With the Fed reluctant to raise interest rates further, those in or near retirement may need to look beyond bonds for steady, secure income. Healthcare Real Estate Investment Trusts (REITS) may provide bond like yield with more safety than most stocks. Here are three suggestions that could provide healthy cash flow to fund your retirement…
By the Sick Economist
4%. That is about the best you will be getting any time soon on bonds that anyone could describe as “safe.” No one can ever say for sure, but it looks an awful lot like Fed Chairman Jerome Powell has decided to respond to recent volatility in the stock market by taking his foot off the interest rate accelerator. In fact, if the American economy should suffer a downdraft over the next few years, interest rates could actually go LOWER. If interest rates were to fall to 3%, then you would need at least $3,000,000 in savings to earn $90,000 in retirement income. Are you that rich?
If you aren’t that rich, or just can’t stand to see your money do so little for you, healthcare real estate could be the Rx that your portfolio needs.
Before you groan, I don’t mean that you should go through the expense and hassle of owning medical office buildings or nursing homes directly. Rather, you can simply buy shares in a health Real Estate Investment Trust, or REIT. A REIT is a special kind of corporation dedicated exclusively to owning real estate assets. It may trade on a major stock exchange such as the NYSE, but the laws that govern REITS are slightly different than most major corporations.
The key feature is the following; in exchange for favorable taxation policies, REITS must pay out 90% of their income directly to shareholders. This feature makes REITS ideal investments for yield seeking retirees (or, really, anyone who likes to get checks sent to their Etrade account…). Many stocks traded on the NYSE could payout much higher dividends then they do. But instead they choose to retain the corporation’s earnings for a whole range of purposes that may, or may not, eventually benefit shareholders. In the case of a REIT, those earnings must be paid out, resulting in securities that often yield more than standard stocks.
So REITs are great for retirees because they pay robust income streams that could fund a lifestyle. But the REIT structure also may provide a certain amount of security to retirees that other kinds of stocks don’t.
One of the biggest fears for investors on a fixed income is that a corporation could fall victim to fraud. Remember ENRON? It turns out that all of those pretty paper profits that ENRON was wracking up were just that, paper profits that never did exist in reality. For a REIT, that kind of fraud would be very hard to pull off. If a REIT’s accountant says that they earned $100, then they must pay $90 out. Hard to fake that for long.
Almost any kind of real estate business can be organized as a REIT. You name it; hotels, shopping malls, offices, etc. However, Health Care related real estate may offer additional safety that some other REIT sectors may not.
Let’s imagine that you buy shares in three different kinds of REITS. A shopping mall REIT, an office REIT, and a Hospital REIT. Then, as it always does sooner or later, a recession occurs. The stock market tanks; people get laid off, houses get foreclosed. In this worrying economic scenario, what kind of Real Estate holds up best? If your bank account looks bad, you may hold off on shopping. If your business isn’t doing well, you may cut back on office space. But you can’t time a heart attack, or put off stroke until it’s convenient. The REIT that owns hospitals will tend to do best when the chips are down.
In fact, some healthcare REITS may actually do BEST during tough economic times. How could this be? Let’s imagine that your hospital REIT currently yields 5%. This means that if it’s stock is worth $100 on the open market, the security pays out $5 every year. A tidy sum, but nothing to write home about.
But then the economy crashes. The Fed lowers interest rates to the floor, so that you can now only earn 2% on bonds. Meanwhile, the hospitals that you indirectly own just keep pumping out cash flow, week after week, month after month. The market value of your REIT may actually go up. If your security keeps paying out $5 every year, while everyone else only pays out $2, then the market value of your investment will grow.
Nursing homes, hospitals, medical office buildings, research facilities; the kinds of specialized real estate needed for the provision of healthcare is endless. Below find three options that prioritize safe, steady payouts that may thrive no matter what the economic cycle throws at us…
1. Ventas, Inc. ($VTR).
This is the granddaddy of Healthcare REITs. Most of the company’s holdings are in assisted living facilities or medical office buildings, both of which face runaway demand over the next twenty years. The company has faced some headwinds lately, with critics pointing out that everyone and their brother has jumped on the “assisted living bandwagon.” Simply put, some analysts feel that too many assisted living facilities have been built, even with demand set to surge. This could affect rent levels and occupancy rates, the thinking goes.
Ventas has several things going for it that will help it weather this tempest in a teapot. First, only 50% of its revenue currently comes from assisted living facilities. So even if the sector remains overbuilt, $VTR has other sources of revenue. 20% of revenue comes from Medical Office Buildings (MOBs). These buildings are often very near, or directly on, hospital campuses, which means very limited competition. Cramming new buildings into already overbuilt hospital campuses is no easy feat.
Another 7% of revenue comes from investments in scientific research centers. This allotment is set to grow dramatically over the next few years, as $VTR has just announced a new, $1.5 billion dollar partnership with Wexford Inc, to develop more research centers. Much like MOB’s, this is a very specialized business with high barriers to entry.
Another consideration is $VTR’s strong balance sheet and superior access to capital. The company only has $10 Billion in debt on its books vrs. $22 Billion in hard, tangible assets. It is one of the most liquid, most frequently traded healthcare REITS on Wall Street. So, Ventas has bountiful access to capital that it could use to slowly, but surely, buy smaller competing companies.
Assisted Living, Medical Office Buildings, and Scientific Research. According to the Institute on Ageing, by 2030, more than 20% of America’s population will be 65+, with more than 19 million Americans being 85 years of age or older.
Does it seem like Ventas would be well positioned to capitalize on this trend?
2. Medical Properties Trust, Inc. ($MPW)
Medical Properties Trust, Inc, is another way to play those very favorable demographic trends. $MPW actually owns hospitals.
Before you start to worry about all of the potential headaches associated with running a hospital, focus on this; $MPW doesn’t run hospitals, it just owns the real estate.
$MPW offers existing and aspiring hospital operators an opportunity to focus on what they really do well; run hospitals. $MPW takes care of all the rest. Essentially $MPW offers a financing option that unlocks capital for hospitals that want to grow.
To some degree, the raw physicality of $MPW’s value proposition offers a lot of safety to investors. First of all, it is very hard to build a new hospital. Not only would it be incredibly difficult to assemble the proper land and resources, but in many jurisdictions it is actually illegal to build a hospital without government approval. And that governmental approval process is every bit as onerous as you would imagine.
Also, $MPW is somewhat shielded from all of the changes and tumult rumbling through the healthcare world, because ultimately, some kind of care must be provided. Just by snapping on the TV or browsing the internet, you can see that there is constant and furious controversy over how care should be provided, and who should pay to provide care, but one indisputable fact remains; care must be provided. With 19 million seniors living past age 85, sadly the need for hospitals cannot decrease. We can probably count on Medical Properties Trust to pay out steady income for many years to come…
3. Physicians Realty Trust, Inc ($DOC)
This REIT should make sense to anyone who has cared for an ageing relative or friend. Every once in a while, a perfectly healthy older person will simply fall over dead from a heart attack. But, more typically, the ageing relative will require more and more doctor’s visits and small procedures as thier health slowly but steadily declines.
$DOC is here to help with this process. This REIT owns Doctors’ offices, ambulatory surgery centers, and diagnostic centers. In some ways, $DOC is the opposite of $MPW; they own everything on the care continuum except the hospital.
Again, some of these properties are specialized, either in build out, or in location, and are hard to duplicate. For a caregiver, the sheer logistical challenge of hauling a non mobile loved one to various medical providers can be a burden. A well located diagnostic center, a surgery center close to home, or a doctor’s office near to the hospital can command premium rent. These rent premiums will only increase as more and more seniors face the reality of their slow decline.
Most importantly, $DOC has been managed conservatively from a financial point of view. They have modest debt on their books relative to the total value of their real estate. This puts the company in a strong position to quickly snap up key locations as they become available. In the past, these kinds of medical properties were highly fragmented and often owned by small time landlords. $DOC is very likely to consolidate this market for years to come. Why shouldn’t you be the one who benefits?
These three suggestions are just the tip of the iceberg. Healthcare REITs come in all shapes and sizes; most will benefit from powerful demographic trends. You can reap the financial reward of real estate without all of the headache and hassle of becoming a landlord. Do your research, and those healthy dividends should flow to you without putting any additional grey hair on your own head.