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Vertical Integration: REITs

By Motley Fool Staff – Apr 11, 2018 at 10:09AM

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Should real estate investment trusts manage their own properties?

There are several real estate investment trusts (REITs) that don't just own properties. Some manage their properties, and others have a stake in the underlying businesses that occupy them. Here's what investors need to know.

A full transcript follows the video.

This video was recorded on April 9, 2018.

Michael Douglass: Let's turn to our third area where we're seeing this beginning to happen, which is, oddly enough, in real estate investment trusts or REITs. Now, I'm saying "oddly enough" because my tendency in REITs has been to really focus in on companies that are really good at one thing, and that one thing is figuring out what properties are the right ones to buy and then -- well, OK, I guess two things. Figuring out which properties are the right ones to buy and leasing them out effectively.

And I tend to actually favor companies that outsource all the other stuff. As a REIT, you don't have to be a great property manager, because there are other people who are very good at property management. But, certainly, there is an argument in the other direction, and you actually see some REITs heading in that direction. Welltower is a great example of a company that is really starting to try to integrate a lot of these different functions under its umbrella.

Matt Frankel: Yeah, Welltower and a lot of the healthcare REITs, on that note, they're structured more as operating partnerships than just landlord-tenant relationships. In Welltower, it's actually a 50-50 mix, roughly, of their senior housing properties are triple net leased, and the other half are operated in partnership with some of the best senior operators in the business, Brookdale being one of them.

Douglass: Triple net leasing, by the way, as background for anyone who's not familiar, essentially means that the tenant is paying all of the extra stuff associated with occupying the property. That's usually utilities, maintenance, insurance, and often taxes.

Frankel: Yeah. And by the way, that produces a pretty low-risk business model. You want to look for triple net REITs if you want to see ones that'll get through the tough times. REITs are kind of my favorite thing. A lot of people think it's weird how much I like REITs.

Douglass: I don't think it's weird. I like them, too. [laughs]

Frankel: But, back to the healthcare and vertical integration. Recently, there was actually an interesting news story where Quality Care Properties, which was a spinoff of HCP, one of the major healthcare REITs, they announced they are absorbing, as a result of back rent owed, HCR Manor Care, which is the second-largest skilled nursing facilities operator in the country, giving up their REIT status to do so. So, they're actually going to be in the skilled nursing business, in addition to owning the properties that the skilled nursing facilities are operating out of. So, that's actually a really prime example of vertical integration, a company actually willing to give up its REIT status to have several layers of the supply chain.

Matthew Frankel owns shares of HCP and Quality Care Properties, Inc. Michael Douglass has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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