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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

Investor Demand For Medical Office Buildings Has Gone Global

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Demand for medical office properties is so strong, even foreign investors alien to the American healthcare system are shopping for them

“Investors from Singapore and Australia are shifting capital to the U.S. to invest in medical real estate,” CBRE Vice Chairman Lee Asher said during Bisnow’s Atlanta State of Healthcare event last week.

But as they come, Asher said he is spending more time educating foreign investors on the ins and outs of the American healthcare system.

“The foreign capital, it takes them about two years to understand how healthcare works in the U.S.,” Asher said. “There’s plenty of new capital, but the key is they need domestic operating players.”

Asher was among medical real estate experts at the event who discussed a wide range of topics affecting the industry, from the surge of new medical office construction and the merger mania occurring within the healthcare industry to the effects of the possible dismantling of Georgia’s certificate of need system.

Of course, foreign players are only a portion of the investors seeking stakes in medical office real estate. But increasing revenues, merger and acquisition activity and overall health system growth has been attracting investors from Asia, Europe, the Middle East and even Africa and Latin America, Modern Healthcare recently reported.

According to a 2019 Marcus & Millichap report, medical office sales had their largest growth in transaction velocity, at 13%, since 2015, nearly double the rate compared to other commercial property investments.

“Hospital-affiliated facilities and outpatient surgery centers with long leases and annual rent increases are most desirable, with initial returns ranging in the mid-5% to 7% span,” Marcus & Millichap officials said in the report.

Part of medical office’s attraction is its stability. Panelists said during the Great Recession, those investments largely remained untouched by the overall real estate malaise. Investors today see the sector as one of the best to weather economic downturns, especially as baby boomers age and require more healthcare.

“Also, many of the tenants — especially tenants with lots of medical equipment, like imaging groups or cancer treatment centers — book long leases and rarely, if ever, undergo the headaches of a relocation,” MB Real Estate Services Senior Vice President Brian Burks said.

Ackerman & Co. President Kris Miller said when his firm first started to develop medical office campuses more than two decades ago, it required a significant amount of personal capital and hard work to find investors. Today, the story is completely different.

“We all know racetracks make money, but it’s hard to find a banker who is going to finance one, and that was true with medical office,” Miller said. “There are just so many people who want to buy this right now. We can sell every medical office asset we stabilize, and we can sell that asset 10 times at roughly the same price.”

“Construction costs are complicating the growth of physicians and hospital groups. Even with developers willing to capitalize and build new medical facilities for tenants, the groups still need to have the financial wherewithal to handle the higher rents,” HealthAmerica Realty Group CEO Tommy Tift said. “That is probably our biggest challenge, and also that will be physicians’ … biggest challenge.”

 

Source: Bisnow

Foreign Cash, Loose Capital Is Bolstering Healthcare Real Estate

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A confluence of factors is feeding demand for healthcare real estate, including robust domestic demand, related interest from investors outside the U.S. and relatively easy access to capital.

The rapidly ascending ambulatory sector—one of several trends impacting the undulating healthcare real estate landscape—is feeding a booming medical office market. That, in turn, has drawn increased foreign investment and loosened the purse strings on a vast supply of capital that also has fueled construction and mergers and acquisitions.

“While foreign investment isn’t yet significant enough to dictate a change in medical office pricing or supply and demand, it could eventually shift market dynamics,” said Hunter Beebe, a managing principal at healthcare real estate advisory firm Healthcare Real Estate Capital. “There is a lot of capital pursuing healthcare real estate beyond foreign—private equity, REITs, domestic—the list goes on.”

Care Transformation Spurring Demand

A sweeping transformation is taking place in terms of where healthcare is being delivered. Vast hospital footprints are giving way to more convenient outpatient space, as consumers and payers seek affordable and accessible care.

The number of outpatient facilities jumped from 26,900 to 40,600 between 2005 and 2016, according to a recent report from commercial real estate firm CBRE.

Meanwhile, health systems are looking to keep pace with new competitors aiming to draw people from hospitals. Reimbursement pressures and capitated payments are pushing people out of expensive care settings while technology is enabling more complex care in outpatient facilities and the home.

Those factors drove many systems to adopt a change in approach, such as Vanderbilt University Medical Center‘s transformation of about half of a struggling 900,000-square-foot Nashville shopping center into an outpatient hub.

 

 

Revenue has followed these trends, according to data from the American Hospital Association. Hospitals‘ net outpatient revenue was $472 billion in 2017, coming close to equaling inpatient revenue, which totaled nearly $498 billion. This has fueled investment in healthcare real estate domestically and abroad.

“Twenty years ago, healthcare real estate wasn’t carved out as a separate sector,” said Jeff Calk, a partner at law firm Waller Lansden Dortch & Davis. “Demand has increased with the evolution of the industry. Now portfolio managers want to have 8% in healthcare real estate, 12% in general office and 32% in hotels.”

“That makes sense given the outlook of other asset classes and markets,” said John Claybrook, a partner at Waller.

More people are working from home, which is softening the office market. Retail’s upheaval isn’t doing the sector any favors. A slumping oil and gas market as well as geopolitical turmoil involving what is the not-so United Kingdom, the eurozone and the Middle East have caused investors to look elsewhere.

“In comparison, healthcare real estate looks stable and profitable,” Claybrook said.

 

 

Weighted average occupancy for medical office space rose from 90.4% in 2009 to 92.3% in 2017, according to data from real estate firm JLL. Medical office returns offer a 2% premium over the broader office sector and are more than double the 10-year Treasury yield, according to JLL. That will likely continue as the aging population requires more care.

 

Catching The World’s Attention

The trends have stoked interest from foreign buyers, including China and Japan, who will continue to seek operation and care-delivery expertise in a variety of subsectors, according to PricewaterhouseCoopers‘ latest US Health Services Deals Insight report. More global interest is directed toward medical office properties, which could boost a prime seller’s market for healthcare organizations looking to offload their real estate, experts said.

“While institutional investors like pension funds or insurance companies in Asia, Canada and the Middle East have been surveying the medical office sector for some time, that interest has only just recently translated to more deals,” Beebe said.

 

“We have seen a noticeable increase in interest from foreign investors in the U.S. healthcare real estate market,” Beebe said. “Foreign investors have been behind the scenes of medical office deals packaged with major U.S. health systems and real estate investment trusts. They have also invested directly or acquired major equity stakes,”

Most of the interest is stemming from the Asia-Pacific region, at 21%, followed by 16% in Europe, the Middle East and Africa, and the Americas at 15%, according to CBRE’s Global Investor Intentions Survey.

“What healthcare investors like is the stickiness of tenancy,” said Christopher Bodnar, vice chairman of CBRE Healthcare Capital Markets. “In general, foreign investors are looking to diversify and the U.S. is still considered a safe haven, especially when you consider the geopolitical risks in the other parts of the world.”

Trailing 12-month medical office transaction volume decreased to just less than $12 billion in the second quarter of 2018 but didn’t stray far from the 10-year high of $14.2 billion, according to CBRE.

 

Medical office and total healthcare real estate deals

The real estate investment trust Welltower, for example, recently paid $1.25 billion for 55 medical office and outpatient facilities owned by CNL Healthcare Properties. Most of the 3.3 million square feet of Class A post-acute facilities and specialty hospitals across metro areas of 16 states are affiliated with major health systems.

“Now is a great time to be selling medical office buildings,” Calk said.

“Still, there are three major hurdles to foreign investors eying medical office properties and senior housing facilities—size of the assets, use and sale restrictions, and relationships, Bodnar said. “It requires a lot of manpower to acquire the critical mass of facilities needed to move the needle; a 40,000-square-foot medical office just isn’t going to cut it. These deals also require relationships and trust with major stakeholders. We have seen Chinese firms that are looking at real estate ownership as a possible entry point into partnerships with larger specialty practices.”

Copious Capital

Many large players in healthcare are flush with capital, which is driving expansion, mergers and acquisitions

“Shedding real estate can be attractive to providers that need capital and want to offload maintenance duties as they put more resources into patient care. But cash-rich health systems are not selling their real estate by and large,” said Mindy Berman, managing director of capital markets at JLL.

 

Source: CBRE research, 2018 Global Investor Intentions Survey

“Despite the burden of technology, labor and pharmaceutical costs, providers are increasingly self-developing new facilities with good access to capital and low borrowing rates, especially for highly rated and high-performing health systems, Mindy Berman said. “Last year was the first year where there were no meaningful monetizations—it goes back to access to capital,” Berman said, adding that she typically sees about two a year.

“The continued strengthening of credit continues to drive a lot of merger-and-acquisition activity and construction,” CBRE’s Bodnar said.

“Many health systems have exercised their right of first refusal, which gives a potentially interested party the right to buy a property before the seller fields any other offers. This is likely an outcome of the low cost of capital,” HRE Cap’s Beebe said.

 

Hospital construction starts
Despite the momentum around medical office space, the silver tsunami of baby boomers is poised to boost demand for hospitals as well. The push for more micro-hospitalsfeaturing smaller footprints and post-acute facilities, as well as local requirements like seismic upgrades required in California, are driving the current $21.4 billion of new hospital construction, according to JLL. Nearly 38 million square feet of hospital space was under construction in 2018, JLL‘s analysis of Revista data shows. That was up from 25.9 million in 2017, 32.5 million in 2016, 27.5 million in 2015 and 21.4 million in 2014.

“Since the financial crisis, health systems’ access to capital across the spectrum has virtually been unlimited,,” said Jeffrey Sahrbeck, a managing director at healthcare financial advisory firm Ponder & Co. “This will continue to drive M&A and construction activity. Hospitals have been building beds and spending on brick and mortar in advance of baby boomers.”

 

Source: Modern Healthcare