6 Largest Healthcare REITs to Invest in and How to Maximize Your Returns

Investing in the stock market can be volatile, especially during uncertain times. That's why many investors turn to stable sectors like utilities and consumer staples. But there's another area that can provide stability and potential...

Healthcare REITs

Investing in the stock market can be volatile, especially during uncertain times. That's why many investors turn to stable sectors like utilities and consumer staples. But there's another area that can provide stability and potential growth: healthcare real estate investment trusts (REITs). In this article, we'll explore the world of healthcare REITs, how they work, and why they could be a smart addition to your investment portfolio.

What is a Healthcare REIT?

A healthcare REIT is a company that primarily invests in healthcare-related facilities and properties, such as hospitals, medical offices, skilled nursing facilities, and senior housing. With the aging population and the increasing demand for healthcare services, the healthcare industry is expected to experience significant growth in the coming decades. This makes healthcare REITs an attractive investment opportunity.

How Do Healthcare REITs Work?

Like other REITs, healthcare REITs own income-producing properties. They can be public or private and operate properties within their portfolio. The unique structure of REITs allows retail investors to add real estate exposure to their portfolios without directly owning property or going through expensive intermediaries.

In the United States, REITs must comply with certain rules. They must hold at least 75% of their assets in real estate or cash, and they must distribute at least 90% of their taxable income to investors through dividends. These rules, along with the favorable tax treatment, make REITs an attractive investment option for both companies and investors.

Types of Healthcare REITs

Healthcare REITs can be categorized based on property type or category. Some common types include:

Nursing Home REITs

Nursing home REITs own properties specifically designed to provide round-the-clock care and help with daily activities for elderly individuals who require custodial care. These facilities offer a higher level of attentive care than assisted living centers.

Hospital REITs

Hospital REITs invest in real estate properties used by hospitals. These large, capital-intensive structures rely heavily on Medicare and Medicaid payments. Hospital REITs can be volatile, but they still present an investment opportunity.

Senior Care REITs

Senior care REITs invest in properties such as senior living communities and assisted living facilities. These properties cater to elderly individuals who may require varying levels of care and support.

Medical REITs

Medical REITs primarily invest in properties such as doctors' offices, outpatient centers, research and life sciences facilities, and other medical real estate. Renting from a REIT is often more efficient for medical businesses, allowing them to focus on their mission while the REIT handles property management.

Key Factors Influencing Healthcare REIT Performance

Several factors influence the performance of healthcare REITs. One of the most significant factors affecting all real estate forms is interest rates. In 2023, while mortgage rates rose and the housing market stalled, healthcare REITs continued to perform well. For example, Welltower Inc., the largest healthcare REIT in the country, saw its stock price increase nearly 30%, outperforming the S&P 500.

Looking ahead, several key factors could move the needle on healthcare REITs in 2024. These factors include technology advancements, artificial intelligence, regulatory changes, and an aging population.

How to Evaluate Healthcare REITs for Investment

When evaluating healthcare REITs for investment, consider popular metrics used for evaluating any public company, such as dividend yield, profit growth, and return on assets. One advantage of investing in REITs is the transparency and accessibility they offer. You can easily find information about the types of properties a REIT owns, their locations, and the income they generate.

For example, if you're interested in REITs that own skilled nursing facilities, compare the performance of different REITs in terms of earnings, profit growth, and dividend stability. Look for companies with a solid history of dividend increases and consider their potential for future growth.

It's also crucial to consider the future prospects of a healthcare REIT and assess potential headwinds and tailwinds. Are they successfully navigating competitive areas? Do they own facilities in states with regulatory challenges? By asking these questions, you can make more informed investment decisions.

How to Invest in Healthcare REITs

Investing in publicly traded healthcare REITs is similar to buying any other public company or ETF. Many healthcare REITs trade on major US exchanges like the New York Stock Exchange or NASDAQ, and you can start investing with just a single share.

To invest in healthcare REITs, follow these steps:

Step 1: Plan your healthcare REIT investment.

Before investing, create a plan that aligns with your investment goals. Determine why you want to add healthcare real estate exposure to your portfolio, whether it's for retirement or taxable brokerage accounts. Consider the amount of capital you're willing to invest in a REIT and understand your investment objectives.

Step 2: Research different companies.

The healthcare REIT sector offers various companies with different properties in different locations. Research companies that match your investment criteria. Look for specific property types and locations that align with your goals.

Step 3: Buy your REITs (or REIT ETFs).

Once you've completed your due diligence, select the healthcare REITs or REIT ETFs that fit your investment strategy. You can buy publicly traded REITs through your brokerage account. If you're considering private REITs, you'll need to go through an intermediary. Determine the amount you want to invest in each company or fund and execute your trades.

Step 4: Track your investments and adjust as needed.

After adding healthcare REITs to your portfolio, it's essential to monitor your investments and ensure your allocation remains aligned with your goals. While healthcare REITs are not the most volatile asset class, it's still important to keep an eye on your investments and rebalance your portfolio as needed.

By setting rules ahead of time and avoiding emotional decisions, you can effectively manage your healthcare REIT investments.

Pros and Cons of Investing in Healthcare REITs

Like any investment, healthcare REITs come with their pros and cons. Understanding these can help you make an informed investment decision.

Pros:

  • High dividend payouts: REITs are required to distribute a significant portion of their profits to shareholders, making them attractive for income-focused investors.
  • Growing market: With an aging population, the demand for medical and senior care facilities is expected to increase, providing growth opportunities for healthcare REITs.
  • Easy exposure to real estate: Investing in a REIT allows you to benefit from rental income without the hassle of managing properties yourself.

Cons:

  • Dependence on government programs: Many medical businesses rely on income from government programs like Medicare and Medicaid, making them vulnerable to policy changes.
  • Tenant challenges: Finding new tenants for medical properties can be difficult as these buildings are often purpose-built and may require specific modifications.
  • Interest rate sensitivity: Healthcare REITs have heightened sensitivity to interest rates as most properties are financed. Rising rates increase borrowing costs, affecting profitability.

Largest Healthcare REITs to Consider

While the healthcare REIT market is not as vast as other sectors, there are several large-cap companies worth considering. Here are some of the largest healthcare REITs trading on public exchanges:

Welltower Inc. (NYSE: WELL)

Welltower Inc. is the largest healthcare REIT on major US exchanges, with a market cap of over $40 billion. The company primarily invests in senior housing and outpatient medical facilities, with properties in the United States, Canada, and the United Kingdom.

Ventas Inc. (NYSE: VTR)

Ventas Inc. has a market cap of nearly $20 billion and boasts a diverse portfolio of healthcare real estate throughout the United States, Canada, and the UK. It owns and operates over 1,200 properties, including senior living facilities, hospitals, research centers, and medical office buildings.

Healthpeak Properties Inc. (NYSE: PEAK)

Healthpeak Properties Inc. is a $12 billion US-based REIT that specializes in life sciences, medical office buildings, and continuing care retirement communities.

Omega Healthcare Investors (NYSE: OHI)

Omega Healthcare Investors has a market cap of over $7 billion and invests in various healthcare properties across 42 US states. Its portfolio includes skilled nursing facilities, assisted living facilities, and medical office buildings.

Healthcare Realty Trust Inc. (NYSE: HR)

Healthcare Realty Trust Inc. focuses on outpatient medical facilities and services, owning over 700 properties across 35 states. With a market cap of $7 billion, it offers exposure to the growing demand for outpatient healthcare.

Sabra Healthcare REIT (NASDAQ: SBRA)

Sabra Healthcare REIT has a diverse medical real estate portfolio and a market cap of $3 billion. The company owns and operates buildings and facilities in sectors such as skilled nursing, senior housing, and behavioral health across the United States and Canada.

Healthcare REIT ETFs

While there are no ETFs specifically geared toward healthcare REITs, you can invest in healthcare ETFs that provide exposure to companies owning healthcare properties. For example, the iShares Residential and Multisector Real Estate ETF (NYSE: REZ) holds many healthcare REITs in its portfolio, such as Welltower, Ventas, and Healthpeak Properties. Before investing, research the exposure different REIT ETFs have to the healthcare industry.

Future Trends in Healthcare REITs

Several future trends could shape the healthcare REIT industry:

  • Population: As the population continues to age, healthcare services, particularly senior care, will become increasingly important.
  • Life Expectancy: Advances in medicine and robotics are extending life expectancies and improving the quality of care for older individuals.
  • Regulation: The healthcare industry is subject to regulatory changes that can impact the profitability of specific companies. Investors should be conscious of regulatory and compliance reforms within the sector.

Building a Diversified Portfolio with Healthcare REITs

Healthcare real estate is a growing investment sector, driven by population demographics and the increasing demand for healthcare services. When searching for undervalued REITs, look for companies with a strong history of dividend raises and moderate dividend payout rates. Additionally, diversify your investments across different types of healthcare REITs to spread risk and maximize potential returns.

Conclusion

Healthcare REITs present an intriguing investment opportunity for those seeking stability and growth. With the healthcare industry expected to experience significant growth in the coming years, investing in healthcare REITs allows you to benefit from the demand for healthcare facilities and services. However, like any investment, it's important to conduct thorough research, evaluate key factors, and consider the pros and cons before making investment decisions. By following these guidelines, you can make informed choices and potentially maximize your returns.

Should You Invest in Healthcare Realty Trust?

Before considering Healthcare Realty Trust as an investment opportunity, it's crucial to consider the insights and recommendations of top-rated analysts. MarketBeat tracks Wall Street's best performing research analysts and their recommendations. While Healthcare Realty Trust currently has a "Hold" rating among analysts, there are five other stocks that top analysts are quietly recommending to their clients. To discover these top-rated stocks, check out the five stocks here.

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