The healthcare real estate investment trust (REIT) sector offers an object lesson in the economics of supply and demand. Demand for healthcare is fairly inelastic; it's often a necessity, not a discretionary purchase, and consumers buy it regardless of price. For that reason, healthcare REITs have historically been core holdings in many retail and institutional investors' portfolios, especially those geared towards long-term growth. The stability of the healthcare sector means that healthcare REITs are more recession-proof and offer less risk than other types of REITs.
The need for healthcare services will always be there and that need is expected to grow as the population grows. That rise in demand means an increase in supply; more doctors' offices, hospitals, testing facilities, and rehab centers.
The Rising Demand for Healthcare
Several factors have caused the current boom in the healthcare sector but none more so than the aging baby boomer population. By 2030, all boomers will be 65 or older, and due to longer life expectancy, they will be living longer than older generations before them. By 2034, older adults are estimated to outnumber children under 18 for the first time, according to the U.S. Census Bureau.
The Affordable Care Act (ACA) is also driving demand. Approximately 57% of ACA exchange enrollees were previously uninsured, most without coverage for two or more years. As healthcare utilization increases, demand for all types of providers will increase, including doctors and non-physician workers; more consumers will visit their doctors more often, and doctors will need more support staff and infrastructure to meet that demand. Extra personnel and equipment mean more office and operating space.
According to Ventas, Inc. (VTR), one of the largest healthcare REITs, the domestic environment for U.S. healthcare real estate remains positive as the industry offers significant growth opportunities.
The Healthcare REIT Universe
Approximately 17 healthcare REITs exist in the U.S. Most specialize in various types of property sub-sectors including senior housing (primarily assisted and independent living), skilled nursing, medical office buildings, hospitals, and life science labs.
There are three large-cap REITs that derive their revenues from a broad base of sub-sectors. Known as "diversified healthcare REITs," these vehicles have a combined market capitalization of $70 billion and a combined portfolio of approximately 4,000 properties. These REITs are Healthpeak (PEAK), Ventas, and Welltower (WELL).
The smaller healthcare REITs specialize in a pure play platform that provides a “circle of competence.” By staying inside the circle, the pure-play REITs have been able to generate strong returns.
These returns, for example, are evidenced by the year-to-date performance of the following REITs:
Healthcare REIT Dividends
The most meaningful metric for the REIT sector is dividend performance. While many REITs were forced to cut their dividends during the Great Recession, none of the large-cap healthcare REITs did. In fact, Healthcare Peak has been paying dividends for 30 years in a row.
Other healthcare REITs that have demonstrated a steady flow of increased dividends include Universal Health Realty (UHT), which increased dividends 22 years in a row, National Health Investors (NHI), six years in a row, and Omega Healthcare Investors, four years in a row.
The Bottom Line
Steady demand for healthcare services explains why healthcare REIT shares have a solid track record. Looking forward, favorable demographic trends should propel healthcare REITs for quite some time. Healthcare REITs can provide investors with both safety and growth and the dependability of their dividends can help you sleep well at night.