Health Care REITs are Real estate investment trusts that own health care properties. Like all REITs, Health Care REITs are required to pay out 90% of their taxable income in dividends. This increases shareholder return, but it also means that most Health Care REITs are unable to finance expansion from operating income, instead issuing equity and debt. This reliance on debt causes Health Care REITs to be particularly sensitive to changes in interest rates. Fluctuating interest rates can impact debt service payments on variable rate debt, decrease a REITs' stock price as bonds provide greater returns, or increase the cost of issuing new debt, slowing expansion.
Health Care REITs are also subject to legislation which prevents them from operating health care facilities. Most health care REITs lease their properties to third party managers such as Brookdale Senior Living (BKD), Kindred Healthcare (KND) and Sunrise Senior Living (SRZ) which typically operate multiple properties. These managers lease the entire facility on a "triple net" basis, paying the REIT owner a fixed rental fee while also paying all operating costs, maintenance and upkeep associated with the property.
As of February 1st, 2008 there were ten publicly traded U.S. Health Care REITs. Of those, five accounted for 90% of the sector market capitalization. The following Health Care REITs are listed in descending order by market capitalization. The first three are in the Russell 1000.
The following REITs make up 10% of Health Care REIT sector by market cap. They are listed in descending order by market cap.
Health Care REITs typically own the following four types of properties.
This list is not exclusive. For example Health Care Property Investors (HCP) owns and operates Life Science Centers, which are offices and laboratory space for bio-tech and pharmaceutical companies.
The performance of Health Care REITs is tied to the demand for healthcare in the United States. Important factors include the aging U.S. population and changing preferences for varying healthcare services. As the baby boomers age demand for Health Care in the United States will increase, as persons 75 years of age and older spend 60% more on healthcare than those 65-74 and 200% more than the population average. Though the aging population affects the demand for almost all health care properties, changing consumer preferences impact which type of health care properties are most lucrative.
In recent years, one of the most in demand sectors of health care real estate have been Medical Office Buildings (MOBs). MOBs provide office space for clinics, physicians and hospitals, demand for which is expected to rise over the next decade. Because the doctor's office is an individual's entry point into the health care system, an increase in the demand for all types of health care, from impotence treatment to chemotherapy, fuels an increase in the demand for doctors offices and the MOBs in which they locate. Also, due to the falling cost of complex medical equipment and advance of non-invasive procedures, there is an ongoing shift towards the delivery of care in an outpatient setting. Small doctors and clinics, many of which locate in MOBs, can now provide treatments that used to be available only in major hospitals. This is creating a shift towards smaller care centers, which is expected to fuel an increase in the demand for MOBs.
As of February 1, 2008 there were ten REITs in the United States dedicated to owning health care related properties. The largest five represent approximately 90% of the gross value of health care properties owned by health care REITs. The health care industry is highly fragmented; as a sector, health care REITs account for less than 4% of the gross value of U.S. health care real estate. In the chart below, properties measured include skilled nursing facilities, medical office buildings, senior housing and specialty/acute care hospitals.
The following presents the value of U.S. Health Care assets by property type. As of December 31, 2007 no health care REIT accounted for more than 2% of the value any particular property type or 1% of all U.S. health care real estate.