This guide highlights the key performance indicators for the healthcare REIT industry and where investors should look to find an investment edge. While this guide is not a fully integrated healthcare REIT industry primer, as the market leader in granular consensus estimates data, Visible Alpha works with partners and clients to determine the key performance indicators in this industry. This guide will aid market participants in identifying industry trends and the potential future performance of healthcare REITs.
Similar to other REITs, healthcare REITs generate income through the collection of rent from healthcare providers or operators leasing their properties. Lease agreements with healthcare providers, such as hospitals or senior living operators, form the basis of their income stream.
Healthcare REITs derive their income primarily from five segments; senior living facilities, medical office buildings (MOBs), triple-net leased properties, skilled nursing facilities, and life sciences facilities.
Income from senior living facilities is generated through resident fees and services provided within these facilities. Resident fees are paid by the residents of senior living facilities for accommodations, amenities, and healthcare services. These fees may include rent for living spaces, meals, housekeeping, and recreational activities. Healthcare REITs may derive additional revenue by offering or facilitating various other services within senior living facilities. These services could range from basic healthcare assistance to more specialized care for residents with specific medical needs.
Income from medical office buildings (MOBs) is derived by renting space within the MOBs to healthcare practitioners, hospitals, and other healthcare facilities. Healthcare professionals and institutions lease space within MOBs for medical practices, consultations, diagnostics, and outpatient services. The rent paid by these tenants forms a significant portion of the REITs’ income. MOBs are designed to meet the specific needs of healthcare providers, often including features such as specialized infrastructure, medical equipment, and compliance with healthcare regulations.
Another source of revenue for healthcare REITs is triple-net leased properties. Triple-net leased properties, often abbreviated as “NNN” leases, are a type of lease agreement where the tenant pays for all of the property’s operating expenses, such as property taxes, insurance, and maintenance costs, in addition to the base rent. So, the difference between total rental revenue and triple-net leased properties is the portion of rental revenue from properties where the operating expenses are not borne by the tenant. The “triple net” designation refers to the three net expenses that the tenant is responsible for:
The healthcare REIT, in turn, receives the base rent from the tenant, as well as any additional fees or reimbursements for specific expenses incurred.
Healthcare REITs also derive income from skilled nursing facilities by renting space to facilities that provide inpatient skilled nursing care to patients in need of medical, nursing, or rehabilitative services.
Finally, healthcare REITs also generate income from the life science segment by renting space to tenants involved in life science research. Life science tenants may include biotechnology, pharmaceutical, and other research and development companies. These tenants require specialized laboratory and office spaces for conducting experiments, developing new drugs, and other scientific activities. Life science leases are often long term and may involve complex facilities to meet the specific needs of the research conducted by tenants. The rent from these life science tenants contributes to the income of healthcare REITs.
Total revenue generated by a healthcare REIT is the sum of revenue from different segments offered by the company. Revenue from senior living facilities is derived from the number of occupied units (#) and the revenue per occupied room/unit (RevPOR). Total rental revenue from senior living facilities is calculated as:
Further revenue from MOBs, skilled nursing facilities, and life science research can be derived from the net leasable area or the total square feet owned by a REIT, occupancy, and the average rent per square foot. Total rental revenue from MOBs, skilled nursing facilities, and life science facilities is calculated as:
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Total rental expenses: REITs incur expenses to operate the portfolio of properties they hold. These expenses are classified into four main categories:
Investors in healthcare REITs evaluate the profitability of REIT companies by looking at net operating income (NOI), funds from operations (FFO), and adjusted funds from operations (AFFO).
NOI for healthcare REITs is calculated as:
Here, acquisition/disposition/development NOI is acquisition/disposition/development volume multiplied by the cap rate.
Key performance indicators (KPIs) are an industry’s most important business metrics. When understanding market expectations for the healthcare REIT industry, whether at a company or industry level, some KPIs to consider include:
To understand market expectations for the healthcare REIT industry, sell-side analyst estimates and consensus forecast data are key information sources. The buy-side, sell-side, and public companies leverage this type of data to conduct competitive analysis, a type of analysis conducted by professional analysts that involves comparing standardized metrics of one company with those of similar companies. Because companies report metrics differently – and sometimes report on different metrics altogether – standardizing the key metrics for each company can be a cumbersome process.
Visible Alpha Insights includes analyst data, company data, and industry data at a level of granularity unparalleled in the market. Our industry data – Standardized Industry Metrics – enables market participants to quantify and compare market expectations for companies across 150+ industries.
Data as of April 23, 2024
Visible Alpha offers 11 healthcare REIT industry-related comp tables, comparing forecasts for key financial and operating metrics, to make it easy to quickly conduct relative analysis, whether you are interested in looking at key values for global companies, Americas, or Europe. Every pre-built, customizable comp table is based on region, sub-industry, or key operating metrics.
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Visible Alpha offers an innovative, integrated experience through real-time, granular consensus estimates and historical data created directly from the world’s leading equity analysts. Using a subset of the below KPIs, this data can help investors hone in on the key drivers of companies to uncover investment opportunities.
Senior Living Facilities
Senior living facilities, also known as retirement communities, are residential housing complexes designed for older adults who are generally able to care for themselves independently. These facilities cater to the unique needs and preferences of seniors, offering various levels of care, amenities, and services.
Medical Office Buildings (MOBs)
Medical office buildings (MOBs) are specialized commercial real estate properties designed and built for healthcare providers and related medical services. These buildings house a variety of medical practices, including physicians, dentists, specialists, outpatient clinics, diagnostic centers, laboratories, and other healthcare-related businesses.
Triple-Net Leased (NNN)
Triple-net leased (NNN) properties are commercial real estate leases in which the tenant agrees to pay all property expenses associated with the property in addition to the base rent. These expenses typically include property taxes, insurance, and maintenance costs, hence the term “triple net” or “NNN”.
Total Square Feet (K)
Total square feet (K) is the total amount of floor space available for rent to retail tenants.
Number of Units
Number of units refers to the total count of individual properties or real estate assets within the REIT’s portfolio.
Total Occupied Units
Total occupied units refer to the total number of units within the REIT’s portfolio that are currently leased or rented out to tenants.
Portfolio Occupancy Rate
Portfolio occupancy rate measures the occupancy rate or the percentage area of a REIT’s property that has been leased. It is calculated as leased space divided by total leasable area. Portfolio occupancy rate is a measure of success that a REIT has had in attracting tenants and leasing the space it owns. The higher the occupancy rate for a REIT over time (compared to its peers), the better.
Funds From Operation (FFO)
Funds from operations (FFO) are useful to investors in measuring the operating and financial performance of a REIT. It is calculated as net income applicable to common stockholders excluding non-cash adjustments.
FFO Per Share
FFO per share measures the cash generated by a REIT’s operations. It is calculated as FFO divided by the total number of shares outstanding for a REIT.
Core Funds From Operations (CFFO)
Core funds from operations (CFFO) measure the cash flow generated by a REIT’s core operating activities. CFFO is calculated as FFO minus non-core and non-recurring items. The value of CFFO is obtained by making one-time adjustments to the FFO.
Adjusted Funds From Operations (AFFO)
Adjusted funds from operations (AFFO) is a financial measure used to estimate the value of a REIT. It is calculated as FFO minus capital expenditures and maintenance CapEx.
Average Cost of Debt (%)
Average cost of debt is a measure of the average interest rate paid to fund a business. It is calculated as interest expense divided by average debt (secured and unsecured loans and revolving credit facilities).
Net Operating Income (NOI)
Net operating income (NOI) is a measure of the income generated from a REIT’s properties after subtracting operating expenses.
Same-store Net Operating Income (NOI) Growth (%)
Same-store net operating income (NOI) growth is a key measure of profitability for a retail REIT. It is growth that excludes certain non-cash and non-comparable items. Same-store NOI is calculated as same-store revenues minus same-store operating expenses, including property taxes.
Acquisition Rate
Acquisition rate refers to the yield that is generated from an acquired property.
Acquisition Volume
Acquisition volume refers to the additions to a retail REIT’s portfolio of investment properties. This may take the form of transactions in real estate.
Development Rate
Development rate refers to the yield that is generated from a property in development.
Development Volume
Development volume is a measure of a new construction or previously agreed upon re-developments.
Disposition Rate
Disposition rate refers to the yield that is generated from a disposed property.
Disposition Volume
Disposition volume refers to the sale of real estate holdings by retail REITs.
Capitalization Rate (%)
Capitalization rate, or cap rate, is the initial yield on a real estate investment. The cap rate is computed by dividing the cash flow in year 1 by either the acquisition/disposition price or the total expected development cost.
Average Lease Term (Years)
Average lease term (years) measures the average period during which all leases in a REIT’s property or portfolio will expire.
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This guide highlights the key performance indicators for the healthcare REIT industry and where investors should look to find an investment edge, including:
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