America has an aging population, and that translates into continued rising demand for all types of medical services and medical service real estate in the decades ahead.
While selecting winners and losers in a space with ever-evolving regulations and fast-moving technologies may be challenging, a sturdier bet is investing in properties that the bulging health-industry will rent. Keep in mind, health-care providers generally have to locate near population centers and thus are somewhat of a “captive audience” for landlords with medical facilities to let.
However, for even high-net worth investors, individually buying a medical building is probably prohibitive. But investors can buy expertly managed, publicly traded healthcare-oriented real estate investment trusts (REITs), or buy into real estate syndications, which own and operate property that is rented to the medical industry.
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Five Benefits of Investing in REITs
There are several reasons why even high-net individuals would prefer to own healthcare REITS as opposed to a single healthcare facility.
1. Performance. The long-term of track record of REITs is a matter of record, while an individual property could be a gem, or develop problems. The National Association of REITs (NAREIT) reports long-term annual compounded returns on REITS of 9.6%, over the last three decades. In general, the REIT sector offers higher dividends and lower volatility than the general stock market.
2. Yield. As of 2022, the 16 healthcare REITs tracked by NAREIT offer an average 4.1% dividend, more than double that of 10-year US Treasuries. The healthcare REIT sector achieved a total return of 16.3% in 2021, one of the most difficult years on record, due to the COVID-19 pandemic. Of course, healthcare REITs can raise dividends over time, while the owner of Treasury bonds has a fixed yield.
3. Liquidity. An owner of a discrete real estate asset may do very well, but the owner is not liquid, and may indeed incur heavy marketing and transaction costs, and delays upon sale. Public REIT stocks can be sold with a click of the mouse.
4. Transparency. Public, listed REITs disclose all assets and liabilities, and the market capitalization of the REIT is a matter of the public record. There are very few secrets in the REIT world. Most public REITs are reviewed by credit-rating agencies.
5. Portfolio Diversification. There are 16 public healthcare REITS, each different in terms of geography, sector, management or leverage. Not only do individual REITs own more than one property, thus spreading risk, investors can easily mix-and-match healthcare REITs they chose to own, for even greater diversity in the portfolio.
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For those so inclined, there are other REITs across the spectrum of property.
Generally REITS are categorized as—-
Retail. Portfolios heavy on malls, or shopping centers.
Residential. REITs that own apartment buildings, though in recent years REITs have emerged that primarily own single-family detached portfolios.
Office. Some office REITs concentrate on core properties in major “gateway” cities, while others emphasize suburban office buildings, or holdings in growing tertiary markets, or certain regions.
Industrial. The logistics, or industrial-warehouse market has been popular in recent years. Self-storage REITs, too.
Hospitality. The lodging, hotel-motel markets.
Farm and Timberland. Natural resources can be rewarding.
Specialty. Data centers, cell phone towers, and certain types of infrastructure fall into this catch-all category.
Mortgage REITS. As the name suggests , REITs that invest in mortgages on property. Generally, mortgage REITS offer high yields.
Related: The Cure for High Prices
Four Healthcare REITs For Your Portfolio.
1. Welltower (WELL).
Welltower (WELL) This REIT trades at a market capitalization of $36.1 billion, owns nearly 1,800 properties, offers a dividend yield of 2.94%, and is among the largest healthcare trusts globally. The company is known for its investment in senior facilities, post-acute care hubs and outpatient medical buildings. All sectors are considered high-growth as the US population ages, and also as the industry continuously moves to outpatient care. Like other operators, the REIT faces rising labor costs and COVID-19 challenges. In late 2021 Welltower debt was rated Baa1 and the outlook “stable,” by Moody’s, an investment grade.
The outlook for Welltower will likely improve when the COVID-19 pandemic passes, and labor markets loosen up. The dividend is well-covered by earnings, although the dividend has actually been cut in recent years. Investors could see rising dividends and appreciation by buying Welltower on relative weakness.
2. National Health Investors (NHI).
This REIT specializes in sale-leaseback, joint-venture, mortgage and mezzanine financing of need-driven and discretionary senior-housing and skilled-nursing facilities. The REIT has more than 220 properties in its portfolio.
Like most mortgage REITS, National Health Investors offer a solid yield, north of 6.6%, although the dividend has been trimmed in recent years and is below 2017 levels. The stock traded below levels of five years ago.
Fitch Ratings affirmed a “BBB-“ investment-grade rating on National Health Investors in late 2021, with a stable outlook. Like other healthcare REITs, National Health Investors has been undercut by labor issues and COVID-19.
For investors who like yield, and favor buying shares down from peak prices, National Health Investors may be the right choice.
3. Medical Properties Trust (MPW).
Medical Properties Trust (MPW) One of the largest owners of hospitals and other medical facilities, Medical Properties Trust has 438 properties in its portfolio, primarily in the U.S. and the United Kingdom. It rents the properties out through “triple net leases,” in which the tenant pay property taxes, insurance, and maintenance.
The REIT pays a 5.5% dividend, and shares have roughly traded sideways on Wall Street for the last two years.
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Moody’s gave Medical Properties Trust a “Ba1” Rating 2021, considered one notch below investment grade, but with a “positive” outlook. The REIT does have large exposure to a single tenant, Steward Health Care System LLC, and medical facilities in general have been challenged by the pandemic environment. In general, over the years the REIT has borrowed heavily to make acquisitions, but has also consistently raised dividends.
For investors looking for dividends in the post-pandemic outlook, Medical Properties Trust is a possible play.
4. Omega healthcare Investors (OHI)
Omega Healthcare Investors (OHI) Omega Healthcare Investors owns more than 900 senior-living facilities in the U.S,, and the United Kingdom, rented to operators under triple-net leases.
The first thing investors note about Omega Healthcare Investors is the REIT pays a 9.5% dividend, and that it has regularly raised dividends in recent years. Despite the attractive dividend, the REIT’s shares have undulated sideways on Wall Street for the past five years.
While such a high dividend often indicates risk, Fitch gave Omega Healthcare Investors an investment-grade “BBB-“ in late 2021, providing comfort.
Like other healthcare-oriented enterprises, the Omega Healthcare Investors REIT has been challenged by the tenacious COVID-19 pandemic, yet has survived. For investors looking for yield, Omega Healthcare Investors may be a REIT to hold into old age.
REITs vs. Private Equity Real Estate Syndications
As stated above there are a lot of advantages to owning REITs, including total performance or return, dividend yields, transparency (in terms of track records, and public filings), liquidity and diversification.
So, lots of pros to owning REITs, but a few cons too.
In exchange for liquidity, investors forsake some amount of total return. That is, a buyer of a long-term bond nearly always obtains a higher yield than a buyer of the same-quality short-term bond. Public REITs, of course, can be sold at the click of a mouse. For an investor who does not need liquidity, but can, say, put money down for a five-year period, then there are likely higher yielding opportunities in property investing than a liquid REIT, all things being equal.
Alignment of management vs. shareholder interests. Public REITs, and most public companies, have come a long way in recent decades in aligning shareholder and management financial interests—-the cliche “incentivized management” refers to managers who have stock bonuses tied to company public share prices. In addition, company boards, in general, now include more “independent” directors who are supposed to represent shareholder interests, and sit on audit and compensation committees of the company board.
Still, it is common for public company boards to downwardly adjust management incentives, if share prices decline. In addition, company management can draw large salaries and other compensation not tied to share prices.
Public REITs, and other large public companies, are under increasing pressure from “environmental, social and governance” (ESG) initiatives. While perhaps worthy, many ESG initiatives run counter to a management that strictly adheres to serving its fiduciary responsibilities to shareholders. Reducing energy consumption in a large property portfolio can be an expensive proposition, as can be meeting social obligations as determined by local governments and interest groups.
Lack of true operational transparency. While public REITs and listed companies do file quarterly and other disclosures with the Securities and Exchange Commission, when an enterprise has hundreds of properties in the portfolio, the investor is more or less overwhelmed. The prospects for such large portfolios of properties are generally limited to market-average appreciation, or depreciation. Even a successful turnaround of a particular troubled or aging property is likely but a blip on the radar on a REIT’s financial sheet.
In contrast, the benefits of participation in a property syndication include—
1. Close alignment of management, sponsor and shareholder interests.
While real estate syndication investors must read the offering memorandum closely to determine fees and profit-splits between shareholders and sponsors, in general the syndication managers hit pay-dirt at the same time as ordinary investors—when a project is sold, usually at three to seven years after fundraising. Real estate syndication managers want a successful exit strategy on the target date indicated in the memorandum, and in this way are unlike public REIT managers, who may plan to hold onto their executive positions for decades.
Related: Government Strings Attached
2. Better prospects for appreciation
While most REITs are well-managed, the large portfolios managed can only appreciate slowly, and then only if the larger property market forebears. In contrast, many real estate syndications target a single property, or a small portfolio, to develop, re-develop or otherwise re-position to obtain larger returns. There is the real possibility of a large capital gain on the syndicated investment, along with dividends.
3. Operational transparency.
As stated, deciphering a public REIT’s operations is beyond the ken of most investors, and even that of many industry analysts. Granular operational details are not released publicly. In contrast, a real estate syndication with a single asset or small portfolio can be understood in a practical way by most investors willing to do due diligence.
4. Low correlation to stock market and other investments.
An investment in a typical real estate syndication will often reflect the management skill, business plan and regional property market involved, all of which will likely vary from national property and stock markets. Investing in a real estate syndication adds diversity and ballast to the typical investor portfolio.
The world of investing has rarely been as challenging as the 2020s, in which pandemic has been met with inflation, and seemingly intractable geopolitical snarls.
While nothing is guaranteed, owning properties that collect rents from healthcare facilities (or on mortgages thereon) is obviously a sturdier type of investment than most.
REITs offer a way for ordinary investors to protect their savings, have a chance for appreciation, and earn dividends along the way—and yet maintain liquidity too.
Real estate syndications, while generally requiring a longer hold—that is, they offer less liquidity—perhaps offer better prospects for a large capital appreciation.
Certainly, for investors seeking income, capital appreciation and diversification, REITs and real estate syndications deserve a place in the portfolio.
Start investing today with Alliance. The easy way to add Healthcare REITS to your portfolio. Contact them today.
Founder & CEO | Alliance Group Companies
Ben Reinberg is Alliance Group Companies' founder and CEO.
Since 1995, Alliance Consolidated Group has acquired and invested in medical properties with net leases between $3 and $25 million across the United States. With decades of commercial real estate experience, we take pride in committing to meeting the goals of our Sellers, as we consistently and seamlessly adhere to successful closings.