Health-Care REITS Sell Into Strength

By Stephen Boyd

Stephen Boyd

The U.S. population is aging—now at a rapid rate as Baby Boomers head en masse into retirement. Much has been made about this demographic wave’s effects on programs like Social Security, Medicare and the health-care industry in general. But what about the effects on the real estate demands that an enlarging elderly population will require?

For health-care REITs, this trend is enabling them to continue to reposition their portfolios through asset sales despite operating headwinds. Institutional investors, including private equity, pension plans and sovereign wealth funds, are increasingly turning to health-care real estate as an investment option. Demand from these major investors has helped to improve liquidity for health-care real estate properties. And this trend has led many health-care REITs to reposition their portfolios after years of growth that resulted in them owning some assets in sectors or leased to operators that were not long-term fits.

Increasing acceptance of health-care real estate in institutional portfolio strategies should help improve the relative credit profile of health-care REITs. The breadth and depth of capital for health-care REITs varies by property type but has traditionally been weaker than traditional commercial real estate property types. 

Growth prospects

While health-care REITs are currently net sellers and improving their near-term credit profiles, we do not expect this to persist, nor do we expect the competing bids to put them at a long-term competitive disadvantage. The fragmented nature of U.S. health-care real estate ownership, strong market relationships and attractive capital costs should allow health-care REITs to remain competitive on the acquisition front, notwithstanding the growing pool of interested buyers.

Moreover, health-care REITs generally have adequate flexibility to make strategic growth-related acquisitions, while adhering or returning to financial policy targets within the one- to two-year credit Rating Outlook horizon. Health-care REITs have previously traded at premiums to net asset value due to investors’ growth expectations. Renewed pressure from investors to invest for growth—were it to occur—rather than sell into market strength, could trigger a more aggressive stance towards investments. That said, the widespread probability of investor pressure to invest for growth is low, due to divergence between private asset and implied REIT valuations. 

Health-care REITs may have been an underappreciated corner of the commercial real estate market, but U.S. demographics are changing the attractiveness of this property type—something institutional investors are noticing.