10 Notes From My REITs Field Journal

Brad Thomas  |

1. The U.S. Census Bureau categorizes Baby Boomers as individuals born between 1946 and 1964.

2. The effects of having to care for such a large group will be felt in many areas.

3. By 2029, when the last round of Boomers reaches retirement age, the number of Americans 65 or older will climb to more than 71 million. That’s up from about 41 million in 2011, a 73 percent increase, according to Census Bureau estimates.

4. Ventas VTR CEO Debra Cafaro pointed out, “We know that the silver wave of the over-75 population will experience a net gain of 70 million individuals between 2020 and 2035, boding well for our business and giving us confidence in the future while we manage through current operating conditions.”

5. According to CBRE's CBRE 2018 U.S. Real Estate Market Outlook, the aging U.S. population will be a significant tailwind for medical office demand in the years ahead. "We expect demand for medical office buildings to grow, fueled by a shift away from the delivery of patient services on hospital campuses, the adoption of new technology, the aging population, healthcare job growth, tight market conditions and the relative recession-resistance of these properties," said Andrea Cross, Americas head of office research, CBRE.

6. The medical office market has performed well in recent years, registering a lower peak vacancy rate than traditional office properties during the 2008 recession, and showing a steady decline in vacancy during the recovery. Net absorption has outpaced new supply in 24 of the past 29 quarters, with particularly large imbalances since 2015.

7. Gross asking rents have been stable, reflecting consistent user demand and long lease terms that limit tenant turnover. New medical space completions have also been low relative to pre-recession levels, and the amount of space under construction has decreased slightly from the Q2-16 peak.

8. Chris Bodnar, vice chairman, Healthcare, CBRE Capital Markets, explains, "Investment trends reflect strong medical-office market fundamentals and a broadening pool of interested investors. While uncertainty about healthcare policy poses a risk to the medical office market, favorable demographic trends point to continued strong healthcare demand, regardless of any policy changes."

9. The core business of healthcare is inherently driven by demand for patient care, providing a stable foundation to support investment in the sector. The need for more facilities and services to manage the chronic illnesses of this aging population will be a major driver for growth.

10. Despite the controversy around these and future changes to reimbursement, healthcare is a required service that will continue to need real estate assets, and REITs provide an excellent vehicle for healthcare providers to become more efficient by partnering with “healthy” capitalized companies.

On my REIT Watch, five of the healthiest healthcare REITs:

Ventas Inc. VTR: A champion, and diversified healthcare REIT. Deliberately constructed portfolio. More than 1,200 assets. Focuses on high-quality real estate, well-located in attractive markets, with high barriers to entry. Partners with top operators in each asset class; sector leaders, well-positioned for growth. Properties: U.S., Canada, United Kingdom. Portfolio: Senior Housing 62%, Medical Office 20%, Life Science 7%, Health Systems 5%, IRFs/LTACs 2%, Skilled Nursing 1% (VTR experienced continued decline in Genesis’s(GEN) performance from ongoing industry SN headwinds.) Investments cross the spectrum to provide sustainable, growing cash flow during strong economic cycles, resilience during downturns.Best credit profile and balance sheet. Net debt-to-EBITDA ratio at 5.3x (excellent), debt-to-assets robust at 36%. Substantial dry powder ($3.1 billion credit facility) for any M&A. Successful history of dividend performance and growth, current yield 5.30%. Payout ratio 78% on FFO. STRONG BUY

LTC Properties, Inc. LTC: Triple net leases primarily in senior housing and healthcare properties via joint ventures, sale-leaseback transactions, mortgage financing, preferred equity, mezzanine lending.

In business over 25 years. Enterprise value (June 30) over $2.1 billion. Holds 199 investments in nearly balanced capital allocation: assisted living communities (102, includes independent living & memory care communities), skilled nursing centers (96), behavioral healthcare hospital. Locations in 28 states. FFO $29.6 million for Q2-18 ($31.4 million Q2-17), decreases mostly from defaulted master lease in Q3-17 and reduced rental income from sold properties the past year. Recently sold portfolio of six assisted living and memory care communities for net gain $48.3 million; andacquired two memory care communities in Texas for $25.2 million with 10-year master lease and 7.25% initial cash yield. New unsecured credit agreement has opportunity to increase to $1.0 billion. Dividend payout ratio 76%, yielding 4.95%. STRONG BUY

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Healthcare Trust of America, Inc. HTA: Largest dedicated owner & operator of 450 medical office buildings (MOBs) in U.S. (33 states). More than 24 million square feet. Over $7 billion invested. Provides real estate infrastructure for integrated delivery of healthcare services in highly desirable locations, targeted to build critical mass in 20-25 leading gateway markets generally with leading university and medical institutions, to support a strong, long-term demand for quality medical office space. Founded 2006, NYSE-listed 2012: returns have outperformed S&P 500 and U.S. REIT indices. 75% payout ratio, dividend 4.33%. STRONG BUY

Welltower Inc. WELL: Operating environment for senior housing remains challenging. Owns premier, major urban market-focused attractive portfolio. Shows resiliency expected from the premier operators in top markets and submarkets. Q2-18 balance sheet position was strong: $215 million cash and equivalents, $2.5 billion capacity. Leverage metrics robust, net debt-to-adjusted EBITDA 5.4x, net debt-to-undepreciated book cap ratio 35.6%, adjusted fixed charge cover ratio strong at 3.5x. Strong balance sheet, investment grade credit ratings. 5.23% dividend yield. Maintain HOLD.

Physicians Realty Trust DOC: Most important in assessing a medical office building: health system affiliation, credit quality to tenant, age of building, occupancy, market share as a tenant, average remaining lease term, size of building, client services, mix of facility services. 88% of DOC’s growth space is on campus and/or affiliated with a healthcare system. Disciplined approach to investments improves portfolio metrics, narrowing gap with competitors at aggressive pace. Just 4.4% of leases expiring through 2022 (peer average 11.8%).Downside: institutional investors have rotated out of the MOB sector (like HTA), and DOC has yet to increase its dividend. Balance sheet metrics remain strong, with debt-to-firm value of 34% and net debt-to-EBITDA of 5.5x. Extremely well-positioned in rising rate environment. 99% of debt at fixed interest rate or completely hedged, with no significant maturities until 2023. Dividend yields 5.26%. STRONG BUY

Note: For a detailed SWAN (sleep well at night) research report on over two dozen choices across numerous REIT sectors, see the new Forbes Real Estate Investor, out Tuesday. Subscribe here.)

I am long VTR, LTC, HTA, and DOC.


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