Health Care REITs: A Dose of Durable Dividends

The healthcare REIT sector offers an object lesson in the economics of supply and demand. Demand for healthcare is fairly inelastic: It's often a necessity, not a discretionary, purchase, and consumers buy it regardless of price. For that reason, healthcare REITs historically have been core holdings in many retail and institutional investors' portfolios, especially those geared towards long-term growth. The stability of the healthcare sector means they are more recession-proof and offer less risk than other REITs.

However, the outlook for REITs specializing in real estate for the healthcare and medical sectors is especially rosy right now. The need for healthcare services in the United States is at an all-time high. That rise in demand means an increase in supply: more doctors' offices, hospitals, testing facilities and rehab centers. So this is an especially good time to invest.

Several factors have caused the current boom in the healthcare sector.  The 75-and-older cohort is growing over six times faster than the rest of the population, and according to the U.S. Census Bureau, the senior population is expected to grow by over 144% by 2050. The Affordable Care Act (ACA) is also driving the demand. Approximately 57% of ACA exchange enrollees were previously uninsured, most without coverage for two or more years. As healthcare utilization increases, demand for all types of providers will increase, including doctors and non-physician workers; more consumers will visit their doctors more often, and doctors will need more support staff and infrastructure to meet that demand. Extra personnel and equipment mean more office and operating space.

According to Ventas, Inc. (VTR), one of the largest healthcare REITs, the domestic environment for U.S. healthcare real estate remains positive as the $1 trillion industry offers significant growth opportunities for landlords.

Approximately 15 healthcare REITs exist in the U.S. Most specialize in various types of property sub-sectors including senior housing (primarily assisted and independent living), skilled nursing, medical office buildings (or MOB), hospitals and life science labs.

There are three large-cap REITs that derive their revenues from a broad base of sub-sectors. Known as "diversified healthcare REITs," these vehicles have a combined market capitalization of around $57 billion, and a combined portfolio of over 4,000 properties.

The smaller healthcare REITs specialize in a pure play platform that provides a “circle of competence.”  By staying inside the circle, the pure-play REITs have been able to generate outsized returns as evidenced by the year-to-date performance of by such REITs as Healthcare Trust of America (HTA), up 27.6%, Omega Healthcare Investors (OHI), up 21.6%, and National Health Investors (NHI), up 17.1%.

The most meaningful metric for the REIT sector is dividend performance. While many REITs were forced to cut their dividends during the Great Recession, none of the large-cap healthcare REITs did. In fact, HCP, Inc. (HCP), which first listed shares in 1985, has paid increasing dividends for 28 years in a row.

Other healthcare REITs that have demonstrated a steady flow of increased dividends include Universal Health Realty (UHT), which increased dividends 27 years in a row; National Health Investors, 11 years in a row; and Omega Healthcare Investors, 11 years in a row.

The shares of healthcare REITs have historically traded at lower multiples of free cash flow (or funds from operations) and at higher dividend yields (4.87%) than most other sectors.

Steady demand for healthcare services explains why healthcare REIT shares have a better track record than other REITs during recessions. Looking forward, favorable demographics trends should propel healthcare REITs for quite some time. Healthcare REITs can provide investors with both safety and growth. And the dependability of their dividends can help you sleep well at night.

For related reading, see A Guide to Residential, Healthcare and Office REITs.

Brad Thomas is the Editor of The Intelligent REIT Investor. He owns shares in VTR, HCN, HTA, OHI and DOC.

Disclaimer: This article is intended to provide information to interested parties. As I have no knowledge of individual investor circumstances, goals, and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any stocks mentioned or recommended.