Outside the Box: Examining Health Care REITs for Profits
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May 7, 2008
One alternative for investors who want to invest in real estate without tying up capital for several years is the Real Estate Investment Trusts, also known as a REIT. Typically these vehicles are publicly traded on the stock market and can be purchased just like buying regular stock.
Though residential real estate is suffering right now, there are certainly some opportunities in the health care sector. Before discussing the health care sector specifics, we need to outline some basic facts and characteristics of REITs. REITs must have at least 100 shareholders who elect members to a board of trustees, just as the shareholders in a corporation elect members to a board of directors.
The trustees appoint an investment adviser or an advisory group to handle the regular business of the REIT. The advisory group or single adviser is often the same as the entity who originally organized the trust or it may be a related entity. Some REITs do not use an investment adviser, however. The trustees assume the advisor’s role. Also, over 75 percent of the assets of a REIT must be in investments related to real estate, cash or government securities. In addition, more than 75 percent of the trust’s income must be generated from real estate investment.
This brings us to a REIT that has some good future prospects for profits, which is the Health Care REIT. Usually health care REITs do buy-leasebacks rather than finance new construction. By doing buy-leasebacks, they purchase an existing facility then lease it back to the original owner.
Not all health care REITs that operate has the same investment strategy. For example, one REIT might own different types of facilities, including nursing homes, hospitals and substance-abuse centers. Another REIT might own nursing homes exclusively or just own acute-care hospitals. They certainly are not all the same in terms of their typical portfolios.
When selecting a health care REIT make sure that it owns solid real estate, has made wise loans and generally has a consistent record of dividend payments that indicate an upward trend over the years. Also, less debt means less interest to pay and less risk of default if the income stream is disrupted. A REIT with a smaller percentage of equity fund financed assets means an increase in leverage.
The investor should review at least three years of data. As with any REIT much of the success will be based on the expertise of those who are managing the investments. This is why it is very important to evaluate the current managers’ track record as well.
Happy Trading.
Jeff Neal
Senior Writer, Options Strategist & Profit Strategies Radio Show Market Correspondent
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