Senior Living REITs: Good for Your Portfolio?


Should senior living REITs be a part of your portfolio? A REIT, or real estate investment trust, is a company that owns, or finances, income-producing real estate.

Like mutual funds, REITs provide everyday investors with dividend-based income and long-term capital appreciation. Diversified or specialty REITs might hold different property types in a portfolio, ranging from apartment complexes to retail centers, to infrastructure such as cell towers or energy pipelines. Unlike real estate proper, your investment in REITs are liquid, with shares you trade like stocks on an exchange.

REITs must pay more than 90% of their taxable income as dividends to shareholders, who then pay income taxes on those dividends. Doing so allows them to forgo corporate income taxes.

REITs allow investors to target industry trends. In the early 2010s, urban growth outpaced suburban growth for the first time since the 1920s. With a parallel boom in online shopping, REITs strictly or heavily exposed to malls presented greater risk to investors. An aging population, however, can present opportunities for investors looking to capitalize on changing demographics. Increased demand for senior living properties could forecast growth for senior living REITs.

Many of us are getting older. Some 10,000 baby boomers are turning 65 every day. By 2030, all baby boomers will be older than 65, so that 1 in every 5 U.S. residents will be of retirement age. By 2034, older people will outnumber children for the first time in U.S. history, according to U.S. Census data.

As boomers age, they will want or need to move into housing that fits their needs. Often, these options fall under the umbrella of senior housing, which range from senior-oriented facilities providing independent living options to different forms of assisted care.

The need for all types of senior-living facilities will grow. A 2015 study by NAREIT economists yielded the following:

  • Seniors are moving into senior housing with more frequency than in the past, and those moves are occurring at younger ages than in the past. Part of this is driven by the availability of senior-living options beyond assisted-living care.
  • While senior living is more common with older retirees, the most rapid growth is among those in the 70-to-79 age group.
  • Wealthier seniors have greater options in terms of senior living.

These and other demographic trends are favorable to senior housing REITs. The question remains: Are these a good investment? Like most investing options, the answer is that it depends.

Investing in publicly traded REITs is like investing in any other company. For starters, you should know who manages the company. What is the business/investing strategy? What is the company’s track record? In others words, you should have many of the same questions that you would ask and research before investing in Apple, IBM or any other individual stock.

Senior living REITs are largely in the healthcare REIT sector. The percentage of healthcare and specifically senior living REITs will vary from REIT to REIT.

Beyond the questions above, you should first find out how the REIT makes its money. Within this broad category, there are REITs that invest in senior-oriented apartments and communities, assisted living facilities and related properties, such as medical buildings.

Large healthcare REIT Ventas (VTR) has made a major bet on senior housing. Morningstar’s recent comments on the REIT echo some concerns about the future of senior housing: “The strong growth initially enjoyed at Ventas’ senior housing operating assets has slowed as levels of new competitive supply and uncertainty grows. Performance could continue to be tested if the supply/demand dynamic weakens.”

Like many trends we see across the business world when companies spot the potential for profit, they tend to jump into a business segment. Senior housing is no exception. While the demographics are favorable to senior-living facilities of all types, an oversupply could cut into their profitability and thus the profitability and cash flow of REITs investing in these properties.

A construction boom ccording to the National Investment Center for Seniors Housing & Care (NIC), occupancy rates have been weaker than expected, and in 2019, slowed to the lowest level in eight years. “Demand has been strong, it just hasn’t been strong enough,” given the rate of new construction and supply into the market, NIC’s chief economist and director of outreach, Beth Burnham Mace, said in an interview.

REITs are known for generating dividend-based income. The Vanguard REIT ETF (VNQ), for example—an index fund tracking the MSCI U.S. REIT index—has a 12-month unadjusted effective yield of 2.85% as of April 30, 2021. Some of the major healthcare REITs, with significant senior housing holdings, carry yields that have disappointed relative to expectations in recent years.

Demographic trends certainly favor senior housing REITs and healthcare REITs with significant holdings in this sector. Before investing in them, however, it pays to consider several points.

First, while the dividend income of many of these REITs can be tempting under circumstances that favor high yields, consider whether they are sustainable and what additional risks they might incur. Second, high interest rates impact REITs—assess how an interest rate hike will impact any REIT holdings. Lastly, while the demographic trends are favorable, it is important to stay on top of the supply of senior housing in relation to the potential demand.​​

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