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Net Lease, Residential and Healthcare REITs Are Hot

Juliette Fairley

NEW YORK (MainStreet) —Net lease and healthcare are the place to be right now in the REIT market, according to experts. And the most efficient way to get access is through ETFs and mutual funds.

"The net lease retail space is getting stronger because consumer spending has been increasing and the health care space is attractive because there's more demand for doctors. As a result, there's more demand for office space for doctors," said IndexIQ CEO Adam S. Patti, who is part of the team that created the IQ U.S. Real Estate Small Cap Index.

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REIT ETFs are a market cap weighted broad survey of all REITs that are available, according to Morningstar. "REIT ETFs have done fairly well since the crash of 2008. They've had a solid and steady performance last year and so far in 2013," said Abby Woodham, a fund analyst at Morningstar.

Healthcare REITs like HCN REIT Inc. (HCN) and Sabra Healthcare REIT (SBRA) are among those that top the list.

"We maintain a diversified portfolio because we never know what kind of headline risk is coming. We have exposure to industrial companies, mall landlords, office landlords and lodging landlords," said James Kammert, manager of the Aston Harrison Street Real Estate Fund, which is 20% invested in healthcare and 6% invested in the net lease space.

Healthcare REITS can include assisted living facilities, Alzheimer's care centers and hospitals while net lease retail properties include gas stations, bank branches and fast food outlets, such as Wendy's and Arby's.

But the downside of investing in healthcare REITS is the economic or headline risk.

"A lot of the underlying tenants or the operators of these healthcare facilities may have Medicare/Medicaid issues," said Kammert. "The government sets the reimbursement rates, which is a big component of the tenant's revenue stream. This dependence can influence their ability to renew leases or pay higher rents."

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As for net lease REITS, Kammert favors W.P. Carey (WPC) and Spirit Realty (SRC).

"The number of REITs specialized in owning these free-standing net leased retail properties has increased because the sector had average higher dividend yield in the overall index," said Kammert. "You can get a pretty nice price appreciation."

While 14.2% of Patti's small cap ETF (RooF) is invested in healthcare, 14.7% is invested in the net lease retail space and 4.4% in residential.

"Residential is hot right now because interest rates are low and there's pent up demand for consumers looking to buy a new house. Now that the economy has improved somewhat people think now is a good time to buy a house," said Patti.

Overall, REIT investors have seen performance upwards of 8% so far in 2013 based on the performance of the the Vanguard REIT ETF (VNQ), which was up 17.63% in 2012 and is up 8% so far in 2013.

"VNQ stands as a good proxy for the REIT Sector as whole because it is diversified," said Woodham.

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