Posts

Healthcare REITs: Back On Life Support

/in /by

The United States healthcare system has taken center-stage amid the coronavirus outbreak as Healthcare REITs have been on a roller-coaster ride amid evolving forecasts of the severity of the pandemic.

Within the Hoya Capital Healthcare REIT Index, all 18 healthcare REITs are tracked, which account for roughly $110 billion in market value. One of the higher-yielding and more defensive REIT sectors, Healthcare REITs comprise 10-12% of the broad-based “Core” REIT ETFs and are generally well-positioned to capture the demographic-driven tailwinds of the aging population over the next decade.

healthcare REITs

There are five sub-sectors within the healthcare REIT category, each of which have distinct risk/return characteristics. The senior housing sector can be further split into two categories based on lease structure: triple-net leased properties or SHOP (senior housing operating properties). For senior housing, supply growth has been a lingering headwind that has pressured occupancy and rent growth in recent years. Policy-risk is an important factor for skilled nursing and hospital REITs, which derive a significant portion of their revenue from public and private health insurance reimbursements. These “public pay” REITs have been pressured in recent years by policy changes that have attempted to push patients into lower-cost healthcare settings. Medical office and research/lab space, meanwhile, have generally exhibited the most steady and consistent fundamentals within the healthcare REIT space.

healthcare REIT property fundamentals

Healthcare REITs tend to focus on a single property type and are led by the “Big Three” healthcare REITs – Ventas (VTR), Welltower (WELL), and Healthpeak (PEAK). These “Big 3” REITs hold a fairly diversified portfolio across the healthcare spectrum, although these firms have divested most of their public-pay assets in recent years to focus more exclusively on the senior housing sub-sector. Other players in the senior housing space include New Senior (SNR), National Health (NHI) and Diversified Healthcare (DHC). On the public-pay side, the skilled nursing sub-sector includes Omega Healthcare (OHI), Sabra Health Care (SBRA), CareTrust (CTRE), and LTC Properties (LTC) while there is a single hospital-focused REIT, Medical Properties (MPW). The medical office sub-sector includes Healthcare Realty (HR), Healthcare Trust (HTA), Universal Health (UHT), Physicians Realty (DOC), Community Healthcare (CHCT), and Global Medical REIT (GMRE). Alexandria Realty (ARE), meanwhile, is the lone REIT focused exclusively on research and lab space.

healthcare REITs 2020

Still a relatively fragmented industry, Healthcare REITs own approximately one-tenth of the total $2 trillion worth of healthcare-related real estate assets in the United States. Occupancy in senior living facilities is generally “by necessity” and the average age of occupants in these facilities is roughly 84 years old. Healthcare REITs have historically been among the most active acquirers and consolidators, using the competitive advantages of their REIT structure to fuel accretive external growth. Healthcare REITs primarily lease properties to tenants under a long-term triple-net lease structure, though these REITs have taken on increasingly more operating responsibilities over the past decade as these they attempt to mitigate the risks of their third-party operators, many of which have struggled to remain profitable in recent years amid rising costs and lower reimbursement rates. Healthcare REITs have historically been a defensively-oriented sector that pays hearty dividend yield.

healthcare REIT

Healthcare REITs Slammed By Coronavirus Pandemic

Healthcare REITs were slammed during the early-onset of the outbreak but have recovered in recent weeks as death rate estimates have, thankfully, been revised drastically lower from early catastrophic figures. At their lows on March 23, the healthcare REIT sector was off by roughly 45% on the year with several small-cap names down more than 75%, but these REITs have clawed back nearly half of these losses over the last three weeks as coronavirus forecasting models evolved and updated. For the year, the Hoya Capital Healthcare REIT index is lower by 24.9% compared to the 20.9% decline on the broad-based REIT average and the 10.9% decline on the S&P 500.

healthcare REITs

The Institute for Health Metrics and Evaluation (IHME) now estimates that there will be 60,308 COVID-19 deaths, significantly lower than the 240,000 estimate just a month ago. Concerns about the severity of any given flu season is an annual issue for healthcare real estate investors – particularly senior housing and skilled nursing operators – who unfortunately see thousands of resident deaths per year. A typical flu season in the United States will result in between 20,000-60,000 deaths every year according to the CDC, with 95% of deaths above the age of 65. Using current estimates from the CDC and IHME, the 2020 flu season – including the impacts of coronavirus – will likely be 2-3x worse than the typical year and skewed more heavily towards older age cohorts which have been hit disproportionately hard.

flu deaths 2020While likely less devastating on underlying demographics than once feared, no healthcare real estate sector – or any REIT sector for that matter – is immune from the significant near-term and long-term effects of the pandemic. Below is a framework for analyzing the REIT property sectors based on their direct exposure to the anticipated COVID-19 effects as well as their general sensitivity to a potential recession and impact from lower interest rates. Within the COVID-19 sensitivity chart, healthcare REITs are the fifth-most exposed sector to according to our estimates behind hotel, gaming, and retail REITs. Healthcare REITs, however, are usually one of the more stable sectors during “garden variety” economic downturns due to their long-lease terms and generally stable demand profile.

covid sensitivity

The effects of the pandemic will be felt in different intensities within each healthcare real estate sub-sector. Amid the ongoing lockdowns, senior housing REITs have seen occupancy decline due primarily to depressed move-in rates and a sizable uptick in expenses in efforts to prevent and/or control the spread of the virus within the community. Long-term attitudes and behaviors towards senior housing – particularly in independent living communities – may be affected as well. For skilled nursing REITs, the pandemic further exasperates issues with their troubled operators, who have seen expenses rise significantly, a near-term issue that could very well become a long-term risk. For hospitals, the suspension of elective surgeries and a far lower-than-expected surge of coronavirus patients has stretched the already-tight budgets of hospitals and led to tens of thousands of layoffs of doctors and nurses. For the medical office category, while near-term risks are minimal, the huge uptake in usage of telemedicine may alter the long-term need for MOB space.

Naturally, the relatively more immune research/lab space and medical office-focused REITs have outperformed amid the pandemic with Alexandria Realty, Healthcare Realty, and Universal Health Realty leading the way this year. Senior housing-focused REITs, particularly small-cap New Senior and Diversified Healthcare, have been hit especially hard since the start of the outbreak and have yet to enjoy a similar bounce-back as the rest of the sector. So far, two healthcare REITs – Sabra Healthcare and Diversified Healthcare – have announced dividend cuts anda few more expected once earnings season kicks-off next week in what will surely be an eventful and newsworthy few weeks. We’ll have full real-time coverage of earnings season on iREIT on Alpha and as well as in our Real Estate Weekly Outlook.

healthcare real estate

Long-Term Outlook Remains Mostly Intact

For healthcare REITs, the long-awaited demographic-driven demand boom from the aging Baby Boomers – a historically large generation generally defined as those born between 1945 and 1965 – is finally on the horizon. While there was significant fear last month that the contours of this generation could be materially altered by the coronavirus pandemic, current forecasts thankfully suggest a more muted impact. Following the relatively small “Silent Generation,” Baby Boomers are a healthier and wealthier cohort, expected to live longer lives and consume healthcare at a rate that significantly exceeds their prior generational peers. After years of relative stagnation in the critical 80+ population cohort for healthcare real estate, the long-awaited demographic boom is finally in sight as this age segment will nearly double over the next 30 years and grow at an estimated 4% per year through 2040.

Early hints of this long-awaited demand boom were just showing hints of emerging at the end of 2019. According to recently-released NIC data, 2019 was the first year since 2015 to have seen a sequential uptick in average occupancy for senior housing and the first year since 2005 to see an uptick for skilled nursing. While wage pressures continue to pressure margins and rent growth remains uninspiring at inflation-matching levels, same-store NOI performance in 2019 appeared to be an inflection point for the long-sagging healthcare sector. In 4Q19, same-store NOI growth rose to the strongest TTM growth rate in nearly three years at 1.48% following three years of deteriorating performance. Several unknown variables will determine the extent of the coronavirus-related slowdown in 2020, primarily related to the length and severity of the pandemic and if it results in any “permanent” damage to key tenants that would require restructuring.

healthcare REIT same-store NOI growth

Normally, a “garden-variety” recession would be associated with relative outperformance from the healthcare REIT sector. After the prior recession, healthcare REITs went on a buying spree, acquiring tens of billions of dollars worth of healthcare assets from weaker and more troubled operators. This accretive external growth was harder to come by over the last half-decade, but strong share price performance over the last two years had restored the sector’s coveted NAV premium, allowing these REITs to get back to doing what they do best. Healthcare REITs acquired more than $10 billion in net assets in 2019, which was the largest since 2019. The coronavirus pandemic, however, has quickly flipped these sizable NAV premiums to similarly-sized NAV discounts, which will likely reverse the recent momentum.

healthcare REIT transactions

The ‘Aging Boomer’ investment thesis has been no secret to developers as senior housing has been one of the few housing segments seeing ample speculative supply growth in preparation for aging boomers, defying the broader “housing shortage” theme of limited supply in the entry-level and mass-market housing segments. While demand has been predictably steady and showing early signs of Boomer-led acceleration for most sub-sectors outside of skilled nursing, relentless supply growth over the past several years has continued to pressure same-store NOI growth for the senior housing sector. Absent the coronavirus outbreak, it was projected that in 2020 would see roughly supply/demand equilibrium followed by a decade of demand growth outpacing supply growth. That supply/demand equilibrium will likely be pushed back to 2021 given the likely near-term contraction in demand amid the ongoing lockdowns.

senior housing supply growth

The relative oversupply of purpose-built senior housing, however, needs to be viewed in the context of the broader housing market. CBRE estimates that there are roughly 3 million professionally-managed senior housing or skilled nursing units in the US, representing less than 2% of the total US housing stock. By nearly every metric, the U.S. housing markets remain significantly undersupplied at the national-level after a decade of historically low levels of residential fixed investment. As discussed in the focus of our last healthcare REIT report, this has important implications for the retirement prospects of millions of aging Boomers. It is believed that the fears of a “retirement crisis” are overstated due in large part to rising home values over the past decade as Americans – mostly Boomers – who have built up $10 trillion in additional home equity over the last decade which can be tapped over the next decade to pay for healthcare services.

housing shortage

Healthcare REIT Valuations & Dividends

Healthcare REITs currently trade near the lowest valuations seen over the last decade, and continue to trade at discounted valuations relative to other REIT sectors based on consensus Free Cash Flow (aka AFFO, FAD, CAD) metrics. Trading at roughly an 11x AFFO multiple, healthcare REITs trade well below the 15x REIT sector average. Powered by the iREIT Terminal, the sector now trades at a roughly 5-10% discount to Net Asset Value, a reversal from the NAV premium seen at the end of 2019.healthcare REIT valuations

Healthcare REITs have historically been strong dividend payers and continue to rank towards the top of the REIT sector in that regard even after two of the eighteen REITs cut their dividends last month. Healthcare REITs pay an average yield of 6.0%, which is above the REIT sector average of 4.1%. Healthcare REITs, on average, payout roughly 75% of their available cash flow, which leaves some cushion to maintain dividends, though several REITs are at higher risk of dividend cuts due to their already extended payout ratios.

dividend yields healthcare REITs

Dividend yields of the individual names in the healthcare REIT sector range from a low of 1.5% (Diversified Healthcare, which cut its dividend last month to preserve cash) to a high of 17.8% (New Senior Investment). SNR and GMRE as the two most at-risk for a dividend cut based on extended payout ratios, which may be announced during earnings season over the next few weeks. Investors seeking a safe, predictable income stream should focus on the MOB, lab/research, and upper-tier senior housing healthcare REITs such as the Big 3 (Welltower, Ventas, and HCP), Healthcare Trust, Healthcare Realty, Physicians Realty, or Alexandria. Investors who are looking willing to take on significant speculative policy and operational risk can take a look at the primarily public-pay REITs such as Omega, Medical Properties, and Sabra.

healthcare REIT dividend yields

In a recent report, “The REIT Paradox: Cheap REITs Stay Cheap“, the study that showed that lower-yielding REITs in faster-growing property sectors with lower leverage profiles have historically produced better total returns, on average, than their higher-yielding and higher-leveraged counterparts. We’ve now tracked 22 equity REITs in our universe of 165 names to announce a cut or suspension of their dividends in addition to the roughly half of mortgage REITs (20 out of 41) that have announced dividend cuts thus far. So far, all of the dividend cuts or suspensions have come from sectors that are deemed as High or Medium/High COVID-19 risk.

REIT dividend cuts 2020

Key Takeaways: Back on Life Support, But Not Terminal

The United States healthcare system has taken center-stage amid the coronavirus outbreak. Healthcare REITs have been on a roller-coaster ride amid evolving forecasts of the severity of the pandemic. Healthcare REITs were slammed during the early-onset of the outbreak but have recovered in recent weeks as death rate estimates have, thankfully, been revised drastically lower from early catastrophic figures.

While likely less devastating on underlying demographics than once feared, no healthcare real estate sector is immune from the significant near-term and long-term effects of the pandemic. For senior housing, skilled nursing, and hospital REITs already dealing with soft underlying fundamentals, the pandemic will put a sizable dent in near-term demand and drive significantly higher expense growth. The positive long-term outlook for senior housing remains intact as the long-awaited demographic-driven demand boom is finally arriving. Behaviors and attitudes towards senior housing and telemedicine, however, shouldn’t be overlooked.

Investors seeking to play the sector through an ETF can take a look at the Long Term Care ETF (OLD), which allocates roughly 50% of its holdings towards senior housing and skilled nursing REITs or the iShares Residential REIT ETF (REZ), which allocates roughly 30% towards healthcare REITs, including medical office and hospitals. Senior housing REITs also compose roughly 4-5% of the Hoya Capital Housing Index, which tracks the performance of the U.S. housing industry. It is believed that the combination of historically low housing supply and strong demographic-driven demand provides a very compelling macroeconomic backdrop for the US housing industry – including senior housing – over the next decade.

housing etfI

Source: Seeking Alpha

Riding The Wave Of Surging MOB Demand

/in , , /by

In a country where over 10,000 people turn 65 daily, it’s safe to say that an aging population will drive the demand for healthcare resources for years to come.

Healthcare Trust of America (NYSE:HTA) is a real estate investment trust that seeks to not only ride the irresistible wave of current demographic trends, but also aims to carve out strong footholds in markets where high tenant quality can be secured and leveraged to more profitable relationships. As the largest dedicated owner/operator of medical office buildings (MOB’s) in the U.S.,

HTA is also well-positioned to benefit from the broad shift away from expensive inpatient facilities, and instead toward more cost-effective outpatient resources, as healthcare spending already projects to account for fully 20% of GDP by 2026.

HTA currently has lots of competition in the medical property space (not just from other REIT’s either) as the sector is one of the few areas where growth is almost guaranteed to exceed nominal GDP growth for years to come. This has pushed the price of related real estate assets sky high, and has been something of a double-edged sword, because profitability on leases takes a bit of a hit as profit margins are eaten away by the rising cost of asset purchases. Fortunately, HTA‘s focus on specific markets with strong demographic dynamics, its fully-integrated property development capabilities, and prudent cost management have all combined to insulate profits somewhat more than peers. Past is not necessarily prologue, however, and challenges from interest rate volatility to changing investor sentiment and MOB demand can affect spreads, margins, and FFO numbers. With respect to HTA, I’ll look at the company’s structure, competitive position, real estate portfolio, financial strength, and underlying fundamentals of the stock to help current and prospective investors assess whether HTA is a buy at current prices, and what the long-term outlook is for the company and the stock.

HTA company snapshot(Image source: HTA 2018 annual report)

Finding its Niche

As the single largest owner of MOB’s in the U.S., HTA‘s real estate portfolio comprises 23 million sq. feet of GLA (gross leasable area), having invested roughly $6.8 billion in those properties over the last 10 years. While the firm has considerable market breadth across the country, it does try to focus on 20-25 “gateway markets” where it seeks to “build critical mass,” especially in communities with universities and large extant medical institutions. The thinking is that this strategy presents not only favorable demographic trends for local demand, but also supply in the form of skilled-labor and job growth. Consequently, the company has already started to see some of the benefits via robust long-term demand for medical office management and leasing services. Overall, the firm has an integrated asset management model consisting of on-site leasing, property management, engineering and building services, and targeted real estate development. With a focus on operational efficiency and tenant quality, HTA has sought to build lasting relationships with dependable clients, and achieve real rental growth. Management hopes this combination will lead to peer-beating value-creation in the long-run.

HTA portfolio map(Image source: HTA investor presentation)

Founded in 2006 as a private REIT, HTA went public on the NYSE in 2012. Headquartered in Scottsdale, AZ, the firm has quickly expanded as it has not only emerged from the depths of the real estate and financial crash of 2007-8, but benefited from the growth of healthcare in general, and its own target markets in particular. This concentration in a few key markets has allowed the company to build strong competitive positions within those communities, and has actually led to relatively strong operating margins. Further, management’s focus on the firm’s financial strength and liquidity has allowed for continued investment and development, leading to accretive acquisitions and leasing relationships. Those strong tenant relationships foster increased margins, higher tenant retention, better leasing spreads, and more and better growth opportunities.

HTA d/a and d/e(Source: Author, Benjamin Black)

The operating platform consists of four main segments, including property management, maintenance services, leasing services, and construction & development. This multifaceted approach has allowed HTA to not only capitalize on leasing and property management fees, but also build its footprint through development and property investment. While 93% of the company’s overall GLA consists of in-house property, the top 20 markets comprise 75% of GLA as well, which is actually a 12% increase since 2013 (when it was 63%). What this shows, given HTA‘s ballooning real estate portfolio during this time period, is a strengthening position in the markets it chooses to focus on. The portfolio is increasingly concentrated in large and growing markets with high MOB demand, and top markets now include Dallas, Houston, and Boston, among other expanding metro areas with favorable demographics. Specifically, HTA targets strong same property cash NOI growth.

HTA portfolio(Image source: HTA investor presentation)

Growing the Portfolio

Since the end of 2013, HTA has doubled its portfolio in terms of GLA and property value (from $2.6 billion to $5.4 billion). Over this same period, leverage (net debt/EBITDAre) has remained fairly steady at a rate between 5 and 6X, falling at a respectable 5.8X in 2018. Cash from operations and use of the firm’s ATM equity program have largely financed the acquisitions. Solid enterprise value growth and normalized FFO growth of 27% (through 2018) help underscore the merits of a strategic focus on core-community, on-campus, and academic medical center locations. The economics and demographics of university-heavy cities favors MOB demand and related pricing. What sets HTA apart from peers is its vertically-integrated operating platform allowing it somewhat of a unique offering to customers. This has translated to success for investors in the underlying stock, as the REIT has outperformed not only broader REIT indices, but also the healthcare REIT index as well. Of course, this underlying performance does include some years as a private REIT, where returns are calculated mainly by factoring in total distributions over the period, but regardless, the 156% total return since ’06 compares favorably (bear in mind the period begins right around the height of the real estate bubble).

HTA real estate assets(Source: Author, Benjamin Black)

Healthcare delivery is expected to shift to more outpatient facilities over time due to it being more cost-effective than inpatient care. Additionally, limitations to existing hospital resources have further enhanced outpatient visit growth. In fact, inpatient visits have begun to decline in recent years, despite the growing demand for healthcare overall, which is especially beneficial to MOB operators. While demographic and industry dynamics favor the MOB REIT sector generally, HTA‘s laser-like focus on key “gateway” markets further drives growth and profitability. In addition to this, the consolidation of healthcare providers will likely lead to increased opportunities for MOB operators with scale (such as HTA).

HTA P/FFO(Source: Author, Benjamin Black)

MOB’s are desirable to providers because they help augment provider growth by helping to limit capital outlay/commitments by providing leasable properties, and also limit the volatility of cash-flows. The ability to develop synergistic and profitable relationships with strong providers depends greatly on location, barriers to entry, and operational efficiency of both the leaseholder and the property manager. That said, the MOB sector is especially fragmented, as less than 20% of the market is institutionally owned. Further, REIT’s only have an 11% share of the MOB market, which is less than private equity, developers, and providers themselves. Of that relatively small slice of the pie, however, HTA is fast becoming a dominant player.

Competitive Position

From 2012-2018, annualized FFO growth of 4.6% matches that of Welltower (NYSE:WELL), and is above peers H&R REIT (OTCPK:HRUFF) (3.3%), Ventas Inc., (NYSE:VTR) (1.2%), and Healthpeak Properties (NYSE:PEAK) (-1.7%). Same-property cash NOI growth, which I’ll refer to as SS (similar to same-store growth in retail), averaged 3% from 2013-2018, bested only by HRUFF (3.2%), and ahead of Physicians Realty Trust (NYSE:DOC) (2.6%), WELL (2.3%), VTR (1.4%), and PEAK (1.3%). Total shareholder returns meanwhile, have outpaced them all, coming in at 68% over the period (vs. a range of -6% to 54% for the previously mentioned companies).

MOB REIT returns(Image source: SEEKING ALPHA HTA STOCK PAGE)

PEAK (formerly HCP) in particular, has struggled over the last 5-6 years, and HTA may stand to benefit as a result. Note that in 2 of the last 4 quarters, SS growth fell below the REIT MOB average of 2.6%. Prior to that, from 2014-17, HTA grew cash NOI at a range between 2.8-3.3%. It has hit a low of 2.3% in 1Q18, but has since recovered to 2.7% as of 4Q18. The good news, however, is that since 2014, SS expenses for the company have actually declined, averaging -0.8% vs. an average of +0.9 to 3.4% for peers (including WELL, VTR, HCP, DOC, and HRUFF), which collectively averaged 1.75%. This disparity shows HTA‘s greater efficiency and cost management than peers. So, over the last 5-6 years overall, same-property figures look healthy, but keep an eye on the trend, and take special note of any further deterioration in NOI growth rates, or rising same-property expenses.

HTA SS-NOI growth(Image source: HTA investor presentation)

It’s important to note that the MOB sector (and healthcare real estate investment generally), is currently experiencing a period of record low cap rates. Cap (capitalization) rates are the ratio of net operating income (NOI) to property asset value, and such rates have fallen in recent years due to high investor demand and fast-rising property values. One major reason for this trend is that health-related real estate is seen as a sector of fairly reliable growth; in fact, total number of outpatient visits has grown by almost 2% annually between 1994-2014. By comparison, over the same period, inpatient admissions actually declined by 0.67% annually.

HTA EV/EBITDA(Source: Author, Benjamin Black)

Investor demand remains at an all-time high for healthcare real estate assets, and especially MOB’s, consequently pushing down cap rates and therefore profit margins and ROI expectations. Because healthcare is seen as one of the strongest drivers of economic growth in the U.S. going forward, investors continue to position their portfolios to reflect that trend. Total healthcare real estate volumes, though, stayed roughly the same for 2019 as 2018, mostly due to the lack of available properties, presenting an opportunity for profitable MOB development in key markets where demand is particularly robust.

And the Survey Says…

In a survey of medical real estate investors, CBRE showed that 94% of respondents favored MOB’s for acquisition, by far the highest of any building type (ambulatory surgery centers (ASC’s) were 2nd at 69%, for some perspective). These results further underscore the high continued demand for MOB’s, and the resultant tight supply-demand and pricing environment. Expected cap rates for MOB’s in 2019 are between 5-6%, which represents the lowest cap rates for all medical building/real estate investment categories, including ASC’s, wellness centers, LTC hospitals, rehab hospitals, etc. Only 2% of survey respondents felt that 2019 would see lower investor demand for MOB’s than 2018, and only 1% of respondents said that occupancy rates of their MOB portfolio had fallen from the prior year (99% said it was the same or higher). Generally, survey results show that the bulk of those asked see annual growth for medical office lease rents falling between 2-3%, largely reflective of inflation expectations and GDP growth.

Cap rates

MOB cap rates(Source for the above two images: HTA investor presentation and Hammond Hanlon Camp LLC 2018 MOB report, attached at the end of the article)

In 2018, the “tightening of the spread between sales and development capitalization rates (had) many developers on edge given the rising interest rate environment.” Fortunately, interest rates have actually fallen over the last year, as the Fed has lowered the Fed Funds Rate by 0.25% on three separate occasions in the TTM period. In the 24 months between the beginning of 2017 and the end of 2018, construction costs generally increased between 15-30% (depending on the market). Despite this surge, rental increases generally kept pace with rising construction costs, as the growing economy allowed developers to pass on rising costs. Additionally, cheap credit continues to augment market growth as loan-to-value ratios remain elevated at between 65-90%, and are increasingly occurring at the higher end of that range.

The Fundamental Picture

While the healthcare industry is clearly growing (average healthcare spending per person rose 11% in 2017 alone, for example), not all MOB operators are created equal, and not all markets are especially geared towards that sector’s growth. HTA with its university-centric market approach (it targets a portfolio composition of 68% of GLA from on-campus properties, and 32% off-campus), seems to have found a profitable niche. Growing its real estate assets from $1.7 billion to $5.7 billion from 2009-2019 (12.86% CAGR), HTA has greatly expanded its portfolio and simultaneously managed to grow its FFO from $28.8 million to $317.7 million, producing a CAGR of roughly 27%. Meanwhile, management has grown overall EBITDA from $61.3 million to $416.2 million (21.1% CAGR) over the same period.

HTA FFO(Source: Author, Benjamin Black)

While the annual dividend was higher in 2010 at $1.46 per share (vs. $1.24 in the TTM period), the FFO payout % was also much higher, at over 85% (vs. roughly 80% today). Dividends have increased annually since 2013, but at a compound annual growth rate of only 1.26%. The P/FFO ratio is just under 20 (at 19.8), and is reasonable, if not a screaming bargain. Reflecting on these numbers, HTA‘s focus is expanding its competitive position, showing very impressive top-line growth, but due to historically low cap rates and exploding real estate costs, that is not necessarily translating to stellar profit and dividend growth.

HTA dividends

HTA FFO payout %(Source for the above two graphs: author)

The Bottom Line

While HTA is well-positioned as a leader in the healthcare REIT sector, shareholder returns will likely remain muted while asset prices and earnings multiples remain high (relative to historic norms). That said, this is a company to consider adding to your watchlist, as it is a best-of-breed operator in a growing sector of the economy in the long run. It’s a great company, but a so-so stock at the moment. If HTA were to fall 20-30% over the next few months, however, (or basically flat-line over the next 2-3 years),  a reasonable and profitable entry-point would present itself, but wait for the underlying fundamentals to catch up to the price first.

*Most market and company-specific data drawn from HTA’s 2018 annual report or most recent investor presentation, found on the company’s investor website. Data used to construct graphs drawn from Seeking Alpha’s HTA stock page.

 

Source: Seeking Alpha

What’s Behind Medical Office Buildings’ Strong Trajectory

/in , , /by

One of the US’ fastest growing industries, healthcare spending reached almost $3.5 trillion annually in 2017.

The US Centers for Medicare & Medicaid Services anticipates national healthcare expenditures to grow to $5.7 trillion by 2026. With this growth, healthcare real estate, specifically medical office buildings, are poised for further success.

Medical Office Buildings

Medical office buildings comprise approximately 10% percent of the US office sector. These buildings are typically about 40,000 square feet and range from small physician offices to large healthcare systems. Investors are attracted to this asset class due to its stability and positive forecasts for a strong performance. On the rise for the last four years, medical office sales totaled $10.4 billion in 2018.

“Medical office buildings are so popular and are in demand as a renovation or as new construction,” says Jason Signor, CEO and partner of Caddis Healthcare Real Estate. “The market is phenomenal and occupancy levels and rental rates are healthy.”

It is well-known that the the aging US population is directly correlated with the rising demand for healthcare as doctor visits dramatically increase with age. Individuals 65 years and older spend five times more on healthcare than those who are younger. Yet, even with the favorable demographic and economic backdrop, new healthcare construction has not kept up with demand.

“With the continued shift from inpatient to outpatient care, new real estate strategies are being implemented which includes moving to urgent care centers, MOBs, micro-hospitals and health-system sponsored wellness centers,” says Signor. “ Outpatient care is booming and will continue to flourish in the future. The challenge, of course, is for our sector to keep up with the growing demand.”

Ambulatory Surgery Centers

Ambulatory surgery centers—healthcare facilities which offer patients the option of having procedures and surgeries performed outside of the hospital setting—have drastically reduced healthcare costs. According to the American Hospital Association, the number of ASCs and hospitals are almost equal with 5,534 hospitals and 5,532 surgery centers. While hospitals have declined by 5%, surgery centers have grown as much as 82% since 2000.

“ASCs will continue to dominate the healthcare real estate landscape,” says Signor. “We won’t see these large hospital campuses being built as much. As the campuses get older however, you will see more renovations as hospitals keep up with medical technological advances and stay abreast with ASCs.”

 

Source: GlobeSt.