Healthcare real estate investment trusts (REITs) invest in a variety of property types such as assisted living, hospitals, and surgery centers. The operators in these properties are providing services that won't be going away. This makes healthcare REITs one of the most attractive for long-term growth.
It's important to consider the changes in the healthcare industry when you're looking for a healthcare REIT to invest in. Pay close attention to the types of properties they invest in, the services that are provided within the real estate, and the strength of the operators.
You also want a healthcare REIT that's ready and able to make new investments as opportunities arise. The healthcare industry is changing, so REITs have to be able to move quickly with it.
Three healthcare REITs to buy now
Following a very difficult year in 2020, REITs have come back strong so far in 2021. One niche within the sector that's still facing some uncertainty, however, is the healthcare submarket. But that may be offering investors an opportunity. Here are three healthcare REIT names worth looking at today.
1. The all-in-one
The healthcare niche of the REIT sector is actually pretty big, covering offices, medical research facilities, senior housing, hospitals, and nursing homes, among other sectors. For investors who just want to own one broadly diversified healthcare REIT and not a collection of focused names, Ventas (NYSE: VTR) is probably the best call.
The yield here is 3.2%. Its portfolio includes senior housing (about 45% of rents), medical office (23%), research (10%), and a collection of smaller exposures to hospitals, long-term care facilities, and other things. It's kind of like a punt.
To be fair, it has a heavy exposure to senior housing operating assets (known as SHOP in the industry). That was a terrible business in 2020, and it continues to face headwinds because of the pandemic. However, Ventas is starting to see this business turn higher again, with improving leads and move-in trends in recent months.
The key here is that the REIT both owns and operates these assets (it actually hires others to handle the day-to-day activities), so the property-level performance flows through to Ventas' top and bottom lines. That was a huge drag in 2020, but as business picks up again, it should turn into a notable tailwind. Now add in the aging baby boomers, and the long-term opportunity for senior housing looks pretty positive. And Ventas appears pretty well-positioned.
The dividend was cut in 2020, and conservative types might want to wait for dividend growth to resume before jumping in here. However, for investors looking for a simple way to play the aging demographic story that backs healthcare REITs more broadly, Ventas is a solid, diversified, and historically well-run option.
2. An incredible dividend record
Next up is Universal Health Realty Income Trust (NYSE: UHT), with a yield of 5%. This healthcare REIT's claim to fame is that it has strung together more than three decades of annual dividend increases, which puts it soundly into the Dividend Aristocrat area. For investors who like dividend consistency, no healthcare REIT can match up to that record (in fact, there's only one REIT that has a better dividend track record, Federal Realty).
Universal Health Realty's dividend growth has historically been pretty slow, but that may be just fine for conservative investors. The focus of the portfolio is medical office builds and clinics, at 71% of its investments. Acute care hospitals come in at 16% of its investment, with the remainder a hodgepodge of other property types.
What's interesting here is that the stock is down more than 10% so far this year while other REITs are generally moving higher. This is largely due to company-specific factors that, given the long and successful history here, are likely to be worked out over time.
Most notably, Universal Health Realty is controlled by Universal Health Services, which is one of the REIT's largest tenants. However, Universal Health Services isn't planning on renewing its lease for a major asset and has proposed a trade in which it will acquire the property from the REIT in exchange for two other assets. It's not yet clear how this is going to work out for Universal Health Realty.
There's another notable property that is also set to be vacated at the end of the year that the REIT either has to sell or release, which adds to the uncertainty. The thing is, you don't build a 30-plus-year dividend streak by accident, and every year can't be a good one. So investors looking to get a healthcare REIT known to be a reliable dividend payer might want to do a deep dive here with the overriding thought that "this, too, shall pass."
3. Higher yield, higher risk
Omega Healthcare Investors (NYSE: OHI) is the last name on this list, sporting an impressive 8.6% dividend yield. That's a particularly high yield compared to other healthcare REITs, but it's actually the norm because Omega largely owns nursing homes. It is a riskier area of the healthcare niche, in which the government, via Medicare and Medicaid, ends up responsible for a material portion of revenues. Investors generally worry that the government will change payment rates, which has happened before, and that the impact on landlords will be... undesirable.
Right now, however, the big-picture problem is the coronavirus, which has pushed down occupancy levels. That's left three of Omega's lessees in financial trouble. Occupancy rates are improving, which is something that Omega is monitoring closely, but investors are worried that the recovery won't come in time for the REIT to save its dividend.
Still, Omega has a long history of dividend increases behind it, and the adjusted funds from operations payout ratio was 79% in the second quarter. Reading into those two facts, management clearly places material importance on the dividend, and it seems like there's some coverage leeway for a little near-term adversity. There are notable risks here, but for those seeking to maximize current income, the risk/reward tradeoff might be worth it.
One should fit your needs
If you are looking at the healthcare REIT space, these three options should allow you to find at least one name for your portfolio. Ventas is a "one and done" type of investment, providing broad exposure to the property sector. Universal Health Realty is a reliable dividend name with an office focus, dealing with unique problems that seem likely to be temporary. And Omega is a REIT that's historically managed to excel in a tough healthcare niche while rewarding investors with big dividends. Times are tough, but history suggests investors will be front and center in management's thinking.