Stability, Yield Drive Healthcare Real Estate Investment Activity, Say InterFace Panelists

by Camren Skelton

DALLAS — Investor demand for healthcare properties throughout the country is soaring, driven by the recession-resistant nature of the asset class and its ability to consistently generate strong returns.

Confidence in the property type also stems from the prevailing realization that legislation opposing the Affordable Care Act (ACA) has thus far been unsuccessful. After multiple failed attempts to repeal and revise the law, the Republican Party introduced a bill today that aims to cut overall funding for healthcare and give states more control over their individual healthcare budgets.

Other demand drivers for the healthcare sector include a growing number of aging Americans, the tendency of healthcare tenants to sign long-term leases and an expectation that government spending on healthcare, as a percentage of gross domestic product (GDP), is set to rise above its current level of 15 percent.

It all adds up to a remarkably healthy flow of capital into the healthcare sector from institutional, private and foreign investors alike.

Five healthcare real estate panelists at last week’s InterFace Healthcare Real Estate conference discussed a variety of topics within the healthcare investment market, including the profiles of the investors, the pressures they face to deploy their capital in a timely manner and the market forces inducing property owners to sell. The event was held on Sept. 14 at the Westin Galleria hotel in Dallas and attracted about 240 healthcare real estate brokers, lenders and developers from around the country.

Panelist Jonathan Winer, senior managing director and chief investment officer of New York-based investment firm Seavest Healthcare Properties, highlighted the key traits that have drawn REITs and non-institutional players to the space in recent years.

“Some investors are focused on the defensive, recession-proof nature of the asset,” said Winer. “Others are drawn to the variety of individual assets that have traded at sub-5 percent cap rates in recent years. And others are focused on the relative value of the yield, which currently exceeds that of industrial assets.”

Winer added that the general vibrancy of the current market is prompting fund managers that represent institutional capital to act quickly on healthcare investment opportunities.

Investment interest in the space from newcomers has taken more time to materialize, primarily because of the steep learning curve that comes with operating healthcare properties, according to panelist Mervyn Alphonso.

“There’s definitely an educational process involved for new capital players entering the market,” said Alphonso, who serves as senior vice president of development for Washington, D.C.-based Anchor Health Properties. “You can come in and buy the largest portfolio in the world, but if you don’t have an operational strategy, you’re in trouble. This is a long-term game with long-term tenants, and you have to understand that.”

Panelist John Trabold, director of real estate services for healthcare advisory firm VMG Health, concurred with Alphonso’s statement that healthcare tenants prefer longevity in their leases.

“One of the great selling points of medical real estate is the retention rate,” said Trabold. “Simply put, doctors do not like to relocate. So that’s a big part of the recession-proof perception of the asset — you have a stable base of tenants who make good money, aren’t in a business that goes up and down and tends to stay in one place.”

Alphonso and Winer both noted that Asian and Brazilian investment firms are among the leading sources of foreign capital in the sector. Their need to diversify is driven by political instability and slow growth in their domestic real estate markets.

Moderator Andy Dow, chairman of the healthcare industry group of Dallas-based law firm Winstead PC, offered anecdotal evidence of the asset class’ popularity. Dow stated that his firm represented one of the bidders on Duke Realty’s firesale of its healthcare holdings in May 2017, a portfolio that totaled nearly 7 million square feet across 78 properties in various stages of development.

In its attempt to merely get into the running for the acquisition, Dow’s client spent millions of dollars on due diligence and other costs associated with the bid, only to come up empty. The portfolio eventually sold to Healthcare Trust of America for approximately $2.95 billion.

“To me, that’s one of the most surprising things about today’s market — that a seller could dictate those kinds of terms and still have so many interested parties,” said Dow.

After establishing the breadth and diversity of the demand for healthcare properties, the panel shifted gears to analyze the supply side of the equation. The group collectively assented that the strength of the investment demand alone would precipitate more ground-up development in new markets in the coming years.

The panel also stated its unanimous belief that the higher costs of labor and compliance facing healthcare providers in today’s market, plus the rising costs of maintenance for owners of older properties, would eventually incentivize more sellers to come out of the woodwork.

Panelist Kyle O’Connor, president of Boston-based MLL Capital, noted that among the active sellers of healthcare real estate are aggregating firms that buy low-quality assets and dispose of their holdings in portfolio sales.

“It does seem that healthcare has entered into the age of the portfolio sale,” said O’Connor. “Whether that’s a temporary trend as a result of pricing or a long-term trend, we don’t know, but it’s definitely something we’re going to see more of in this market.”

Taylor Williams

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