Publicly traded healthcare REITs can be an interesting opportunity for investors in the stock market because they have dual exposure to two favorable themes: real estate and healthcare spending.
Exposure to both themes are attractive to investors because (1) the real estate market can sometimes diverge from the stock market, making it a good investment in some bear markets, and (2) aging baby boomers and expanded life expectancies are driving higher demands for healthcare spending.
There’s various types of REITs (Real Estate Investment Trusts) within the healthcare space which generally profit from these trends, including:
- Senior housing
- General acute care hospitals
- ER/ urgent care facilities
- Medical office building (MOBs)
- Skilled-nurse facilities (SNFs)
- Mental institutions
- Other outpatient facilities
And within these main types of buildings/ real estate, there’s a variety of ways that the REITs themselves can make money.
A REIT can own and operate a facility, simply own the land and task the tenant with operating and maintenance costs, or provide additional financing options on top of standard tenant agreements.
When a REIT owns the land but requires its tenants to maintain the property and pay associated expenses such as taxes and insurance, this is called Triple Net Leasing, or NNN. Investors looking at healthcare REITs may prefer the NNN model as it frees up capital for the REIT to expand, rather than having to tie it up in its properties. Of course, there’s risks associated with NNN, which REITs work to mitigate during its regular course of business.
Many landlord-tenant agreements in the healthcare space tend to be long term (5-15+ years) and have steady rent increases (“escalators”) within the agreement.
These rent escalators can either be fixed or tied to an index such as the inflation-indexed CPI.
Why Would a Hospital, Medical Office, or Facility Want to Use a REIT?
The choice to rent vs own real estate is as personal to a business as it is to an individual.
There are some pros and cons to owning, operating, and maintaining a business’s properties—and those can vary depending on each particular business (or non-profit) and its management.
Some examples of the “pros” for a business to own real estate include:
- A well picked location can result in the price of the asset appreciating
- Future savings in rent payments once the property is paid off
- Complete control of a property, meaning there’s little chance you can be forced to relocate
Some “cons” of owning real estate, which are “pros” to renting from a REIT:
- Financing for commercial real estate is often limited, which can hinder growth
- It may be harder to exit unprofitable locations if the real estate was purchased
- Owning the land can lock-up a lot of equity in real estate, which isn’t always very liquid
- Capital might earn better returns if reinvested in the business instead of real estate
Because of these inherent needs and limitations for businesses, there will likely always be a need and demand for the services that REITs provide.
This means that although commercial real estate is a zero sum game, there’s still room for growth for each individual REIT if it can maintain more efficient business models and earn higher returns compared to its cost of capital.
Various REIT specific metrics can help investors determine those things with the companies they analyze, such as:
- REIT Valuation: Methods, Metrics, and Analysis (Simplified)
- REIT Cap Rate Formula with Real-Life Examples [STOR, ADC, NNN]
REITs, Dividends, and Fundamentals
One last thing to mention about REITs before we dive into these companies.
Because of the way that REITs are structured, they must eventually pay out 90% of their earnings in dividends in order to stay qualified as a REIT. So unless a REIT is struggling with its profitability, buying its stock usually means receiving a dividend with it.
And REITs tend to have higher dividend yields than other stocks, because of the requirement to pay so much in dividends.
But there’s a tradeoff here—since a REIT can’t expand through reinvesting most of its earnings, it must acquire its assets by issuing debt or shares.
So while a REIT might have much higher dividends than a stock, it also tends to be either much more heavily diluted or much more levered.
Its cash flows are generally much more stable too, since rent agreements are generally one of the last things their tenants want to default on.
Finding a good REIT all comes down to finding the right balance between high growth, a good valuation (and dividend yield), and prudent leveraging and dilution.
Overview of the Healthcare REIT Industry
As of today, there are roughly 17 publicly traded REITs in the Healthcare Facilities industry (according to finviz):
Because of the dividend requirements discussed above, all 17 have a positive dividend yield as I write this. The REIT market as a whole has also been beaten up as of late, particularly because of the effects of COVID driving many businesses (and even hospitals) into bankruptcy.
We can’t possibly hope to cover the whole industry at this point, but I’d like to analyze a few of the top stocks in the space to give a broad overview.
Hopefully looking at some of the top players gives a good reference point for further analysis, either with the same names, some smaller names, or some names in the future.
Analyzing the Top Healthcare REITs and Their Business Models
Right off the bat, we want to get a broad sense of some of the leaders in the industry and exactly what sphere of healthcare they play in.
I decided to eliminate some companies right off the bat due to concerning trends in their Debt to Equity (or total liabilities to assets).
Among the leaders which still seem to have a healthy balance sheet (at least one that is still trending in a decent direction):
WELL—Senior housing and post acute outpatient care
OHI—skilled nursing, assisted living, skilled nursing facilities (SNFs)
HTA—medical office buildings (MOBs) leader
DOC—also an MOBs competitor
I was able to find the synopses of each these REITs based on their Business Overview sections of their 10-k’s.
You can also use a free tool such as quickfs.net, which usually sources a company’s Business Overview in the “Business Description” tab of a ticker’s homepage.
Because I personally see COVID as a long term shift in consumer behavior as it relates to senior housing, I’m much more inclined to avoid those types of stocks until financial data proves that many seniors are comfortable living in those types of facilities again in a pre-pandemic capacity.
Keep in mind that many of these healthcare REITs have not outperformed the S&P 500 over the last 10 years, and that was even pre-pandemic with much higher occupancies.
Though the catalysts for growth remain attractive, actual growth is still tough to come by for some of these REITs and could be reflective of an intensely competitive industry (with lots of capital fighting for few properties).
Comparing Healthcare REITs Revenue Growth Rates
Keeping in mind the tough environment for REITs compared to the general prosperity for other parts of the stock market and economy, let’s try and separate the wheat from the chaff in the industry.
In other words, let’s compare how some of these companies were able to grow over the past 10 years, and then evaluate some of the best performers to see if top performance is likely to be sustained.
It doesn’t make much sense to try and pick winners from the losers, I’d rather apply Newton’s law here: “objects in motion tend to stay in motion”.
I think it’s easier to find those kinds of stocks rather than comeback story stocks, even if it means slightly less upside potential. That said, great past performance never guarantees future results, which is why the need for further analysis is so crucial after filtering the list down.
Here’s the median revenue per share growth for each REIT over the last 10 years.
- WELL: 5%
- VTR: 1.7%
- MPW: 6.5%
- OHI: 3.8%
- HTA: 3.3%
- HR: 0.5%
- DOC: 5.6%
I used revenue per share instead of revenue because remember, we have to account for share dilution when looking at REITs. Great revenue growth isn’t that impressive if it doesn’t result in incremental revenue per share (and earnings per share) growth for investors.
If you’re following along at home, you can use the Key Ratios section to find revenue per share and quickly copy+paste those values into Excel, and use a =MEDIAN() function to calculate the median in a fast and efficient way.
Based on the data above, I think it’s safe to eliminate VTR and HR from our list.
Not to say that these companies might not make a comeback later on, but that it’s not a bet I’m willing to take with my hard earned money.
Let’s do a basic valuation check, as a screening tool, to see if any of these REITs are trading too high to even be considered, and then dive deeper. I’m using Gurufocus to quickly reference their P/FFO (use FFO instead of FCF as described in this REIT guide).
- WELL = 27
- MPW = 15
- OHI = 16
- HTA = 18
- DOC = 17
Right off the bat, WELL’s P/FFO seems a bit high for my tastes especially considering their median revenue growth per share was only 5%, which is cause for concern but not necessarily a deal breaker yet.
Everything else seems reasonably priced as far as a basic valuation multiple goes, enough to at least warrant a deeper in-depth analysis and then possibly a more detailed valuation model.
Deeper Dive: A Select Few Healthcare REITs
To get a better sense on what really makes each of these REITs different from each other, we’ll want to read the 10-k thoroughly and find places where the companies have unique features.
I’ve done this ground work already, so I’ll highlight some of my observations from my notes.
Feel free to do your own, and make your own conclusions, as well.
Welltower Inc. (WELL)
Has the following revenue stream breakdown.
- Seniors housing – 37.6%
- Triple-net – 37.2%
- Outpatient – 25.2%
The high exposure to seniors housing brings me concern, and in addition to my other previous concerns eliminates them from consideration for me.
Medical Properties Trust (MPW)
Has some geographic diversification which seems slightly higher than its peers.
- U.S. – 71%
- U.K. – 14%
- Germany – 7%
- Other – 8%
Also draws most of its rents from general acute care hospitals (74%), inpatient rehab hospitals (11%) and mental health facilities (8%). They also specialize in NNN leases, which is a definite plus.
Omega Healthcare Investors (OHI)
Has a higher customer concentration than your regular REIT might, with its top 5 tenants providing 10.8%, 9.6%, 6.5%, 6.0%, and 4.8% of total revenues respectively. It appears that MPW and WELL also have similar higher tenant concentrations compared to other peers like HTA and DOC.
OHI also has a triple net lease structure with its tenants, and has a highly experienced management team with many combined years of service in the healthcare/ REIT industry.
Healthcare Trust of America (HTA)
Considers itself the MOBs (Medical Office Buildings) leader. Boasts a portfolio in which 94% is located in the top 75 MSAs (Metropolitan Statistical Area). I like the heavy concentration of Texas (Dallas and Houston driving 9.7% and 6.2% of their total markets respectively), especially since many people seem to be relocating there in the past few years.
According to the company, the MOBs Industry’s ownership looks close to the following picture:
- 13% = Public REITs
- 52% = Hospital/Health System
- 24% = Private investors
- 10% = Providers/ government
HTA sees this fragmentation as a huge TAM (total addressable market) potential, though it’s unclear to me how much REIT investors can count on any REIT acquiring vast amounts of real estate from hospitals, especially considering that many (if not all) are private or non-profit and generally don’t publicly disclose their financials—and might not have the same capital efficiency needs that a small, medium or large size business might have as a duty to its shareholders.
Physicians Realty Trust (DOC)
This REIT is a major competitor to HTA in the MOBs space and considers itself the leader in ESG for its industry.
The company also discloses the following pertinent details, among many others:
- 23.9% of portfolio leases are expiring in 2026
- Portfolio leases = 6.8 average weighted years remaining
- Lease terms are generally 5- 15 years, with 1.5%- 3% lease escalators per year
- Current Portfolio weighted average rent escalator = 2.4%
DOC also has a high exposure to Texas and seems to focus on a similar, location-based strategy as HTA (where its MOBs want to be close to highly trafficked hospital and medical systems). Though, the company might not be as explicitly committed to that as HTA.
With this ground work, the enterprising investor should have a great launching pad for really diving deep into these healthcare REITs for some thoughtful analysis.
While each of the companies do a pretty good job of using pretty words to describe their competitive advantages, an exercise such as checking recent cap rates might be a very fruitful exercise in confirming these claims and separating the true industry leaders.
As it pertains to learning about any industry, and the world of investing in general, the entire process is a journey.
You won’t become an expert at any industry overnight, but the knowledge you attain does compound over time.
Like investing, commit to learning about these businesses in the same way you’d learn a language—you don’t become fluent overnight.
Best of luck, I hope you find great REITs and great stocks to grow and compound your wealth over time.