Guide to Healthcare REIT Industry KPIs

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:

• Property Taxes: The tenant pays the property taxes associated with the leased space
• Property Insurance: The tenant is responsible for insuring the property, including liability and casualty insurance
• Property Maintenance: The tenant covers the costs of maintaining the property, which can include repairs, upkeep, and general maintenance

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.