Since they were conceived, the real estate investment trust (REIT) investment sector has shown an ability to help investors generate wealth and passive income. That’s because the REIT business model, which involves a corporation selling shares to investors then using that capital to buy income-generating property, lends itself to wealth-building and passive income.
While residential REITs may have been the first type of REITs, this business model has also shown it can be successful for other business sectors. One of the most potentially profitable sectors of REIT investing is healthcare REITs. Keep reading to find out how a healthcare REIT might be able to boost your investment portfolio.
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Table of Contents
- What are Healthcare REITs?
- Benefits of Healthcare REITs
- Risks with Healthcare REITs
- How to Invest in Healthcare REITs
- Largest Healthcare REITs
- Healthcare REIT ETFs
- Industry Overview
- Quarterly Performance Data
- All Healthcare REITs
- Investing in Healthcare REITs
- Frequently Asked Questions
What are Healthcare REITs?
Healthcare REITs operate in the same fashion as traditional residential REITs, but instead of buying and operating apartment buildings, they operate medical facilities. The REIT and its shareholders make money by renting that space to various healthcare providers.
Healthcare is not only a fast-growing sector of the economy, it’s one that is absolutely essential. That’s why healthcare REITs have so much potential to generate wealth for investors.
Examples of the kind of assets you might find in a healthcare REIT include:
- Hospitals
- Medical office buildings
- Senior living facilities
- Skilled nursing homes
- Outpatient care facilities
- Surgical centers
- Drug treatment centers
Benefits of Healthcare REITs
The most obvious benefit of healthcare REIT investments is necessity. Healthcare is something that everyone will eventually need in some form or fashion. In addition, there is a wide range of specialized care and medical services, all of which require space to operate. That means the healthcare sector isn’t going anywhere. Regardless of the state of the economy, healthcare facilities will be providing essential services to the populations they serve.
Another potential benefit of healthcare REITs is that many healthcare facilities, especially hospitals, are not only big but also of institutional quality. That’s one of the reasons REITs are so important to the healthcare sector. Without REITs and their investors, raising the necessary capital to build new healthcare facilities would be extremely difficult. The upside is that a big facility generates a lot of revenue.
Most leases on healthcare facilities are long term and fairly expensive. The healthcare REITs that own the assets, and by extension healthcare REIT investors, have locked-in revenue. By contrast, even the Class A multifamily assets in a residential REIT depend on hundreds — if not thousands — of tenants to sign one-year leases and renew them.
In an economic downturn, many residential REITs can experience increased vacancy rates or have to reduce rents. This eats into investor profits. But healthcare facility lease terms can last for years, sometimes even several decades. Many of them even have scheduled, regular rent increases locked into the lease contracts. This translates into consistent long-term revenue for healthcare REIT investors.
Most healthcare facilities have high-quality tenants. Whether it’s an entire medical group operating a hospital or a group of doctors in a medical park, the tenants are likely to be well-vetted, licensed, professional operations. Medical groups and doctors generally bill insurance companies or government programs like Medicare, both of which are likely to pay their bills.
Most healthcare facilities also offer essential services to the public, which means healthcare REIT returns should be reliable.
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Risks with Healthcare REITs
Healthcare REITs offer a wealth of potential benefits to investors, but that doesn’t mean they are without risk. The healthcare field is one that is always growing in terms of technology and capabilities. Facilities need to be able to keep up with the times. If a healthcare REIT has older or outdated assets that can’t support modern medical technology, it could have a difficult time securing tenants or lease renewals.
Healthcare facilities also offer specialized services. No matter what area of healthcare a particular facility serves, it won’t be easy to find new tenants if a vacancy comes up. That especially applies to larger facilities like hospitals. If a major healthcare provider opts out of a lease to relocate, a new hospital tenant won’t just be waiting around the corner like a new tenant for an apartment.
Healthcare facilities are also subject to a heavy regulatory structure, with requirements at the local, state and federal levels. It will be incumbent on healthcare REIT providers to stay in accordance with those regulations. Doing so is likely to be very expensive. Failing to do so could result in heavy fines, loss of certification or other punishments that can really damage investor returns. The management of the facilities must be done very carefully.
How to Invest in Healthcare REITs
One of the best aspects of healthcare REITs is that a lot of them are publicly traded. Any investor can buy shares without necessarily having to be accredited. Healthcare REIT shares can be purchased online through brokerage websites or mobile apps. If you’re looking for more professional insight or advice for your investment, you can also purchase healthcare REIT shares with the assistance of a stock broker.
Largest Healthcare REITs
Welltower Inc. (NYSE: WELL): Welltower is one of America’s largest healthcare REITs. This Toledo, Ohio-based REIT primarily owns and operates senior living facilities, rehabilitation facilities and continuing care providers throughout the United States. Most of Welltower’s facilities are newer Class A properties and cater to a client base that is well-insured.
Ventas Inc. (NYSE: VTR): Ventas Inc. is another one of America’s largest healthcare REITs. This Chicago-based REIT has assets in a number of healthcare fields, including senior housing, medical office buildings and research centers. Its assets are spread throughout the continental U.S. and Canada.
Healthpeak Properties Inc. (NYSE: PEAK): Healthpeak Properties is a Denver-based REIT. It specializes in Class A senior living facilities, medical office buildings and life science research facilities. This healthcare REIT is focused on delivering long-term growth to investors.
Healthcare REIT ETFs
Exchange-traded funds (ETFs) are large diversified investment offerings that have multiple holdings in several different REITs. There isn’t a pure healthcare REIT ETF that only holds healthcare REIT stocks. But many REIT ETFs have healthcare REITs in their portfolio.
iShares Residential and Multisector Real Estate ETF (NASDAQ: REZ) is a traditional REIT ETF that includes some healthcare REIT stocks in its portfolio. iShares Cohen & Steers REIT ETF (Cboe BZX: ICF) is another ETF from the same firm that is also invested in healthcare REITs.
Industry Overview
| Number of REITs | 15 |
| Average Dividend Yield | 5.21% |
| YTD Total Return | 1.56% |
| October Total Return | -1.53% |
| 2023 Total Return | -22.18% |
Quarterly Performance Data
| Financial Metric | Q3 2023 | 2023 YTD |
|---|---|---|
| FFO ($M) | $1,776 | $5,507 |
| NOI ($M) | $2,518 | $2,518 |
| Dividends Paid ($M) | $1,623 | $4,495 |
| Same Store NOI | 9.75% |
All Healthcare REITs
| Ticker | Company | ±% | Price | Invest | ||
|---|---|---|---|---|---|---|
Investing in Healthcare REITs
REIT investing has proven itself as a potential tool for helping investors build passive income. Healthcare REITs are definitely a sector worthy of consideration for investors. Healthcare providers offer the public an essential service, so healthcare REITs should generate consistent returns for investors. Although they are not without risk, they are certainly a potential avenue for investors to generate passive income.
Frequently Asked Questions
Q
Are healthcare REITs a good investment?
A
Healthcare REITs certainly have the potential to be good investments. Over 15 healthcare REITs are open for investment, which speaks to the investment potential of the sector. All told, healthcare REITs netted investors an average return of 16.21% in 2021, which is nothing to sneeze at.
Q
How do healthcare REITs do in a downturn?
A
The performance of healthcare REITs in a downturn depends heavily on what area of healthcare the REIT specializes in. Generally, primary care facilities like hospitals are resistant to market downturns because people’s healthcare needs don’t diminish in a bad economy. But a healthcare REIT that has many assets concentrated in facilities that offer elective procedures, such as plastic surgeries, may be more exposed to an economic downturn.
