The real estate investment trust (REIT) industry has grown quickly since its infancy over 50 years ago. However, legendary landlord Sam Zell thinks that there are too many players in the space. He's predicting an acquisition-led culling of the heard. That could make some of today's specialists prime targets, including medical office players Healthcare Realty (NYSE:HR) and Healthcare Trust of America (NYSE:HTA).
The meek can't compete
Zell, chairman of a giant apartment REIT and founder of two others, explained to Bloomberg early in the year that smaller REITs can't compete with the 30 or so giant players that drive property markets. Essentially, small players don't have the liquidity they need to play with the big boys.
He's expecting the industry to consolidate over the next two decades. Buying a stock because you think it will be bought out isn't the best investment practice. But, there are a few niche REITs that are good companies that fall on the small end of their sectors.
For example, Healthcare Realty sports a market cap of under $3 billion but has an enviable portfolio of medical office properties. It owned a more diversified portfolio up until 2007 when it sold its senior housing business, leaving it with mostly medical office buildings and a small percentage of specialty hospitals. Today, 83% of its 200 property portfolio is dedicated to medical offices.
It's closest peer is Healthcare Trust of America, with its portfolio weighted nearly 90% in the medical office space. Like Healthcare Realty, Healthcare Trust, which owns over 285 properties, is a sub $3 billion REIT. But there's a lot to like about the pair.
A desirable niche
According to Healthcare Trust of America, only 6% of the medical office space is owned by publicly traded REITs. In a $250 billion sector, that leaves a lot of room for growth. And there's plenty of reasons to own medical office buildings. For example, according to Healthcare Realty, outpatient procedures at hospitals made up 24% of the average hospital's business in 1991. Twenty years later, that figure stood at 43%. Less time in a hospital means more time in a doctor's office.
Now add in an aging population. In 2000, about 12% of the population was over 65. By 2030 that figure is expected to hit 20%. People over the age of 65 visit the doctor nearly twice as often as those between the ages of 45 and 64. Clearly, there's good reason to like medical office buildings and this pair of specialists in particular.
The big fish
Shifting back to Zell's prediction, however, it's worth noting that Healthcare Trust and Healthcare Realty swim with giants like the $19 billion market cap Ventas (NYSE:VTR). Ventas owns over 1,400 properties and is heavily weighted toward senior housing, which makes up about three quarters of its portfolio. Medical office buildings only make up 16% of the total.
For a company like Ventas, buying a single property here or there doesn't move the needle. However, buying 200 or so would. And with Ventas' size, swallowing a $3 billion acquisition wouldn't be much trouble. In fact, over the last year or so, the company raised over $5.5 billion in capital—more than enough to take on Healthcare Realty or Healthcare Trust.
And Ventas isn't the only large player out there that could do it. There are three giant health care REITs, including Ventas, with market caps closing in on $20 billion that could be interested in expanding in this desirable niche. A big acquisition would be the path of least resistance for each of them. If no buyouts materialize for Healthcare Trust or Healthcare Realty, you will still get to own a good collection of properties poised to benefit from an aging population and a shifting medical care industry. Add in the duo's around 4.8% dividend yields and you win either way.
Is this a better investment than REITs?
Recent tax increases have affected nearly every American taxpayer. But with the right planning, you can take steps to take control of your taxes and potentially even lower your tax bill. In our brand-new special report "The IRS Is Daring You to Make This Investment Now!," you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.