REITs and Their Use in Healthcare

July 18, 2013

Real Estate Investment Trusts could be a viable solution for healthcare providers seeking capitals. Here's a primer on what they are and what they could mean.

A Real Estate Investment Trust (REIT) is a security that "sells like a stock on the major exchanges and invests in real estate."

The investment can be direct in the form of an Equity REIT or indirect, like a Mortgage REIT. An Equity REIT is basically investing in properties and generating revenue from the properties’ rents. Much like an individual who buys real estate and derives income from leasing the property. From there, the revenues impact the value of the overall security, the REIT. Conversely, a Mortgage REIT pertains to the investment and ownership of property mortgage notes, or mortgage-backed securities. The revenues are derived mostly from the earned interest on the loans, which then impacts the security’s value. A combination of these two types of REITs is considered a Hybrid REIT. A Hybrid REIT can diminish the risk associated with one particular type of REIT; however, both types of REITs are tied to macro-environmental factors such as the performance of the housing and commercial real estate markets.

In healthcare, a REIT works in the same way as traditional REITs; however, it is specific to properties and mortgages in the healthcare sector. Health Care REIT, Inc. (NYSE:HCN) is the leader in REITs related to healthcare. HCN "is a real estate investment trust that has been at the forefront of senior living and health care real estate since the company was founded in 1970," according to their website. This REIT represents the full gamut of healthcare real estate including: medical office buildings, inpatient and outpatient care facilities, and senior living facilities.

For physicians, especially those with group practices or those who are partnering with a health system, a REIT may provide another financing option.

Looking beyond bonds or issuing stock, participating in a REIT may be another viable solution for healthcare providers seeking capital.