If anything has changed the way things are done in this great nation from a health care standpoint, it has been the COVID-19 pandemic. With physicians and patients having to adapt on the fly to a totally new situation and sets of circumstances, it was just a matter of time before old accepted norms began to change.
One area that income and total return investors are starting to look at is the net lease medical office real estate investment trusts (REITs), and with good reason. Compared to the office and retail REITs, which have been hit hard during the pandemic, the medical office REITs have held up extremely well, and investors are starting to notice.
A new research report from the Baird real estate team makes the case that things will only get better. They noted this as they started coverage on the medical office REITs with an Overweight sector allocation:
We believe the secular tailwinds benefiting medical office building REITs, namely a shift toward greater utilization of outpatient care and greater acceptance as an institutional asset class, will accelerate following the pandemic. MOB rent collection rates were strong across the board and generally better than expected, and MOBs should screen favorably for institutional capital looking to invest in the broader real estate sector, boosting MOB valuations.
The report said this about the potential for increased spending in the sector:
The Centers for Medicare & Medicaid Services estimates that national healthcare spending will increase at a 5.4% compounded annual growth rate between 2019-2028, which in conjunction with an accelerating transition toward outpatient care, should boost MOB demand. Pre-COVID, CMS had already removed more procedures from its “Inpatient Only” list, and we expect CMS will continue expanding the type and number of surgeries that can be performed in an outpatient setting given lower risk of infection and technology improvements.
The team is bullish on three stocks that offer investors timely and dependable dividends and a solid growth trajectory. They are rated Overweight at Baird, but it is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
This is the top pick at Baird and offers investors solid risk-reward fundamentals. Community Healthcare Trust Inc. (NYSE: CHCT) owns, acquires or finances real estate properties that are leased to hospitals, doctors, health care systems or other health care service providers in non-urban markets. It has investments in health care real estate, including mortgage and other loans.
The company’s medical office buildings are located in areas such as Florida, Georgia, Illinois, Kentucky, Ohio and Texas. Its physician clinics are located in Alabama, Florida, Kansas, Pennsylvania and Wisconsin. Surgical centers and hospitals are located in Arizona, Louisiana and Michigan, and behavioral facilities are located in Illinois and Indiana. It has specialty centers located in Alabama, Colorado, Texas and elsewhere.
The analysts noted this:
While the stock continues to trade at a large premium to NAV, we believe Community Healthcare is in a unique position where its cost of capital is tied to the benefits of diversification and a conservative balance sheet rather than the private market value of its properties. We expect additional accretive external growth, fueled by management’s ability to fund acquisitions in the 9%-11% cap rate range with equity issued at a 4%-5%cap rate.
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Investors receive a 3.58% distribution. The Baird price target is $52 and the Wall Street consensus target is $50.80. Community Healthcare Trust stock closed at $46.76 on Wednesday.
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Physicians Realty Trust
This higher yielding REIT makes sense for frustrated income investors. Physicians Realty Trust (NYSE: DOC) is a small-cap, internally managed health care REIT that looks to acquire, develop, own and manage health care properties leased to physicians, hospitals and health care delivery systems. Its portfolio consists of medical office buildings, specialty hospitals and long-term acute care hospitals.
The company operates as an umbrella partnership REIT in which its properties are owned by the operating partnership, directly or through limited partnerships, limited liability companies or other subsidiaries.
The analysts pointed to solid rent collections as a huge plus:
Collections exceeded expectations as the off-campus thesis plays out. Management thesis that care will shift away from hospitals to convenient outpatient facilities playing out. Collection rates have been the highest among off-campus, affiliated tenants. Benefit from accelerating trend toward outpatient care and patient preference for off-campus facilities.
Physicians Realty Trust stock investors receive a 5.15% distribution. Baird has a $20 price target, while the consensus target is $19.41. Wednesday’s last trade was reported at $17.91.
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Global Medical REIT
Income investors also should take a long look at Global Medical REIT Inc. (NASDAQ: GMRE), which engages in the acquisition of purpose-built health care facilities and leasing of those properties to strong health care systems and physician groups.
Baird likes the story and noted this:
Global Medical REIT is a levered play on strong MOB fundamentals with capital allocation upside. The company acquires off-campus healthcare facilities at 7.0%-8.5% cap rates, funded with a low- to mid-6% cost of equity and draws on its credit facility (low-2% current cost of debt). Collections have outperformed expectations during the pandemic (>95% of second quarter rents collected). Cost of capital is tied to benefits of diversification and external growth potential.
Investors receive a 5.93% distribution. The $14 Baird price objective compares to the $14.46 consensus figure and the Global Medical REIT stock close at $13.50.
These companies should do very well going forward and may provide income investors, and those looking for total return, with some outstanding potential for 2021. They make good sense now for investors concerned about the potential for market disruptions.