There is a much needed push to change the way healthcare is delivered in the United States. While there is, and should be, great debate about the future of the industry, there is one group of healthcare companies that will always have a special place, Healthcare real estate investment trusts.
A Changing Industry
The Obama presidency will very likely go down in history as the first time that the United States tried to address what many view as a flawed healthcare system. While there are many who disagree with the approach taken, there are few who think that inaction is the correct course. This is, then, a tipping point.
Time and politics is likely to change the current law and the healthcare industry will have winners and losers. However, healthcare will always be a hands on process. True, one can read an x-ray in any part of the world. However, a broken bone can only be mended in the location of the broken bone. Surgery can only be performed on the person who needs it. This aspect of healthcare simply can't change.
Since healthcare will always be centered around the patient in some way or form, it means that some form of building will also be needed. If you need buildings, than real estate investment trusts (REITs) will be there to own them. This makes owning healthcare REITs a great way to invest in healthcare.
The healthcare REIT industry isn't all that large, totaling less than 15 publicly traded companies. That number is highly likely to get larger in the coming years. For example, Aviv, a large nursing home operator, reintroduced plans for an initial public offering late in 2012 after shelving similar plans following the severe 2007-2009 recession. With over 250 properties across 29 states, it is a perfect example of the type of public companies that are likely to come.
Healthcare is a perfect fit for the REIT structure. For starters, most properties are leased so that the occupant is responsible for taking care of all maintenance issues (called a triple net lease), resulting in simplified business structure and low ongoing costs for the REITs involved. Second, healthcare properties are highly specialized and tenants generally stay for long periods of time. After all it is hard to move an entire hospital. Third, by leasing a healthcare property, healthcare providers can save themselves the usually immense cost of buying or building one themselves.
Demographically speaking, now is a great time for the healthcare REIT business. Indeed, the baby boomer generation is retiring, which means there will be a huge influx of people who will need an increasing amount of healthcare. While drugs, home care, and the Internet will help reduce the need for in-patient care, increased use of healthcare facilities is virtually inevitable.
In addition, with the funding of healthcare likely to change materially, many providers that own their own facilities will likely seek to free up cash via sale/lease back transactions. In this way, the healthcare provider gets to stay in the buildings it occupies, but doesn't have capital and costs tied up in owning it. This should give healthcare REITs a notable source of growth.
Healthcare REITs generally come in two different varieties, generalists and specialists. While the latter is appropriate for investors looking to benefit from specific issues, like housing the elderly, the former provides greater exposure and a reduced risk profile. Clearly, a generalist can put money to work where it sees the best opportunities and pull money from areas that are less compelling. Every investor looking at this area should own at least one of the big generalists.