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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

Healthcare REITs Signal An Increased Focus On Medical Office

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It is earnings season, which means real estate companies are diligently releasing their earnings and analysts are intently scrutinizing said reports. Mizuho REITs analyst Richard Anderson covers healthcare REITs and he noticed a trend among the big 3 companies HCP, Welltower and Ventas in their recent releases: they all are emphasizing strategies involving medical office buildings.

To be sure, MOB is a staple among their holdings but as Anderson tells GlobeSt.com, “it just seemed interesting that each of the three highlighted a very specific strategy aimed at approaching the medical office business to some degree, versus past earnings reports.”

He says that:

  • HCP made mention of its joint venture with Morgan Stanley that’s aimed at investing in medical office as well as a new partnership with HCA to focus on the asset class.
  • Welltower is expected to close about $500 million of MOB transactions in the short term. “Also, they have always talked about using their senior housing portfolio as a quasi hanging carrot for medical office, as a medical office feeder.” The REIT has also brought on board a former Duke Realty executive Keith Knokoli, who has strong credentials in the MOB segment. “You don’t make an investment at that level of executive if you’re not serious about the business.”
  • Ventas is re-igniting its exclusivity arrangement with PMB Real Estate Services. It is a medical office developer that Ventas inherited when it merged with Nationwide Health Properties many years ago, Anderson explains. Ventas just re-upped its exclusivity arrangement with the company for the next ten years, he says.

A Lower Risk Profile

What is strange, he says is that “cap rates on medical office assets that are trading hands are still quite low, but nonetheless REITs are maintaining a fair amount of attention toward the space.” Anderson also points out that medical office assets are known for their stability and relatively lackluster growth while skilled nursing is a higher returning asset class that comes with higher risk.

His tentative takeaway: there is possibly a return to risk-off mentality around the corner for healthcare REITs. “Maybe REITs are becoming buyers of medical offices simply because of their low risk orientation, even though the asset class remains quite expensive.”

 

Source:  GlobeSt.