A Matter of Time for Health-Care REITs
We prefer the yield, stability, and growth prospects of the triple-net structure over RIDEA.
Until the introduction of the REIT Investment Diversification and Empowerment Act of 2007, health-care real estate investment trusts simply owned property and rented it to tenants. RIDEA, however, allows REITs to directly expose themselves to the financial performance of the underlying health-care operations, instead of just collecting rent checks. RIDEA has brought changes to health-care REITs' profitability, cash flows, and return prospects--some cosmetic and others meaningful. Although triple-net leases have dominated health-care REITs' results historically, the rapid adoption of the RIDEA structure since 2010 has resulted in portfolio exposures of as much as 34%. The new structure has been a financial boon lately, as RIDEA-structured assets have enjoyed robust growth. However, RIDEA introduces the potential for variability in health-care REITs' cash flows and makes REITs responsible for additional expenses relative to traditional triple-net assets. Also, RIDEA transactions have generally been priced more aggressively than triple-net deals, which implies that faster cash flow growth is required to make the RIDEA structure pay off. As a result, we generally favor the yield, stability, and growth characteristics of the triple-net deals.
The Basics: RIDEA vs. Triple Net
Before the introduction of RIDEA, health-care REITs stuck to a simple model: Buy property and rent it to tenants. Since 2007, however, health-care REITs have had the option to buy property and--instead of simply collecting rent from a tenant--be financially responsible for the success of health-care service operations conducted in the property.
Todd Lukasik does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.