As the population ages, the health care REIT sector has produced tremendous results recently. Now that the Supreme Court has upheld the constitutionality of Obamacare on June 28, 2012, health care REITs can only benefit from this latest development.
Health care REITs are mainly separated into four categories: 40% senior housing, 30% skilled nursing facilities, 20% medical office buildings, and 10% biotech and other facilities.
These REITs more often than not just manage properties and are landlords to hospitals and other related facilities, but as demand increases, so will their revenues.
Medical costs have outpaced inflation for several decades, and this trend is projected to continue at a fast pace for several more decades, as the first baby boomers start entering retirement age. Thus, it is reasonable to correlate the trend in medical costs to investments in businesses that service the health care sector. While providing rich yields, around 6%, health care REITs do not follow the same path as residential or commercial real estate REITs and possess a strong possibility for future growth.
According to Jim Sullivan of Green Street Advisors, senior housing is relatively unaffected by Obamacare, and is much more closely related to the housing market and unemployment. Senior citizens need to get enough out of the properties they are selling in order to move into senior living facilities, and their children need to be fully employed as most will have to support their parents to some extent.
The outlook for medical office buildings is somewhat murky as doctors will probably see an increase in the number of patients they treat, fueling expansion in the medical office building sector; however, doctors will most likely also experience lower compensations from Medicare and Medicaid. Still, Jim Sullivan believes that the outlook will be mainly positive.
The skilled nursing sector will be the one to benefit the most from Obamacare, as Medicare and Medicaid are the two major sources of revenues for these skilled nursing facilities.
The Most Prominent Healthcare REITs…
- Omega Health Care Investors: This is a pure play on the skilled nursing sector which also happens to offer a very nice yield of 7.4%. The shares have already appreciated by 17% for 2012, and are up by 9.4% from a year ago.
- Ventas, Inc: The yield of 4.1% is small compared to its peers, but the REIT is one of the larger REITs, with a market valuation of $17.9 Billion, thus is more diversified. Excluding dividends, this REIT has returned 12.18% so far this year, and is up by 15.4% from a year ago.
- HCP, Inc.: With a market valuation of $18.2 Billion, HCP is yielding 4.6%. This REIT has the distinction of having increased its dividends every year for the past 25 years.
No matter what happens to Obamacare in the future, health care REITs are certain to continue to be good investments due to demographic trends alone.