Health Care REITs, an Attractive Pipeline for Dividends
Also investors should expect rates to stay low which will make the REIT dividend that much more attractive vs. the 10-year (already lower) and corporates, and continue to provide a low cost of debt tailwind for commercial real estate and REITs.
Health care REITs are predominantly considered a defensive sector due to the non-cyclical nature -- namely, people do not tend to change their health care spending patterns depending on the economy. Accordingly, health care REITs indirectly participate in the defensive nature of their tenants through their lease payments.
Before the election, there was considerable uncertainty about the future of the Affordable Care Act. This all went away with the re-election of President Obama. As a result, health systems and doctors will now be able to move forward with the certainty they need to make major decisions such as leasing, capital expenditures, and other investments.
The Affordable Care Act is projected to add an additional 35 million to 45 million insured patients into the marketplace. These individuals are expected to increase their utilization of health services which should bode well for hospitals and physicians volumes -- a net positive for hospitals and the owners of on-campus medical office buildings.
These additional patients are expected to be somewhat funded by Medicare and Medicaid cuts to providers. In total, the increased volume for hospitals and physicians is expected to offset any reimbursement cuts. However, skilled nursing facilities are expected to face difficulties from the cuts.
Health Care REITs Should Outperform
Due to the non-cyclical demand for their product and above average costs to relocate, health care tenants also prefer long-term leases to make their expenses predictable. As investors, this serves as a defensive governor on earnings because landlords are less likely to be forced to renew leases at a time when the market is weak. Consequently, rents do not fall as much as in other real estate sectors during economic downturns and, alternatively, they do not rise as much during economic upswings.