Quick Insights into Healthcare REITs

Snippets from the book "DIY Guide to Winning with REITs" 

Healthcare REITs

Hospitals and nursing homes are underlying assets of Healthcare reits. The master lessee of these properties usually takes care of all property operating expenses, taxes and insurance of the property. Who is the master lessee? They are the main tenant who rents the entire hospital from a lessor.

The leases of healthcare assets are generally long term, and by long term I mean more than ten years! This makes sense, given their industry. For example, National Health Investors, Inc. (NYSE: NHI) generally sign 15-year leases on each of their portfolio assets.

The leases of healthcare facilities are made up of two portions. The first portion is the base rent which is inherently inflation-protected (meaning the rent rises alongside the inflation) and the second portion is the variable rent which rises and falls according to the performance of the portfolio of hospitals.

This is an attractive lease structure for risk-advised unit holders as the base rent limits the downside, while the variable rent mechanism allows you to participate in the upside.

Reputation matters

Did you know that there were more than 125 million outpatient hospital visits in the US in 2014 alone? Be it for small accidents or major emergencies, hospitals and healthcare offices will always be in demand. This is one of the reasons hospitals’ reits are often sought-after investments, as they are likely to show a solid and steady return on investment even during a recession.

But not all hospitals are built the same; some are better than others, and so doing your due diligence to find the better ones is still required.

Hospitals like Massachusetts General Hospital (MGH) in Boston represent the kind of hospitals in which your Healthcare REIT should invest. MGH has many reputable doctors, specialists and dedicated nurses that helped the hospital develop an exceptional reputation among the public.

When people in the area think of the best place to go for surgery, they think of MGH; likewise for people seeking treatments for cancer, and heart diseases. All of these pose a strong barrier to entry for new entrants and sustain the yield for a Healthcare reit.

“How to quickly tell if a hospital is well managed? The answer: Visit the car park. If the car park is well kept, clean and tidy, then the rest of the hospital will likely be well kept, clean and tidy too.”

Overseas healthcare assets

If you are thinking about investing in overseas Healthcare reits, be sure to apply additional scrutiny. Ask yourself these two questions before investing: Does this overseas Healthcare reit have a track record of managing healthcare assets in a cash-flow positive manner? Does the reit have a reputable parent?

Quantitative observation-wise, look at the “Rent over the EBITA” ratio of the hospital operator, which is simply the total rental/earnings before interest, taxes, depreciation and amortization.

This refers to the rental owed to the reit as a proportion of the cash that the healthcare business is generating. Generally speaking, the lower the ratio, the safer it is for the reit. A ratio of 40% to 60% offers a respectable margin of safety to the reit should things take a turn for the worse in the local economy.

But where in the world are those impeccable Healthcare REITs?

Allow me to point you to Southeast Asia. Healthcare properties across this region are generally backed by strong future predictors of success: the Asian population is poised to increase, to urbanize and to grow wealthier; the demands for all types of quality healthcare facilities/services are likely to grow.

Indonesia, for example, spends less than 5% of their GDP on healthcare relative to countries like the US and UK. As such, wealthy Indonesians will fly to countries like Singapore, Japan and as far away as Switzerland for better healthcare services and elective procedures. Thus, Indonesia has huge potential in its healthcare industry, and many major healthcare operators are racing to acquire these first-rate assets. Hint: First REIT (AW9U.SI)

“Many unitholders do not have the financial capability and time to do due diligence on an overseas hospital asset. However, one can simply use Google maps and observe where the

hospital is located. Is it easily accessible? Is it in or near a major city or dense population base? Are there many other hospitals around in proximity?”

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