From a small northwestern observatory…

Last week, I talked about the Office REIT sector and some of the headwind problems it’s facing.  I’ve been tracking the Health Care REIT sector for a while as well, and next week’s report will be specific to those 15 publicly traded REITs. 

In the meantime, though, I wanted to review a timely and informative article written this month by Edward F. Pierzak for NAREIT titled “Aging of U.S. Population to Provide Strong Demand for Health Care REITs.”  Of course, this is a prediction that’s been hovering around the industry for more than a few years.

The Census Bureau projects that 20% of Americans will be age 65 or older by the end of this decade, an increase from about 16% at the beginning of the decade.  By 2034, the number of us over 65 will be greater than the number under 18 for the first time in U.S. history.  Given all this, it’s not surprising that Health Care REITs account for 8% of the FTSE NAREIT All Equity REIT index.

Some overarching facts driving the fundamentals of this sector include:

• According to Green Street Advisors, about 80% of demand for senior housing comes from the growing 75-and-older cohort.
• Seniors in their early-to-mid 80’s are the primary cohort for assisted living and memory-care subsectors.
• Seniors age 65 and older tend to visit the doctor 2½ times as often as middle-agers.

One problem in the sector is the high level of debt.  Most REITs are fairly well insulated from the current debt market problems.  Ironically, in past years, Health Care has benefitted from its somewhat unique level of access to unsecured debt.  However, what was an advantage in yesteryear is coming back to haunt the sector today.

Nonetheless, 2^nd quarter data from NAREIT suggests Health Care REITs are delivering solid performance and are keeping pace with inflation.  According to Mr. Pierzak’s report, funds from operations (FFO) increased 20.3% year-over-year and net operating income (NOI) was up 8.1%, on average. 

The average one-year total return in the sector was negative 5.14%, and five-year returns averaged an anemic 0.92%.  This is in the face of an average dividend yield of 5.23%.  The total market cap of the 15 REITs in this sector totals $102.33 Billion.

I’m planning on another run-down of returns in this sector next week. In prepping for that, I can’t help but notice that many Health Care REITs report in their 2nd quarter SEC filings that the overhang from the pandemic continues to haunt them. I’ll discuss a bit of that next week, and perhaps a more fulsome look at the pandemic’s impact on this sector in coming weeks.

Again, and as always, I’m not an investment advisor, and this is not a solicitation or recommendation to invest in anything. Further, I and the entities I’m involved with may have positions or interests in one or more of the securities discussed here. However, if you have any questions about this, please don’t hesitate to reach out.

John A. Kilpatrick, Ph.D., MAI

john@greenfieldadvisors.com