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Nursing homes, senior housing, and hospitals have all been in the news during the coronavirus pandemic, and not in good ways. All three of these property sectors are struggling to deal with the impact of the novel illness. Investors have reacted by selling real estate investment trusts (REITs) that own such properties. But that could be a long-term opportunity if you are willing to step back and look at the big picture. Here are three ways to invest in healthcare REITs right now, despite the bad press.
This too shall pass
There's no way to gloss over the fact that the coronavirus has upended the world as we know it. Countries around the globe effectively shut down their economies to slow the spread of the illness, and people tried to avoid group settings in an attempt to avoid catching it. Meanwhile, the world is only just starting the complicated and lengthy process of vaccinating people. It will likely be several quarters before there's a notable positive impact on the direction of the pandemic.
That's not great for hospitals which are, again, facing an influx of ill patients. So many, in fact, that some are having a hard time keeping up. Nursing homes and senior housing, meanwhile, are purpose-built to bring older adults into group settings, exactly where the coronavirus can be easily spread to one of the most at-risk demographics. Even medical offices aren't exactly immune, given that occupancy limits are needed to minimize risks and the fact that many people have just put off normal care.
About the only niche in the healthcare space that's not facing some sort of headwind right now is medical research. These assets are in hot demand because the pandemic has shown just how important it is for the world to keep pushing medical knowledge forward. The problem is that investors have acted on this view and bid the price of medical research focused REITs up. So what's an investor to do?
Where to invest now
The first thing to do is step back and take a deep breath. History suggests that the coronavirus will eventually be overcome and the world will return to some semblance of normal. And the demographics shifts working their way through society, notably the baby boom cresting into retirement, aren't going to be materially altered. So healthcare real estate and the REITs that own it still have some appeal. The question is how you want to go about investing in the sector.
For those who want broadly diversified healthcare exposure, a name like Healthpeak (NYSE: PEAK) is probably a good choice. It is one of the largest REITs in the sector and its portfolio covers the important asset categories, with about 30% of rents coming from medical office, 33% from medical research, and the rest from senior housing. The stock yields around 5.2% and is down nearly 25% from its early 2020 highs. And while Healthpeak's senior housing properties are facing headwinds, the office and research segments are more than offsetting the hit. In fact, net operating income grew 2.7% through the first nine months of 2020. That's pretty impressive given the pandemic.
That said, some investors may want to take a more focused approach. There are two ways to do that. One is to buy a turnaround story like LTC Properties (NYSE: LTC), which focuses on senior housing. Another is to avoid the highest-risk areas and single out medical office assets, which could be accomplished with a REIT like Healthcare Trust of America (NYSE: HTA).
LTC Properties owns around 180 investments split about evenly between senior housing and nursing homes. Nursing homes are generally paid by third-party vendors, like Medicare and Medicaid, and while there have been headwinds on the occupancy side, this level of care is generally necessity based. Nursing homes have been holding up relatively well, all things considered. Senior housing has had a harder time of it, given the non-necessity and private-pay nature of the business. But, there's a key factor here about LTC that's important to understand. The REIT doesn't operate the assets it owns, it leases them out to others. So, it just collects rent; the performance of the underlying properties doesn't have a direct impact on its results. (Some healthcare REITs, Healthpeak included, actually operate some of their properties.)
LTC is definitely feeling the pinch, having to grant rent concessions to some of its tenants. However, it remains insulated from the full operational hit because of its leases. And, assuming that things do start to improve after vaccines are widely distributed, the REIT could see a quick recovery in its business as its operators get back on track. In the meantime, LTC has maintained its dividend despite the headwinds and offers a sizable 5.8% yield. This is hardly a risk-free way to invest in the sector, but for those who are looking for a turnaround play, it could be an interesting option. The shares are off by nearly 21% relative to their early 2020 peak.
Healthcare Trust is exemplary of the exact opposite approach, as it's focused on a healthcare niche that has managed to avoid much of the pandemic pain. Notably, it increased its dividend in 2020. The REIT owns around 470 medical office properties in 33 states and its normalized funds from operations (FFO) was up roughly 5% through the first nine months of last year. Moreover, it continues to invest in its new construction pipeline and buy medical office assets. This suggests that growth remains on tap. With the stock down around 20% from its early 2020 peak and offering a nearly 4.8% yield, investors looking for a REIT that is, perhaps, being unfairly lumped in with riskier healthcare options should take a look.
The real story here is that all healthcare REITs are not alike. If you're looking at the sector and take the time to dig beneath the surface, you can still find some interesting options. Healthpeak is a well-positioned name for those seeking one-stop exposure via a large, diversified REIT. LTC is a turnaround play that's holding up relatively well in one of the hardest-hit niches. And Healthcare Trust is really doing quite well, given the circumstance, as it continues to push forward with its growth plans. If you can stomach a little uncertainty, one of these healthcare REITs could very well be a perfect buy for you today.
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