I often refer to Welltower, HCP, and Ventas as the "big three" healthcare REITs. Not only do they offer the advantage of scale, but they also have diversified investment strategies.
Welltower’s portfolio is 63% senior housing, while most of the rest is outpatient medical and health system properties. HCP’s portfolio is roughly split into thirds: senior housing, medical offices, and life science properties. Senior housing makes up just over half of Ventas’ portfolio, with medical offices, research facilities, health systems, and other property types making up the other half.
The big question is just how much senior housing exposure you want.
Senior Housing Properties Trust, which invests in senior housing and medical offices, is the riskiest name on this list, having recently announced a major restructuring of its portfolio and a deleveraging of its balance sheet. The company slashed its dividend as part of this process and has a long way to go before it's on stable financial footing. If its transformation is successful, patient investors could be handsomely rewarded.
CareTrust is the closest to a pure-play on senior housing on the list, with a focus on senior housing and skilled nursing properties. The portfolio is 71% skilled nursing facilities, 19% assisted/independent living senior housing, and only 10% non-senior-focused properties.
Risks of investing in senior living REITs
Stocks with lots of growth potential aren’t without risks, and senior living REITs are no exception. Before you consider any of these stocks for your portfolio, there are a few risk factors to be aware of.
First, rising interest rates are a downward catalyst for REIT share prices. In a rising-rate environment, REIT yields rise, and price has an inverse relationship with yield. We’ve been in a low-rate environment for years, but if this changes, it could put pressure on REITs.
Oversupply is another risk that has come into play in recent years. Whenever there’s a great deal of growth expected in a market, there’s a possibility that new supply could hit the market faster than demand can keep up. In the case of senior living REITs, this could lead to increased vacancies and loss of pricing power.
Finally, there are a bunch of company-specific risks that could be present.
For example, many senior living facilities aren’t leased to tenants. Instead, they're operated as partnerships with their operators. That means income fluctuates depending on how well the businesses are doing. And some senior living REITs have lots of leverage, while others have strong balance sheets. These and other risk factors make it important to know a fair amount about each company before you invest.
Should you invest in senior living?
There’s no doubt that senior housing will be a major growth industry over the coming decades. However, there are likely to be growing pains along the way, particularly in regards to oversupply.
Despite short-term noise, rock-solid companies that invest in senior housing should do well over the long run. A senior living REIT could be a smart addition to a long-term focused portfolio.