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Why Trending Outpatient Care is a Boon for Healthcare REITs

Devyani Chamria

The U.S healthcare industry is witnessing a shift of medical services from inpatient to the outpatient environment. In fact, soaring demand for medical office buildings (MOBs) has largely fueled outpatient medical growth.  

Understandably, healthcare real estate investment trusts (REITs) are maintaining a fair amount of attention toward this space. Per a presentation by Welltower Inc. WELL, REITs currently own nearly 11% of outpatient medical real estate.

The increasing popularity of MOBs can be tied to the fact that these are considered the safest healthcare realties. This is because MOBs are less vulnerable to reimbursement and regulation changes, and have predictable revenue streams as compared with other healthcare real estate assets with similar exposure.

Also, MOBs have shorter lease terms, which enable rollover rent increases that boost internal revenue growth. Compared with senior living investments, MOB and outpatient care can capitalize on demographic trends at an earlier stage. While many seniors occupy assisted living facilities (ALF), independent living facilities (ILF) and skilled nursing facilities (SNF) at a much later stage of their lives — in their 70s and 80s, demand for outpatient facilities crop up much sooner. Consequently, healthcare REITs, with a significant MOB footprint, benefit significantly from this elevated demand.

Per a study by the commercial real estate services firm CBRE Group Inc. CBRE, the average asking rent for U.S. medical office buildings rose by a record 1.4% year over year to $22.90 per square feet of space. In fact, lower availability and vacancy rates have accelerated MOB rent growth across Nashville, Manhattan, Louisville, Seattle and Indianapolis.

Since these low-cost clinics provide high-quality care and are convenient — closer to homes and workplaces, and do not require an overnight hospital stay, preference for this outpatient setting is increasing. Also, development of minimally invasive surgical procedures is driving popularity of the outpatient model.

Going by statistics, the U.S. hospital and outpatient care center market is projected to grow from $1060 billion in 2016 to more than $1275 billion by 2020.

While Healthcare Trust of America HTA, Healthcare Realty Trust HR, and Physicians Realty Trust DOC have been benefiting from their significant MOB footprint, not all MOB properties are expected to benefit at the same rate.

Properties located on or adjacent to hospital campuses are beneficial for both physicians and patients, and hence, witness higher outpatient visits. Most of these markets have a high-entry barrier, making vacancy risk lower and tenant retention higher.

In fact, earlier this month, Welltower entered into a definitive agreement with CNL Healthcare Properties, to acquire a portfolio of 55 Class A medical office and outpatient facilities, for $1.25 billion. With affiliation to top-tier healthcare systems, these properties are 94% occupied and will strengthen the company’s existing outpatient medical portfolio.

HCP Inc. HCP is also emphasizing on strategies to expand its MOB portfolio. In fact, it closed on a joint venture transaction with Morgan Stanley Real Estate Investing for a 2-million-square-foot MOB portfolio.

Lastly, leveraging on the outpatient trend, Ventas Inc. VTR is developing a trophy MOB project in downtown San Francisco with Pacific Medical Buildings.  

All the stocks mentioned in the article carry a Zacks Rank #3 (Hold), at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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