Senior housing boom propels healthcare REITs

A growing pipeline of senior housing construction projects has buoyed growth for the healthcare real estate investment trusts on Modern Healthcare's annual list of the largest healthcare REITs, experts say.

Construction of senior housing expanded in the mid-1990s, fell off for many years, then picked up again over the past two years, said Calvin Schnure, senior vice president of research and economic analysis at the National Association of Real Estate Investment Trusts.

Senior housing is being built in anticipation of baby boomers' interest in moving into communities offering a continuum of housing and assisted-living options that meet their needs as they age, Schnure said. There is a strong market shift toward seniors who have saved a nest egg and are eyeing senior living communities as a lifestyle choice rather than based on immediate medical or nursing needs, he said. “This is supplanting people moving in with their children,” he said.

Almost every REIT on Modern Healthcare's list had a higher market capitalization as of May 31 than in the previous year. All saw increases in total revenue in 2014 over 2013. Healthcare REITs led all other real estate property sectors in dividend yield listed on the FTSE NAREIT U.S. Real Estate Index, at 5.55% as of June 26.

Healthcare REITs are continuing to expand their portfolios, and one major factor is more trusts are embracing the REIT Investment Diversification and Empowerment Act (RIDEA), said Kevin Tyler, a healthcare REIT analyst at Green Street Advisors, a consulting firm based in Newport Beach, Calif.

Before the law was enacted in 2008, healthcare REITs had to be structured as triple-net leases with rent payments and escalations. But under the RIDEA model, the REIT owns and operates the property, rather than just collecting rent, Tyler said.

That gives them more earnings potential. Toledo, Ohio-based Health Care REIT, which topped the Modern Healthcare list, has 35% of its total portfolio in RIDEA-structured investments, while 27% is in triple-net leases, he said.

RIDEA-structured investments aren't the only source of revenue growth for healthcare REITs. Health Care REIT has expanded to the U.K. and acquired four private-pay hospitals in London in the first quarter of 2015, said Scott Estes, executive vice president and chief financial officer. The company also completed the sale of its life sciences portfolio last month, he said.