Steward Health Care's Chapter 11 bankruptcy filing is the latest example of the significant role real estate investment trusts play in healthcare.
REITs have served as a financial solution for providers and health systems, allowing them to broaden their networks without as hefty a capital investment.
Related article: KKR, Healthcare Realty Trust partner on acquisitions
Steward, for example, is the largest tenant of Medical Properties Trust, which bought Steward's real estate assets in 2016. The REIT, which also owns 10% of Steward, has approved $75 million in debtor-in-possession financing to help Steward maintain patient care while looking for operators for its hospitals.
Much like private equity's ownership of healthcare organizations, there are concerns about the potential cross-purposes of REITs in healthcare, since their goal of creating investor returns may run counter to the access and delivery of patient care.
Here's what to know about the growing role of real estate investment trusts in healthcare.
What is a REIT?
A real estate investment trust is an entity that owns, operates or otherwise financially supports a portfolio of commercial real estate properties.
The passage of the Real Estate Investment Trust Act in 1960 allowed everyday people, not just corporations, to invest in commercial real estate.
Many REITs are publicly traded, meaning the general public can invest in a REIT by buying shares outright or it can be part of another investment vehicle such as a mutual fund or a 401(k) retirement account. Nareit, an association for real estate investment trusts, estimates 170 million people, or about 50% of U.S. households, either directly or indirectly own REIT stocks.
Generally, a REIT must pay out a minimum of 90% of its taxable income to shareholders annually in the form of dividends.
Why are healthcare REITs popular?
Healthcare players ranging from health systems to physician groups and skilled nursing facilities are looking to both free up capital and expand to serve an aging America in need of healthcare services in a variety of locations. Part of that growth comes from opening new facilities.
On the investor side of it, healthcare is considered far more recession-proof than, say, retail or commercial real estate so it is attractive because of the returns generated.
All publicly traded REITs own more than $2.5 trillion in assets, with healthcare REITs owning $140 billion in assets, according to real estate services firm JLL.
What federal oversight is in place?
In November, the Centers for Medicare and Medicaid Services finalized a rule that requires nursing homes that accept Medicare or Medicaid to disclose owners and other affiliated businesses. The rule means they must disclose relationships with REITs or other entities that own property on which nursing homes stand even if they don't own or operate the facilities themselves.
The rule, which took effect in January, is an effort to improve industry transparency for consumers, following reports that facilities had lower staffing and care quality levels.
What healthcare properties are REITs buying?
Senior living facilities and medical offices each account for about a third of the properties in healthcare REITs, followed by skilled nursing facilities and life sciences-related facilities.
While the COVID-19 pandemic forced many nursing homes to close, the need for those facilities remains so REITs view the properties as good investments, according to Ted Flagg, a JLL senior managing director and head of its healthcare mergers and acquisitions and corporate advisory group.
Life sciences facilities are another area of interest due to the increased interest of private equity in biotech.
Who are the big players?
There are 16 publicly traded healthcare REITs. The three largest companies, by their number of properties, are Welltower, which owns senior housing, post-acute care and outpatient facilities; Ventas, whose portfolio includes senior living, skilled nursing facilities, health systems, outpatient facilities and office properties; and Healthpeak Properties, which focuses on outpatient and lab facilities.
What are some of the latest moves by REITs?
In addition to its work with Steward, Medical Properties Trust last month sold five hospitals in April to Ontario, California-based Prime Healthcare for $350 million.
In March, Sila Realty Trust acquired five healthcare properties leased by Tenet Healthcare for $85.5 million, and CareTrust REIT acquired two properties from Altamonte Spring, Florida-based AdventHealth in August.
Healthcare REITs also have started partnering with private equity firms. Healthcare Realty Trust formed a joint venture with global investment firm KKR to acquire outpatient facilities. The REIT will invest 12 of its medical properties, valued at $382.5 million, into the venture. KKR will make an equity contribution valued at 80% along with another $600 million for future acquisitions.
Correction: This story has been updated to correct details on the size and ownership of healthcare REITs and Ted Flagg's title.
