There’s a huge benefit to diversification, as most investors know well. However, a highly focused company can actually be pretty low risk if it’s in the right place at the right time. That’s exactly the story with Healthcare Realty Trust (NYSE: HR). But details matter. Here’s why this and other incredibly focused Healthcare REITs (real estate investment trust) is a lot less risky than it may first seem.
The Big Picture
Healthcare in the U.S. is about to see an incredible spike in demand because of the aging of the baby boomers. They are cresting into their retirement years in record numbers and are now starting to need more and more medical care. This general trend should last another couple of decades, with medical needs rising along the way. This is simple demographics and the basic logic for why investors should want to own a healthcare-focused REIT.
There are different ways to get such exposure, however. You can choose a REIT, like Ventas, which is diversified across multiple healthcare sectors, or you can focus on a landlord that specializes in just one healthcare niche. For example, Omega Healthcare owns senior housing, with a huge focus on nursing homes, only that sector has been relatively weak due to the coronavirus pandemic’s impact.
On the other hand, Healthcare Realty Trust owns medical office properties, an area that has been performing particularly well despite the pandemic.
To put some numbers on that, Healthcare Realty Trust collected 99% of the rents it was owed in 2020, normalized funds from operations increased 2.9% for the year, and the REIT had a roughly 85% retention rate. It was a solid year even in the face of a global health scare and despite a highly concentrated portfolio.
The details matter. Here are some key reasons why Healthcare Realty Trust’s focus is more of a benefit than a detractor.