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Investors have had great success investing in real estate investment trusts (REITs) over the last couple years.
Vanguard REIT ETF (NYSEArca: VNQ), the REIT bellwether, is up 24.5% over the last 12 months, while the S&P 500 is up just 14% in that same period.
One of the most appealing areas of the REIT market has been health care. Unlike malls or restaurants, which are also attractive for the REIT structure, health-care spending is non-discretionary. Regardless of the economic environment, individuals still tend to visit their doctor and hospitals. That means the rent payments on health-care facilities will keep rolling in without worry.
But many investors have already piled into the bustling segments of the of health-care REIT market. These include senior living facilities that will benefit from the aging baby boomers.
In July 2014 we profiled the top two REITs to play the baby boom, Ventas (NYSE: VTR) and Health Care REIT (NYSE: HCN), which are up 17% and 23% since then, respectively.
Spotlight on Medical Offices
We’re now turning our focus to the hospitals and medical offices that will reap long-term benefits as more individuals with health coverage use health services. That means a higher volume of patient traffic at hospitals and outpatient facilities and more demand for medical office space.
Among options in the medical office space are Healthcare Trust of America (NYSE: HTA) and Healthcare Realty Trust (NYSE: HR).
Healthcare Trust of America is an interesting player in the medical office building space. This REIT has a portfolio of around 270 medical office buildings.
Although its dividend is just 2.1%, it was one of the best-performing REITs of 2014, with shares up 44% over the last year. We recently profiled Healthcare Trust of America as a top REIT for 2015.
Healthcare Realty Trust is another pure play on the medical office market; it owns and operates over 200 medical office and outpatient facilities and offers a dividend yield of 4.2%.
The demand for medical offices will continue to be robust as hospitals boost their staffs and physicians with their own practices are increasing their demand for medical office space. Many physicians are opting to move their practices closer to heavily trafficked hospitals. This means there’s a limited supply of medical offices, which gives these REITs a competitive advantage.
Acute and Long-Term Care
One of the top investments in the REIT health-care space is Medical Properties Trust (NYSE: MPW), which pays a 5.7% yield. That is nearly triple the 10-year Treasury yield and average S&P 500 dividend yield. It’s been paying a dividend for nine years.
Medical Properties Trust has over 110 properties, which include general acute care and long-term-care hospitals, as well as medical office buildings and wellness centers.
The company utilizes triple net leases. This means the tenant, and not Medical Properties Trust, must pay any operating and maintenance expense related to the property, which includes insurance, utilities and taxes. This helps provide Medical Properties Trust with steady and predictable cash flows.
Only four of its 90-plus leases will expire within the next four years and those only account for around 4% of its total rent base. Over 60% of its leases don’t expire until after 2023. And most of its leases have renewal options that don’t require negotiating.
And with just 100 properties, Medical Properties Trust has a big opportunity to grow its small portfolio with acquisitions.
The medical office and hospital REIT space is worth keeping an eye on. The slow and steady growing number of individuals with health insurance is a big positive for this part of the market. But it’s also worth noting that this part of the REIT market will benefit from an aging population. You’ll also find some of the highest dividends around in the health-care REIT space —hence the reason I like Medical Properties Trust’s 5.7% dividend yield.