High-Yield Medical REITs: Unpacking the Misconceptions and Risks of THQ's 12.7% Returns

The abrdn Healthcare Opportunities Fund (THQ) has long been a fixture in the high-yield investment landscape, often cited for its 12.7% annualized returns. However, a closer examination of its structure and operations reveals a critical disconnect between investor perceptions and the fund's actual business model. THQ is not a medical REIT, as some assume, but a closed-end fund with a healthcare-focused equity and debt strategy. This distinction is vital for understanding both its returns and its risks.

THQ's Structure and Strategy: Beyond the REIT Label

THQ's primary mandate is to invest in the healthcare sector, allocating approximately 73.30% of its portfolio to equities and fixed-income securities of healthcare companies, including pharmaceuticals, medical equipment firms, and healthcare providers. A mere 6.17% of its assets are allocated to real estate, a fraction of the exposure typical of medical REITs, which specialize in owning and leasing healthcare properties such as hospitals and clinics.

The fund's 12.7% returns, often highlighted in investment forums, stem from its aggressive distribution policy and leverage strategy. THQ employs 20% leverage—borrowing against its assets to amplify returns—a tactic common in closed-end funds but riskier than the conservative balance sheets of most REITs. Its monthly distribution of $0.18 per share, set by the Board of Trustees, is funded by a mix of net investment income (29%), realized capital gains (29%), and return of capital (42%) as of fiscal 2024. This structure means that while the yield appears attractive, a significant portion of the payout erodes shareholders' cost basis, reducing future taxable gains.

The Risks of Confusing Equity Funds with REITs

Medical REITs, by contrast, derive income primarily from rental agreements with healthcare providers. Their returns are tied to property values, occupancy rates, and interest rate environments, making them less volatile than equity-focused funds like THQ. For example, a medical REIT might generate stable cash flows from long-term leases with hospitals, whereas THQ's performance hinges on the profitability of biotech firms or the success of clinical trials—a far more speculative proposition.

THQ's leverage further amplifies its risk profile. While the fund's 20% debt-to-asset ratio is not uncommon for closed-end funds, it exposes investors to interest rate sensitivity and liquidity constraints. In a rising rate environment, refinancing costs could erode margins, particularly for a fund with a high proportion of debt-dependent holdings. Additionally, the 90% return of capital component in its 2025 distribution policy means investors should not expect sustained growth in NAV (net asset value), which stood at a 1.83% premium to market price as of March 2025.

A Cautionary Note for High-Yield Seekers

The 12.7% returns often attributed to THQ are a function of its distribution policy rather than organic growth. For context, the fund's total return over the past five years has averaged 8.2%, according to industry benchmarks, far below the headline yield. This discrepancy underscores the importance of distinguishing between distribution yields and total returns. Investors drawn to THQ for its high yield must also consider the tax implications of return of capital, which reduces the fund's cost basis and may trigger capital gains taxes upon sale.

Moreover, THQ's focus on equities exposes it to sector-specific risks. For instance, its 37% allocation to pharmaceuticals makes it vulnerable to regulatory changes, patent expirations, or R&D failures—factors that do not affect property-owning REITs. In contrast, medical REITs benefit from the defensive nature of healthcare demand, with tenants less likely to default during economic downturns.

Conclusion: A Misaligned Assumption

THQ's 12.7% returns are a product of its unique structure as a leveraged, equity-focused closed-end fund, not a medical REIT. While its distribution policy offers an attractive yield, the risks—particularly the reliance on return of capital and leverage—make it a less stable option compared to traditional REITs. For investors seeking high yields in the healthcare sector, a diversified approach that includes both equity funds and REITs may offer a more balanced risk-return profile.

Source:
[1] abrdn Healthcare Opportunities Fund (THQ) [https://www.sec.gov/Archives/edgar/data/1604522/000110465924126665/tm2430035d4_ncsr.htm]
[2] Here are two CEFs yielding as high as 8.6% for stable income [https://finance.yahoo.com/news/attention-retirees-two-cefs-yielding-173500094.html]
[3] abrdn Healthcare Opportunities Fund: THQ [https://www.cefconnect.com/fund/THQ]
[5] A Closed-End Trio for Steady Income - MoneyShow [https://www.moneyshow.com/articles/dailyguru-56535/]