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Health Care Real Estate Could Be A Coronavirus Safe Haven

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It’s hard to imagine many stocks will do well through the coronavirus pandemic. But health care stocks and real estate investment trusts tend to be defensive sectors that investors flock to because they pay huge dividend yields.

So what happens when you combine the two?

Health care REITs might be a good bet in this scary market environment. Many are positioned well to help manage the COVID-19 coronavirus crisis, particularly companies that own and operate hospitals, medical offices and life sciences and biotech facilities.

“Health care REITs are generally the most defensive, economically resilient property type in the REIT industry,” said CFRA Research analyst Kenneth Leon in a report last week. “The group offers steady cash flow, low risk of rental rate volatility, and stable occupancy levels.”

Leon said that three in particular that he’s recommending are Alexandria Real Estate Equities (ARE), Healthcare Trust of America (HTA) and Medical Properties Trust (MPW).

Healthy Dividend Yields Are A Big Plus In Uncertain Times

The recent interest rate cut by the Federal Reserve may also help boost health care REITs — and all real estate firms — because of their solid dividend yields.

The three healthcare REITs that Leon recommends pay dividend yields ranging from 2.7% to 5%. With the Fed widely expected to slash interest rates again at its meeting next week, perhaps all the way back to 0%, the income that REITs generate will become even more tantalizing to investors flocking to safe havens.

“While COVID-19 has created near-term economic uncertainty, the REIT industry’s strong earnings, solid balance sheets, and high occupancy rates demonstrate that they are entering this situation well-positioned to handle a potential economic slowdown,” said Steven A. Wechsler, president and CEO of the Nareit trade group.

Senior Living Centers Look Risky

But not all health care real estate firms will thrive. Leon thinks investors should avoid companies that run senior living centers, because they won’t be able to safely show their properties to prospective new residents. He noted that many went into lockdown mode during the flu season of late 2017 and early 2018. And the COVID-19 outbreak is even scarier.

“Coronavirus may limit senior housing operators from showing their properties to prospective residents,” Leon wrote. “Precaution is a top priority for health care operators to better control an elevated death rate from severe flu conditions for the elderly.”

Leon remains wary of companies that operate senior housing centers, most notably Healthpeak Properties (PEAK), Ventas (VTR) and Welltower (WELL). Their rental revenue and profit growth will probably be squeezed by the admission of fewer residents.

“Operators cannot conduct visitor tours and sign up new residents.
Senior housing is in effect quarantined to new prospective residents and their families,” Leon wrote.

 

Source: CNN Business

Q3 Medical Office Building Sales Were $2.2 Billion

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After a slow start to the year, medical office building (MOB) sales have picked up in the second and third quarters (Q2 and Q3), providing a strong possibility that the final 2019 volume will top $10 billion for the fifth straight year.

According to two data firms that separately compile their own MOB sales statistics – Arnold, Md.-based Revista and New York-based Real Capital Analytics (RCA) – transaction volume in Q3 topped $2 billion. Both firms’ data shows that year-to-date (YTD) MOB sales through Q3 topped $7.1 billion.

RCA’s data had Q3 MOB sales at $2.35 billion, for a YTD total of $7.28 billion. The firm’s data also indicates that the average capitalization (cap) rate, or the expected first-year yield, in Q3 was 6.7 percent – up from 6.3 percent in Q2 – and the average price per square foot (PSF) of $316, which was down from $326 a quarter earlier.

Revista, which uses different criteria for compiling its MOB sales data than RCA, indicates that Q3 sales totaled $2.2 billion, bringing the YTD total to $7.1 billion. Revista’s data shows that the overall average cap rate for MOB sales was about 6.6 percent in Q3, with the average cap rate for MOB portfolio sales coming in at 6.2 percent and single assets at 6.8 percent. Revista data puts the average PSF for all MOB sales at $323.

Interestingly, Revista data shows that there is still a premium to be paid for on-campus MOBs, which sold for an average of $339 PSF; on the other hand, off-campus facilities had an average PSF of $321.

Revista’s data also indicates the highest quality properties, those in the top 25 percent, sold for average cap rates of 5.8 percent and the absolute highest quality properties selling for cap rates averaging 4.4 percent.

While the YTD MOB sales volume stood at more than $7 billion at the end of Q3, there is a good chance that Q4 will see a strong uptick in volume. This news come by way of a variety of industry professionals as well as 2019’s biggest buyer by far, Toledo, Ohio-based Welltower Inc. (NYSE: WELL).

As HREI reported on Nov. 13, Welltower, which had made MOB investments topping $2 billion YTD through the end of Q3, last week announced that in recent weeks it had entered into five separate definitive agreements to acquire MOBs for a combined total of $1.67 billion.

Welltower’s pending acquisitions, for which it has entered definitive agreements, includes a $787 million purchase of 29 “Class A” MOBs from Milwaukee-based Hammes Partners. In addition, the REIT announced that it is “under contract” to make four other, separate MOB transactions totaling $885 million.

Those purchases, if they close as predicted by the end of year, would bring Welltower’s total 2019 MOB acquisitions to more than $3.5 billion.

Welltower’s deals alone, should they indeed close by the end of the year, would bring the MOB sector’s overall volume for the year, when added to the $7 billion-plus recorded in the first three quarters, to nearly $9 billion and provide a virtual lock that 2019’s volume will exceed $10 billion once again.

 

Source: HREI

Healthcare Real Estate Offers Superior Returns

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Healthcare REITs outperformed the broad REIT Index and S&P 500 in the fourth quarter 2018, a period of great volatility when equity markets fell 20% at one point.

The NAREIT Healthcare Index closed the year up 3% from the start of the quarter with the S&P 500 ending down 14% and the broad REIT index off 7%.  Healthcare’s positive share movement is linked closely to the movement in U.S. Treasury yields; with 10-year rates declining from 3.05% to 2.68% during the quarter, investor appetite for returns from healthcare REITs grows.

The performance of the healthcare sector’s real estate offerings is a clear reflection that the growing demand for healthcare and long-term care is largely independent of the economy.  Healthcare real estate features long-term leases with predictable income from service providers fulfilling critical medical needs that continue even in an otherwise unpredictable market.

REITs such as Welltower have taken advantage of their buying power during this period, announcing sizeable acquisitions including the $1.25 billion CNL medical office portfolio with 55 buildings totaling 3.3 million square feet as well as more than $500 million of strategic medical office investments.

Healthcare REITs are using more ingenuity to stay in the game for acquisitions through strategic joint ventures.  HCP formed a $605 million joint venture with Morgan Stanley in August 2018 for a 2 million square foot medical office portfolio which included the acquisition of 16 buildings totaling 856,000 s.f. leased to Greenville Health, acquired from Healthcare Trust of America.  Healthcare REITs vie for strategic health system relationships to develop critical scale and future investment and development opportunities with market-leading providers.

While private equity dominated healthcare competitively through much of 2018 as REIT share values lost ground with the rise in U.S. Treasury yields, the fourth quarter is a reminder of how quickly the table can re-set.  The disciplined strategies of certain healthcare REITs and the surplus of capital chasing healthcare properties today is testimony to the durability of this relatively stable property class.  With economic and market uncertainty, the reliable cash flows of healthcare properties supported by the steady forces of a growing and aging population, make this sector a strong defensive play in today’s market.

 

Source: Wolf Media USA