports complexes, healthcare is not closely tied to job growth or consumer spending. While there are some worries about the effects of healthcare reform and dwindling government-based health insurance programs on the sector, they seem overblown. At the end of the day, when it comes down to buying a sweater or life sustaining medicine, consumers will go with the obvious choice. In addition, many medical REITs have been expanding beyond "health insurance' related properties and into more patient out-of-pocket facilities like senior living facilities and nursing homes. For more information, see Recession And Depression: They Aren't So Bad.
Betting Big on the Sector
For investors, REITs like National Health Investors (NYSE:NHI) stable cash flows, a recession resistant nature and long-term growth profiles makes them an ideal candidate for an income portfolio. There are plenty to choose from and many offer big dividends as well as great long-term gain potential.
Like many sectors of the market, mergers and acquisitions seems to be a growing trend. Large firms with strong balance sheets continue to snatch-up smaller rivals. The healthcare property sector is no different. Cash cow Health Care REIT (NYSE:HCN) made $6 billion dollars' worth of property investments and acquisitions throughout 2011. These investments have helped the REIT post a sub-sector leading 21% total return in 2011 and 4% dividend increase for 2012. The company recently announced a $925.2 million deal to buy senior-housing properties in Canada, which also drive FFO growth. Likewise, Ventas (NYSE:VTR) made $11 billion in property purchases in 2011 which have delivered strong results. The Chicago-based REIT currently yields 4.4%. Both firms represent great starting points for medical REIT investors.
For those investors looking for higher yields, both Sabra Healthcare REIT (Nasdaq:SBRA) and Medical Properties Trust (NYSE:MPW) could be the ticket. MPW provides capital to facilities through long-term triple-net leases, while Sabra functions as a more of a traditional property owner. Both stocks currently yield more than 8%.
The Bottom Line
America's aging population will ultimately require more medical focused real estate. For investors, the sector can provide high stable cash flows as well as growth potential. The previous stocks along with HCP (NYSE: HCP), make ideal starting points for a portfolio.
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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.