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Healthcare REITs

How healthcare REITs own senior housing, medical offices, and hospitals, and why an aging population drives long-term demand

What healthcare REITs own

Healthcare REITs own a mix of property types tied to medical care and senior living: senior housing communities (independent living, assisted living, and memory care), medical office buildings, skilled nursing facilities, hospitals, and in some cases life-science and lab space. Some senior housing campuses combine several levels of care on one site — independent living, assisted living, memory care, and sometimes skilled nursing — allowing a resident to move between levels of care as their needs change without leaving the same community. Welltower, Ventas, Healthpeak Properties, Omega Healthcare Investors, and Medical Properties Trust are among the best-known companies in the sector, though their portfolios differ significantly in which of these property types they emphasize.

How they make money

Lease and operating structures vary considerably by property type. Medical office buildings function much like traditional office leases to physician practices and health systems, though those leases often run somewhat shorter than net-leased healthcare properties, and tenant retention tends to be high, since relocating a medical practice is disruptive for both the physician and their patients. Skilled nursing and hospital properties are commonly leased to operators on long-term net leases, similar in structure to net lease REITs in other sectors. Senior housing is often different still: because REIT rules generally prevent a REIT from directly operating a business, many senior housing properties are run by a third-party operator under a structure where the REIT can share in the property's operating performance through a taxable REIT subsidiary, rather than collecting a simple fixed rent.

What drives demand

An aging population is the sector's defining long-term driver, particularly growth in the number of Americans in their 80s, the age cohort most likely to need senior housing or skilled nursing care. Overall healthcare spending growth and the ongoing shift of some procedures out of hospitals into outpatient and medical office settings also shape demand across the sector's different property types. That broader shift toward outpatient and lower-cost sites of care, encouraged in part by insurers and government health programs seeking to manage costs, has supported demand for medical office and outpatient facilities relative to traditional inpatient hospital settings.

Key risks

Operator and tenant financial health is central to this sector: when a senior housing or skilled nursing operator runs into financial trouble, it affects the landlord directly, especially under operating structures where the REIT shares in property-level performance. Labor costs for nurses and care staff are a major expense that squeezes operator margins, and by extension the REIT's income in operating deals. Like residential REITs, senior housing also carries new-supply risk in markets where construction has run ahead of demand, and operators must hold the appropriate state licenses to run a care facility, adding a layer of regulatory complexity beyond a typical commercial lease. Reimbursement policy from Medicare, Medicaid, and private insurers, along with regulatory oversight of care facilities, are additional risks fairly specific to this sector.

Metrics that matter

Occupancy is closely watched, especially in senior housing, where it fell sharply during the pandemic and has been an important recovery indicator since. Same-store net operating income growth applies here as it does elsewhere, and for net-leased skilled nursing and hospital assets, rent coverage — how comfortably an operator's cash flow covers its rent — is a key indicator of tenant health, closely tied to dividend safety for the REIT itself. A coverage ratio comfortably above one times a property's cash flow generally signals more room for the operator to keep paying rent through a rough patch, while a ratio close to or below that level is a warning sign worth watching closely; the glossary covers related terms.

Sub-sectors at a glance

• Senior housing — independent living, assisted living, and memory care communities
• Medical office buildings — leased to physician practices and health systems
• Skilled nursing facilities — leased to operators, often on long-term net leases
• Hospitals — leased to health systems and hospital operators
• Life science and lab space — leased to biotechnology and pharmaceutical tenants

Because these sub-sectors respond to different demand and regulatory drivers, a diversified healthcare REIT's overall results can mask meaningfully different performance happening within each piece of its portfolio. Current healthcare REITs, including Welltower, are listed on the health care sector page; for the rest of the series, see the sectors overview.

See it in the data: Health Care REITs → Welltower profile →

Research and education only — nothing here is investment advice. Figures such as the 90% distribution rule are general and can change; always confirm against a company's filings.