Exploring new investment ideas to add to a diversified portfolio in 2025, I came across an often under-covered sector in the mainstream financial media, real estate investment trusts (REITs), and more specifically healthcare REITs.
The three healthcare REITs I will discuss in this article are Community Healthcare (NYSE:CHCT) Trust, Healthcare Realty Trust (NYSE:HR), and Sabra Healthcare REIT (NASDAQ:SBRA), with a brief discussion of some factors I think could drive future value for investors in these stocks, as well some factors posing future downside risks too.
Sector Driven by Demand Growth in Healthcare and Senior Living
When thinking like a future-minded investor and analyst, I have to consider what factors will drive future growth for these REITs, on a macro level.
What comes to mind would be factors like forecasts indicating growth in demand for outpatient care facilities as well as senior care and assisted/skilled nursing facilities.
In terms of expected revenue growth in outpatient care facilities, Statista data forecasts that this niche "is anticipated to expand further, reaching a market volume of US$0.92tn by 2029."
Besides outpatient care, skilled nursing and senior care facilities are projected to see demand growth, which I think will favor REITs that invest in these types of properties.
According to a May 2024 article in Yahoo! Finance, citing research from Coherent (NYSE:COHR) Market Insights:
"The Global Skilled Nursing Facility Market is estimated to grow from US$ 380.11 Billion in 2024 to USD 688.86 billion by 2031, and is expected to exhibit a CAGR of 8.9% over the forecast period 2024 to 2031."
I think factors like this could help drive future revenue growth at REITs focused on investing in these types of properties, providing potential upside to the stocks.
Community Healthcare Trust: A High-Yield REIT with Broad Tenant Diversification
Of these three REITs being compared today, CHCT has the highest dividend yield at 9.87%, according to its stock page on Investing.com. Since 2017, its dividend history also shows a proven steady dividend growth each year, which I think can be of interest to dividend-income-focused investors.
Further, future-minded investors should consider whether this healthcare REIT is overconcentrated in a single tenant, thereby posing portfolio risk. However, as we can see from the chart below from the company's investor presentation last fall, its largest tenant LifePoint Health is just below 9% of its total portfolio, which I think is a reasonable exposure to one tenant. The majority of the portfolio, over 64%, is exposed to a combination of "other" tenants.
Investors should also consider the valuation of a REIT in comparison to its overall sector, for example. According to Seeking Alpha data, we can see that this stock's forward P/FFO is nearly 22% below its sector average, presenting a potential undervaluation opportunity for new buyers of this stock.
Healthcare Realty Trust: Lags Behind in Dividend Growth
Another REIT that focuses on outpatient facilities, this stock has a dividend yield of 7.69% according to its Investing.com profile, however, it is lacking in dividend growth, since its dividend has been $0.31 since November 2022.
In terms of diversification in its property portfolio, I think we should consider geographic diversification so that a REIT is not overly concentrated in one city or state.
From its company website, we can see from the following geomap how diversified this REIT is across the US, which I think lowers the geographic exposure risk.
In terms of future growth of properties in its portfolio, which could potentially drive future rental income and upside, data from the company's own quarterly results indicates growth factors.
According to its Q3 earnings commentary on Oct. 30th, this firm achieved "431,000 square feet of signed new leases in the quarter, the fifth consecutive quarter above 400,000."
I think such an expansion of its footprint should help drive future rent growth.
Sabra Health Care REIT (NYSE:WELL): A 7% Dividend Yield and Property Growth, with Stable Credit Rating
Sabra Health Care REIT has the lowest dividend yield of this peer group selected, 7.14%, according to its Investing.com profile, however, it has not grown its dividend past $0.30/share since 2000.
In terms of property portfolio diversification, the following graphic from the company website shows that Signature Healthcare has the largest tenant exposure with 8.7% of the portfolio, which I think is a relatively low exposure and lowers the risk profile for this portfolio.
Another factor to consider as a future-minded investor is whether the REIT is growing new properties since those can drive future rental income flows.
A portfolio expansion to highlight from last year was that "in the third quarter of 2024, Sabra closed on the $75.8 million acquisition of two managed senior housing communities operated by the Leo Brown Group (LON:BWNG)," according to Q3 results commentary.
On top of that, CEO Rick Matros in that same commentary had this to say: "Our investment pipeline has seen increased activity, and we are currently reviewing more potential investments than we have seen all year."
Besides growth factors, investors ought to consider the credit ratings of a REIT, if available, as they can provide a third-party perspective on the REIT, and provide a framework for thinking about risk.
For instance, back in May 2024, Fitch reaffirmed its "BBB-" rating and stable outlook on Sabra.
Here is what Fitch had to say about its sentiment:
"Senior housing new starts remain depressed and significantly lower than 2017 peak levels due to rising construction costs and stricter bank-lending standards. Senior housing rent growth, both asking and in-place, has accelerated, and improving occupancy rates should help rent growth outplace inflationary cost pressures."
Thus, I think such a positive credit rating from a major agency like Fitch should provide some confidence to more conservative investors considering adding a REIT with a lower credit risk profile to their diversified portfolio.
Conclusion: A Modest Bullish Case for Healthcare REITs
In summary, the evidence presented points to several factors that could drive future upside to REITs, and that includes macro-level demand drivers for healthcare-related properties, as well as portfolio expansion and lack of overconcentration in one tenant or city.
At the same time, investors should consider additional factors such as valuation, dividend yield and growth, and credit risk.
I think the bullish factors are currently prevailing for healthcare REITs, and as part of an already diversified portfolio, they could provide steady dividend income to that portfolio. However, it's also important to do a more in-depth due diligence of each of these REITs mentioned before investing in one or more of them, and the factors I mentioned could provide an initial framework with which to think about healthcare REITs.