Should senior living REITs be a part of your portfolio? Before exploring an answer to that question, it’s important to know exactly what a REIT, or real estate investment trust, is.

“A REIT is a company that owns or finances income-producing real estate,” according to the National Association of Real Estate Investment Trusts, or NAREIT. “Modeled after mutual funds, REITs provide investors of all types with regular income streams, diversification, and long-term capital appreciation. REITs typically pay out all their taxable income as dividends to shareholders. In turn, shareholders pay the income taxes on those dividends.” (For more, see Investing in REITs and How to Analyze Real Estate Investment Trusts.)

REITs can invest in very specific niches within the real estate sector. One such niche is senior housing. That brings us back to the question: Are senior living REITs a smart addition to your portfolio?

Senior Living REIT Demographics

There is no denying that many of us are getting older. Some 10,000 baby boomers are turning 65 every day. As many of these boomers age, they will want or need to move into more suitable housing for their situations. Many of these options fall under the umbrella of senior housing, which range from senior-oriented facilities offering independent living options to those offering assisted care in many forms.

The need for all types of senior-living facilities will continue to grow. A study by NAREIT economists yielded some interesting observations:

  • Seniors are moving into senior housing with more frequency than in the past, and those moves are occurring at younger ages than in the past. Part of this is driven by a great range of senior-living options, including those where there is no immediate need for assisted-living care.
  • While senior living is more common with older retirees, the most rapid growth is among those in the 70-to-79 age group.
  • Wealthier seniors have greater options in terms of senior living.

These and other demographic trends are favorable to senior housing REITs. The question remains: Are these a good investment? Like most investing options, the answer is that it depends.

Consider These Factors

Investing in publicly traded REITs is like investing in any other company. For starters, you should know who manages the company. What is the business/investing strategy? What is the company’s track record? In others words, you should have many of the same questions that you would ask and research before investing in Apple, IBM or any other individual stock.

Senior living REITs are largely in the healthcare REIT sector. The percentage of healthcare and specifically senior living REITs will vary from REIT to REIT.

Beyond the questions above, you should first find out how the REIT makes its money. Within this broad category, there are REITs that invest in senior-oriented apartments and communities, assisted living facilities and related properties, such as medical buildings.

Large healthcare REIT Ventas (VTR) has made a major bet on senior housing. Morningstar’s recent comments on the REIT echo some concerns about the future of senior housing: “The strong growth initially enjoyed at Ventas’ senior housing operating assets has slowed as levels of new competitive supply and uncertainty grows. Performance could continue to be tested if the supply/demand dynamic weakens.”

Like many trends we see across the business world when companies spot the potential for profit, they tend to jump into a business segment. Senior housing is no exception. While the demographics are favorable to senior-living facilities of all types, an oversupply could cut into their profitability and thus the profitability and cash flow of REITs investing in these properties.

Dividends and Income 

One of the features of most REITs is that they throw off significant dividend income. The Vanguard REIT ETF (VNQ), for example – an index fund tracking the MSCI U.S. REIT index – has a yield of 3.72% per Morningstar. Some of the major healthcare REITs, with significant senior housing holdings, according to Morningstar data, carry very solid yields in today’s low-interest rate environment:

  • HCP, Inc. (HCP) – 7.76%
  • Senior Housing Properties Trust (SNH) – 8.15%
  • Ventas (VTR) – 4.60%

The Bottom Line

Demographic trends certainly favor senior housing REITs and healthcare REITs with significant holdings in this sector. Before investing in them, however, it pays to consider several points.

First, while the dividend income of many of these REITs is very tempting in today’s low interest rate environment when yields are this high on some of these REITs, you need to ask whether they are sustainable and what additional risks are being taken to offer these yields. Second, higher interest rates are the enemy of all REITs, and investors need to ask themselves how an interest rate hike will impact any REIT they are considering. Lastly, while the demographic trends are favorable, it is important to stay on top of the supply of senior housing in relation to the potential demand.​​