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Cap Rates Rise In Single Tenant Medical Sector

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National asking cap rates in the single-tenant medical sector increased to 6.50%, according to The Boulder Group’s 2020 Net Lease Medical Report.That was a 5-basis point increase when compared to the prior year.

Non-investment grade tenanted properties made up 89% of the supply in the third quarter, explaining part of the increase. Investment-grade medical has a 5.93% cap rate.

“When COVID hit in Q2 and Q3, people snapped up almost all the investment-grade product that was out there and left the non-investment grade product,” says Randy Blankstein, president of The Boulder Group. “There was a flight to safety, and everyone understood that investment-grade medical was going to fare well during COVID. So there was a big rush into that space, leaving very little product today. And that’s why it looks like cap rates went up even though it’s not an apples-to-apples comparison.”

Even with much of the investment-grade medical properties taken off the market, the net lease medical sector saw a 6% uptick in transaction volume through the third quarter of 2020.

“The space is still good as far as being e-commerce resistant and an essential business,” Blankstein says. “People are still looking for this product and wanting to go a little bit more up the risk curve as far as some of the larger urgent care centers. But most investors are still not looking at the individual doctors and dentists and those types of offices. They’re not quite there yet on the credit spectrum.”

In Q3, net lease medical properties were priced at a 28-basis point discount to the overall net lease sector. Private and institutional investors continue to seek investment opportunities within the single-tenant medical sector, according to The Boulder Group.

Investment-grade medical tenants such as hospital backed systems and Fresenius typically generate lower cap rates due to the increased demand from private and 1031 investors. Private investors have widened their acquisition criteria to include urgent care groups as higher yields can be achieved.

Blankstein expects the single tenant net lease medical sector to remain active as investors are attracted to the healthcare sector’s long-term outlook and the increased need for conveniently located healthcare. The number of aging baby boomers, combined with the fact that medical space is e-commerce resistant, are a big part of this appeal.

“Between flu shots, COVID tests and COVID vaccines, there won’t be a shortage of this kind of space,” Blankstein says. “There is also a large ramping up of urgent cares as people realize there’s a huge cost savings between going to a hospital and going to an urgent care.”

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Source: GlobeSt.

North Texas Walmarts Are Launching Oak Street Health Clinics

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Chicago-based Oak Street Health announced its arrival in North Texas earlier this year, and now the value-based network is partnering with the world’s largest corporation. Walmart will be launching Oak Street Health in three of its supercenters in Dallas-Fort Worth this year.

Walmart Supercenters in Arlington, Benbrook, and Carrollton will soon transition their Walmart Care Clinics to Oak Street Health centers.

“As we grow Walmart Health locations in other markets, we think Oak Street Health’s innovative value-based healthcare model will help us continue to deliver on our live better promise at these locations,” said said Marcus Osborne, senior vice president of Walmart Health via release.

A rendering of the Benbrook Walmart with Oak Street Health clinic (IMAGE CREDIT: Oak Street Health)

The clinics will offer comprehensive and preventative primary care and urgent care services. Extended hours for walk-ins and same day appointments are part of the plans as well. All patients are welcome to the clinic, but Oak Street says its focus is on the Medicare population. There are 60 Oak Street locations around the country and the clinics’ patients have experienced a 41 percent reduction in hospital visits and a 49 percent reduction in emergency room visits compared to Medicare benchmarks.

“It is our mission at Oak Street Health to rebuild healthcare as it should be, and that aligns directly with Walmart’s history of providing accessible and equitable health care in communities across the country,” said Mike Pykosz, CEO of Oak Street Health via release. “We look forward to becoming a positive addition to the neighborhood in these new markets and providing an unmatched healthcare experience in a convenient location.”

 

Source: D CEO Healthcare Magazine

Medical Real Estate Still The Best Way To Keep Your Portfolio Healthy

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In 2018, the JSE’s SA listed property index dropped 25%. In 2019, the total return from the index was 1.92%, well below inflation. In the first five months of 2020, the index shed 39%.

Although dividends from listed property grew by 8-12% a year between 2014 and 2017, growth slowed to 3.5% in 2019, which again was below inflation. In response to the economic fall-out from Covid-19, many property companies have warned they will withhold dividends this year to strengthen their balance sheets and until they understand the full fallout from the pandemic.

The data is not looking encouraging.  Office tenants are cutting space wherever possible, having learned that their reduced workforce can work from home. Retail is under enormous pressure across the board, from the legendary brands like Edgars to the smaller independent brands, and restaurants that just don’t have the fire power to recapitalise and pay rents in a market where there are still restrictions and the consumer is unable to come to the rescue.

What’s more, if you are in the hotel and hospitality industry, then there is really no clear path to recovery at this stage and the losses will be devastating.

There’s no refuge in residential property, either. The Lightstone Residential Property Index shows national house price growth in SA peaked at 6.25% in 2014 and has slowed since then to a five-year low of 1.7% in 2019. Lightstone expects, despite the recent interest rate cuts, that growth in the residential housing market will slow again in 2020.

Two specialized sectors of the property market have continued to deliver solid returns throughout the Covid-19 crisis. Logistics is one of the winners due to online e-commerce stores which have enjoyed a surge in online shopping.

The other big winner globally is medical office buildings, whose tenants mostly offer essential services. Even those who had been required to close are already benefiting from a post-lockdown surge in patient visits as medical procedures can, in most cases, not be postponed indefinitely. Think for a moment about your dentist, who will still need to attend to those fillings even if he could not see you over the last three months.

For South Africans who invested in offshore logistics or medical buildings, the rand returns have been considerably enhanced by the latest depreciation of the rand against the dollar.

In the US, the Covid-19 crisis has hit particularly hard, with 134,000 deaths by early July, amid total confirmed cases exceeding three million. Hospitals under pressure to clear wards and scale up for the anticipated flood of Covid-19 patients have had to postpone all elective procedures and turn patients away who were not critical.

This dramatically affected the income of all medical professionals who are not directly involved in treating Covid-19 patients, and has also affected hospitals’ revenue. Even as the US emerges from lockdown, patients choose to avoid traditional hospitals in fear of being exposed to the virus. This has been a boost for medical practitioners working outside the hospital systems, as patients have sought treatment from doctors working from these independent facilities.

Orbvest, which has 19 medical office buildings under management in three US states (Texas, Georgia and New Jersey), noted rental collections declined slightly in April, during lockdown, as about 21 tenants across the entire portfolio of over 100,000 square meters requested deferment.

But by end-June, the net collection of rentals was back to 97.6%, as both Texas and Georgia re-opened their economies, and collections for the month of July already are close to normal. The nett result of the pandemic on our projected revenue will be negligible and we expect to have fully recovered before year end.

Medical property investment was not an unexpected beneficiary of the Covid-19 crisis. The argument for buying into a building tenanted by medical professionals, especially in the US, makes fundamental sense in the long term. In the US, the aging population is growing and requiring more medical care. An investment delivering a proven 8% p.a. in US dollar dividends paid quarterly, plus a capital gain share at the end of the investment period, is an essential part of a diversified portfolio for South African investors.

 

Source: Daily Maverick