For several years, people have looked at the healthcare industry as being resilient, and aging baby boomers were making it one of the fastest-growing types of real estate investments. While it may be one of the more recession-proof investments, not many people anticipated a global pandemic would come along and bring it to its knees.
The healthcare industry and the real estate that houses it is still just as vital to our society, so it's not a matter of if things will improve, but when. Investors who play their cards right can profit nicely from this big bump in the road. Here are four things to know to gain an advantage in 2021.
The full recovery may be long
Things have been improving in the healthcare industry, and the vaccine has been a tremendous help. However, a full recovery is likely to be drawn out even after the virus is under control. The fear that people have developed over the past year will have a lasting impact on occupancy in senior housing and the number of elective procedures people will choose to have done in medical facilities.
Patience is key right now, and investors should look past today’s performance with healthcare companies and properties. They should instead focus on the overall strength of the company and real estate portfolio and how well they’re positioned to perform in two to three years.
Cash is king now more than ever
Margins were tighter for most healthcare real estate investment trusts, or REITs, in 2020, with rent deferrals resulting from low occupancy and increased cost to operators. Companies that were already over-leveraged had a hard time covering costs, let alone making distributions to investors.
While things are improving in 2021, the added flexibility that comes from having cash on the books will make a big difference. COVID-19 is continuing to prove how unpredictable it is, so none of these healthcare companies are out of the woods yet.
There were several billion dollars' worth of transactions between healthcare REITs in 2020, and that’s not likely to slow down in 2021. Larger healthcare real estate owners are taking advantage of opportunistic acquisitions on properties struggling to make it through the pandemic, and other healthcare landlords are getting out of their worst-performing assets to stop the bleeding.
This is likely to have a lasting impact on the value of these properties, since most of these companies are more anxious to sell than they are to buy right now. Healthcare property owners that have disposition as part of their plans for the near future may want to delay selling as long as they can in order to maximize their sale proceeds.
Healthcare REIT investors will also want to pay close attention to the balance sheets of the REITs they want to invest in to get a better idea of who’s going to be desperate to lower debt and preserve cash and who’s in a position to take advantage of opportunistic acquisitions that will result in higher revenue in the future.
Life sciences will keep growing
Even before the pandemic, there was a lot of money being invested into life science real estate to start bringing production of certain medications back to the United States. That growth is expected to increase even faster now, as shortening the supply chain in the pharmaceutical industry is becoming a bigger priority.
The supply of life sciences properties is extremely limited, and most transactions in the past year have been for properties that still need to be built. Investors with existing properties that can easily be converted for life science tenants have the potential to capture some of this new demand.
Two REITs investors can look at to invest in the life science sector are Healthpeak Properties (NYSE: PEAK) and Alexandria Real Estate Equities (NYSE: ARE).
Healthpeak is a healthcare REIT that has been transitioning out of its senior housing portfolio to focus on life sciences and medical office investments. It currently has 47% of its portfolio invested in life science and has several more in the development pipeline
Alexandria Real Estate may get overlooked by a lot of healthcare investors because it's classified as an office REIT, even though four of its top five tenants are life science companies and it has an increased focus in this area.
The Millionacres bottom line
One of the most important things healthcare investors can do right now is be patient, because it’s going to take awhile for everything to get back on track. However, being patient shouldn’t mean being passive. The healthcare industry is changing, and real estate companies are making big moves, so investors who can stay ahead of the curve instead of just reacting will have the advantage in 2021 and years to follow.