Diagnosing The Net-Lease Medical Sector

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What do dialysis clinics, urgent care locations, and dental offices have in common?

They are often net lease tenants and together these types of tenants make up the net lease medical sector.

Calkain’s just-released “Net Lease Report: Medical Sector” notes that net lease medical properties can prove to be viable investments, thanks to the following fundamentals.

In-Place Tenants

The main appeal of a net lease medical property is the tenants, which funnel capital into extensive space buildouts and industry-specific equipment. Furthermore, a net lease medical tenant is less likely to up and relocate, as moving X-ray machines, dental equipment and surgical suites can be a costly challenge.

In-Person Healthcare Delivery

Even with telemedicine and virtual healthcare becoming important tools, medical care continues to flourish through face-to-face interaction. The in-person, real-time relationship between patient and physician is difficult to replicate via the internet, meaning a continued need for physical space. Additionally, medical tenants set up shop in specific areas, based on proximity to target populations and lack of competition.

Financial Strength

Net lease medical tenants range from solo dental practices to regional stand-alone urgent care/emergency centers to national specialty clinics. Another aspect tying these businesses together is they are, for the most part, strong financially. A consistent revenue stream adds to the appeal of a net lease medical property.

As with any kind of investment, there are downsides. The net lease medical sector is no exception, and investors need to keep in mind the following.

Empty Space

As mentioned above, relocation is less likely to take place, but this doesn’t mean that it won’t happen. If a healthcare tenant decides not to renew a lease, backfilling the property can be difficult and tenant improvements to convert to general retail purposes can be costly.

Shifting Dynamics

Neighbors Legacy Holdings Inc., which owned and operated Neighbors Emergency Centers, filed for Chapter 11 bankruptcy protection in summer 2018. The year before, six urgent care centers in Southern California filed for bankruptcy protection. Increased competition, changing third-party payer conditions, and increasing overhead costs created financial difficulties for these and other companies. The bankruptcy process can kill a net lease investor’s revenue stream until a judge approves a reorganization plan.

Certainly, there are risks when it comes to owning a net lease medical property and due diligence is essential. The future is bright for the sector.  With advances in medicine, people are living longer and this creates a greater need for healthcare services. The growing demand could push net leased medical facilities to full capacity and lead to a need for additional medical offices, specialty clinics, and urgent care locations. As such, market fundamentals and increasing demand can make medical-sector properties attractive to a net lease property owner.

 

Source: GlobeSt.

$3B Med Tech Company Takes Its Global Headquarters To Dallas

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Medical technology giant DJO Global is relocating its headquarters from San Diego to Dallas early next year.

North Texas will serve as the company’s global headquarters and include a customer experience center and a facility that fosters collaboration, according to a press release. DJO was purchased by Maryland-based Colfax Corp. in November of this year for $3.15 billion.

In addition to the relocating employees, the company says will create hundreds of jobs in the Dallas area including a new distribution center in Fort Worth, which opened a few months ago and has 200 employees. DJO creates braces, joints, inserts and more used by orthopedic surgeons, primary care physicians, pain management specialists, physical therapists, podiatrists, chiropractors, athletic trainers and other healthcare professionals, who use them for injury prevention and and physical therapy.

“We made the strategic decision to move our headquarters to Dallas to expand our presence into a market with a strong and larger pool of talent, gain greater and more efficient customer access and take advantage of what we believe is a better corporate environment for our company as we grow,” said Brady Shirley, DJO’s President and Chief Executive Officer via release. “At the same time, we felt it was important to continue the 40-year legacy of DonJoy in Southern California by continuing to build our Bracing business in Carlsbad.”

 

“This move is a key component of a multi-phase facility optimization strategy that DJO embarked on earlier in the year to enhance the look and feel of many of our offices, bring teams together and remove unneeded workspace in our U.S. locations,” said Jeanine Kestler, Executive Vice President and Chief Human Resources Officer for DJO via release. “We are excited to become one of the leading medical device companies headquartered in Dallas and an active member of the community!”

 

Source: Healthcare Magazine

Cap Rates On The Rise For Net-Leased Medical Market

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Medical uses continue to migrate away from their traditional homes on hospital campuses to retail-oriented sites.

Even as they are overshadowed by non-investment grade property volume, this “medtail” trend is growing in popularity among investors, sending cap rates up.

Year-over-year cap rates on single-tenant, net-leased medical properties were up by 22 basis points at the end of Q3 2018, according to a new report issued by The Boulder Group, a boutique real estate investment firm specializing in net lease property investments. The report, which looked at medical properties priced below $10 million, indicates that the third quarter 2018 cap rate was at 6.47 percent, versus 6.25 percent in the third quarter 2017.

“The increase in cap rates can be attributed to a higher concentration of properties located in secondary markets as well as the high percentage of non-investment grade tenants within the net lease medical sector,” said Randy Blankstein, president and founder of The Boulder Group.

These are favorable cap rates compared to the overall net lease market, though the year-over-year spread has slightly expanded. The current cap rate for general net lease properties is 6.38 percent, 9 basis points lower than net lease medical properties. This time last year, the spread was 5 basis points when the overall net lease cap rate was 6.20 percent versus 6.25 percent for medtail.

With a 6 percent cap rate and accounting for more than 55 percent of the supply for the overall net lease medical sector, dialysis-related properties are clearly the most attractive to investors. Newly constructed properties, and those with at least 11 years of remaining lease term, were even lower with asking cap rates of 5.85 percent, compared to 6.47 percent for all medical properties.

The sector is dominated by properties leased to Fresenius Medical Care and DaVita Kidney Care, two well-established, high-credit operators in the space. A Hammond, Indiana DaVita dialysis center sold in an all-cash transaction last month for $2.2 million. In a separate transaction, a DaVita-tenanted property in South Holland, Illinois sold for $3.7 million and a cap rate of 6.03 percent.

According to Blankstein, net lease medical properties typically provide rental escalations throughout the term of their lease, providing investors with an inflationary hedge and a balance to rising interest rates. Additional long-term factors that make medtail properties appealing include the general marketability and attractiveness of properties that are located within a retail corridor.

“The increasing popularity, demonstrated by sales volume and cap rate movement, is due to a variety of immediate and long-term factors,” said Blankstein. “The medical sector, and the specialized services it provides, is widely seen as e-commerce resistant.”

As popular as this sector has become, not all offerings have the same appeal. In the third quarter of 2018, 75 percent of the medical sector consisted of non-investment-grade tenants. Further, there are a considerable number of properties in secondary and tertiary markets. And, as demonstrated by asking cap rates, there is considerable disparity among the varying categories of net lease medical properties with dialysis properties having the lowest at 6 percent and urgent care facilities witnessing the highest cap rate at 7.3 percent.

In looking ahead, through the balance of 2018 and into 2019, Blankstein predicts that the single-tenant net lease medical sector will remain active as the long-term outlook for healthcare-related properties attracts investors.

“Resistance to e-commerce and the country’s aging demographic will keep investor demand strong in the net lease sector,” Blankstein said. “Investors across all profile types will continue to acquire single-tenant medical properties as cap rates remain attractive when compared to the overall net lease sector.”

Around the country, the Midwest’s median asking cap rate of 6.5 percent lags only the Northeast’s 6.6 percent. The South had a net lease medical property median asking cap rate of 6 percent in the third quarter while in the West, asking cap rates averaged 5.5 percent.

 

Source: REJournals