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Affordable Healthcare Is Boosting Healthcare REITs

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Overview of healthcare REITs

Healthcare REITs own healthcare properties like senior housing communities, skilled nursing facilities, hospitals, medical office buildings, and life science properties. Most healthcare REITs lease their properties to third-party managers that typically operate multiple properties.

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Lease are on a triple-net basis

Most healthcare facility leases by the property managers are on a triple-net basis. For a triple-net basis, a tenant is responsible for all of the operating expenses related to the maintenance and upkeep of the property while the owner receives a rental fee. The triple nets are attractive because of their long duration. This ensures stable cash flows to landlords. Most triple-net leases typically have 10–15 year lease terms with a renewal option after a few years. Since the tenants incur most of the operating expenses they tend to continue for a longer duration.

Main drivers

The main drivers of healthcare REITs include the aging population, rising income levels, and proximity to the nearest hospital. Healthcare REITs are generally thought of as relatively defensive, given that the industry is necessity based and the triple net lease structure.

Major healthcare REITs

There are 16 REITs in the healthcare sector with a combined market capitalization of $87.1 billion. They account for 10.50% of the total REITs market capitalization. Health Care REIT (HCN) is the largest with a market capitalization of $23 billion. It’s followed by Ventas (VTR) with $20.54 billion and HCP (HCP) with $16.7 billion. The average dividend yield of healthcare REITs was 5.30% as of June 2015. Senior Housing Properties Trust (SNH) provided the highest dividend yield in the sector at 8.90%.

Investors looking for diversification in the REIT sector can get exposure to REIT ETFs like the Vanguard REIT ETF (VNQ), the iShares U.S. Real Estate ETF (IYR), and the iShares Cohen & Steers REIT ETF (ICF).

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