Sandra Smith
REIT Rankings: Healthcare
This is an abridged version of the full report and rankings published on Hoya Capital Income Builder Marketplace on March 8th.
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Healthcare REITs - the sector hit hardest by the COVID pandemic - are now experiencing lasting effects, both positive and negative, as a result of this once-in-a-generation event. Previously considered a "bond-like" sector due to the predictable nature of healthcare demand and long-term lease structures, healthcare REITs are slowly returning to normal, but challenges still remain. In the Hoya Capital Healthcare REIT Index, we track all 16 healthcare REITs, which account for roughly $130 billion in market value.
The healthcare REIT sector can be divided into five distinct sub-sectors, each with its own risk/return characteristics: Senior Housing, Medical Office Building, Lab Space, Skilled Nursing, and Hospital. The "private-pay" side consists of Senior Housing, Medical Office Building, and Lab Space, while the "public-pay" side includes Skilled Nursing and Hospital. Triple-net leases, a unique feature of the sector, are only as secure as the tenant's ability to pay rent, which remains a near-term and medium-term risk. Staffing shortages and financial health concerns of operators have also posed challenges for healthcare REITs.
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For Healthcare REITs, recovery has been uneven across sub-sectors, with private-pay segments showing improvement while public-pay segments face difficulties. Hospital and Skilled Nursing segments have struggled with tenant operator issues due to labor cost increases and reduced government support. On the other hand, senior housing REITs, which were hit the hardest by the pandemic, are finally experiencing a recovery. The MOB and Lab Space segments have remained relatively stable throughout the pandemic.
The performance of healthcare REITs varies across sub-sectors. Lab Space REITs have consistently outperformed others, while MOB REITs have shown steady performance. Senior Housing REITs saw a significant decline in FFO, but are projected to be among the fastest-growing in 2023. Skilled Nursing and Hospital REITs, after a strong start during the pandemic, are expected to experience a decline in FFO.
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Skyrocketing labor costs and tenant rent collection issues have been major challenges for public-pay segments. However, recent data suggests that staffing shortages may be easing, with a decrease in reported severe staffing shortages and a decline in job openings in the healthcare sector. For senior housing, a combination of relief on the labor front and record-setting rent growth is driving the recovery. The total increase in Cost of Living Adjustment (COLA) in 2022 and 2023 is approximately equal to the previous 12 years combined, indicating significant rent growth.
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Healthcare REIT Performance
Healthcare REITs underperformed the broader Equity REIT Index in the early stages of the pandemic but have shown improvement in recent years. Private-pay REITs, including senior housing REITs, have performed well, while public-pay REITs have faced challenges. Healthcare REITs have lagged behind the benchmark over longer-term periods but still offer strong dividend yields.
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Senior Housing Fundamentals
Senior Housing REITs have experienced a strong rebound, with positive earnings reports and encouraging private-market data. Companies like Welltower and Ventas have shown significant FFO growth and expect further improvements in 2023. The National Investment Center reports rising occupancy rates and rent growth in the senior housing sector. Slowing inventory growth and increased demand bode well for senior housing REITs.
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Lab Space Fundamentals
Lab space owner Alexandria has reported strong results and expects further growth in 2023. CBRE's Lab Space real estate report indicates solid fundamentals in the life sciences market, although supply growth remains elevated. Lab space under construction has increased significantly, but vacancy rates have stabilized. Continued demand for lab space and rising rental rates suggest a positive outlook for Lab Space REITs.
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Medical Office Fundamentals
Medical Office Building (MOB) fundamentals are stable, with absorption of space outpacing new supply. Healthcare Realty and Global Medical have reported upbeat results, and occupancy rates are above pre-pandemic levels. MOB leases offer steady rent growth, but inflation remains a risk factor. Despite concerns about telehealth and work-from-home disruptions, in-person medical services continue to drive demand for MOB space.
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Skilled Nursing & Hospital REIT Fundamentals
Tenant rent collection and bankruptcy filings have posed challenges for Skilled Nursing and Hospital REITs. Medical Properties Trust and Omega Healthcare have faced difficulties with tenant rent payment, but some progress in restructurings has been seen. The public-pay segments continue to experience financial strain and labor cost pressures.
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Healthcare REIT Dividend Yields
Healthcare REITs are known for their strong dividend yields, currently averaging 5.5%, higher than the REIT sector average. While dividend growth has been subdued in recent years, the sector offers healthy and sustainable dividend levels. Several healthcare REITs have raised their dividends, and yields range from 2.23% to 11.04%.
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Takeaway: Life After The Pandemic Favors Private-Pay
Recovery for healthcare REITs has been uneven, with private-pay segments showing more progress than public-pay segments. Investors should consider a long-term focus on private-pay sectors such as senior housing, medical office, and lab space, which are expected to benefit from structural tailwinds. A more tactical approach may be necessary for higher-yielding public-pay sectors like skilled nursing and hospitals.
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For more in-depth analysis of real estate sectors, please refer to our quarterly reports. Note that Hoya Capital Real Estate advises ETFs listed on the NYSE. Disclosure: We hold long positions in all components of the Hoya Capital Housing 100 Index and Hoya Capital High Dividend Yield Index.
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Editor's Note: This article covers microcap stocks. Please be aware of the risks associated with these stocks.
