Healthcare REITs: In the Sweet Spot

05/12/2017 2:50 am EST

Focus: REITS

Elizabeth Blessing

Contributing Editor, Leeb Group

For a glimpse into what the U.S. workplace will look like in coming years, a good guide is the Bureau of Labor Statistics’ list of the top 20 fastest-growing occupations. Some 13 of the jobs with the highest expected growth are in healthcare, notes Elizabeth Blessing, contributing editor to The Complete Investor.

When you match this against the changing demographics of our population, it’s clear that many of the workers in these expanding job areas will be caring for the burgeoning number of older Americans.

Two of REITs — both in our Income/Value portfolio — are in the sweet spot of these trends. Welltower (HCN) and Ventas (VTR) both specialize in senior housing and health care real estate.

In an effort to get maximum benefit from these areas, both have been diversifying their portfolios of properties away from reliance on government-subsidized payments (primarily Medicare and Medicaid) and toward the more lucrative private-pay sector.

In 2015, Ventas shed more than 300 of its nursing home facilities. This allowed it to focus on acquiring lower-risk properties. Around 93 percent of its revenues now come from private-pay sources.

Its investment portfolio now includes some 1,300 properties across five asset types: senior housing, community-based care facilities, hospitals, post-acute care facilities, and life science facilities.

Recently Ventas has focused on acquiring or developing life science real estate assets — research facilities and medical office buildings leased by universities. In September it completed its acquisition of substantially all of the life science and medical real estate assets of Wexford Science and Technology for $1.5 billion in cash.

What makes this deal particularly attractive is the stable and predictable revenue. The acquired portfolio includes 23 properties that are 97 percent leased and represent a 2017 cash flow yield of 6.8 percent.

Ventas also acquired two development assets preleased to Wake Forest University and Duke University that are predicted to produce an annual yield of about 7.5 percent.

Welltower also has been actively repositioning its portfolio and revenue sources. It sold $2.8 billion in senior living properties in 2016 and plans to sell an additional $2 billion worth this year.

But it is targeting a different niche from Ventas’s: its new strategic vision is to own higher-end senior housing and outpatient care properties located in major metropolitan markets. The company operates or is developing properties in Manhattan, London, Beverly Hills, Toronto, Seattle, and Washington, D.C.

The company aims to attract affluent seniors who can afford to pay for a variety of premium assisted-living services. Toward this end, in August 2016 Welltower spent $1.15 billion to purchase a portfolio of properties operated by Vintage Senior Living.

Welltower owns more than 1,400 health care properties worldwide. In 2016, private pay accounted for 93 percent of its revenue compared to 69 percent in 2010.

While it could take a few years to see the full effects of the REITs’ portfolio restructurings, we think they’ve been wise to reduce their exposure to volatile government revenue sources. Meanwhile, during the transition, both REITs have remained committed to stable and growing dividends.

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