October 26, 2020 BARRON’S 19
housing REITs.
“These companies have strong
tenants, and the risk of a blowup is
low,” says Berenberg Capital Markets
analyst Connor Siversky, whose firm
has Buy ratings on all three stocks.
One measure of their health: Tenants
of medical REITs, such as large
health-care systems, typically have
cash flows that are more than six
times their rental expenses, versus
coverage of 1.2 times for skilled-nurs-
ing facilities and senior housing.
Medical REITs haven’t had to renego-
tiate leases and write down rental
losses like some senior-housing and
nursing REITs, he adds.
“We like the defensive nature of
medical REITs relative to other areas
of health care,” says BMO Capital
Markets analyst John Kim, who has
Outperform ratings on Healthcare
Realty and Physicians.
Medical REITs aren’t cheap. They
trade at a premium to health-care
REITs overall, partly because of low
multiples in senior housing and nurs-
ing. But medical REITs are well off
peak multiples before the pandemic;
Healthcare Realty, for instance, trades
at 22 times estimated 2021 adjusted
funds from operations, or AFFO, a
REIT measure of operating income.
That is down from 26 times AFFO
at the end of 2019.
One reason multiples have com-
pressed: a slower growth outlook.
Medical REITs won’t be able to raise
rents as much if demand for space
weakens because of the pandemic.
Community owns 131 properties in
33 states, including clinics, surgical
centers, rehabilitation facilities, and
oncology and dialysis centers. No ten-
ant amounts to more than 10% of total
annualized rent, and properties are
90% leased with an average remain-
ing lease length of 7.7 years. The com-
pany raised its dividend during the
pandemic, and has increased it every
year since going public in 2015.
Community’s returns on acquisi-
tions top 9%, one of the highest rates
among health-care REITs, Siversky
says. It is on track to buy $120 million
to $150 million of properties this year,
adding to its $612 million asset base.
Telehealth isn’t a threat, says CEO
Wallace, because doctors and nurses
still need office space to see patients,
partly to comply with privacy laws
and insurance-reimbursement rules.
Physicians Realty owns 268 prop-
erties worth $4.8 billion. Its proper-
ties are spread across the Midwest,
West Coast, and South, including as-
sets such as the Baylor Charles A.
Sammons Cancer Center in Dallas.
About 47% of its properties are lo-
cated off hospital campuses, one the
highest percentages among medical-
office REITs. That poses more risk
than locations on campus, which are
considered more stable, but acquisi-
tion and development yields tend to be
higher off campus, and that is where
health services are heading, says Phy-
sicians’ CEO John Thomas. “It’s an
evolution of health care moving to
more-convenient locations,” he says.
At 17 times estimated 2021 AFFO,
Physicians trades at a premium to the
health-care REIT average of 16. But its
5.3% yield looks well-covered: Its pay-
out ratio was 91% of AFFO in the sec-
ond quarter, which may have been the
high point of the pandemic.
Healthcare Realty is a play on the
stability of major hospitals in cities
like Dallas, Seattle, Los Angeles, and
Charlotte, N.C. About 89% of its 210
properties are located on or within a
quarter mile of hospital campuses.
Tenant retention and occupancy
rates tend to be more stable on cam-
pus—both averaging more than 84%
a year. And its tenant roster is well
diversified. The company expects
to add properties worth as much as
$375 million to its asset base of $4.
billion this year.
The trade-off with the stock is that it
doesn’t offer the growth or yield that
off-campus REITs generate. The com-
pany hasn’t raised its dividend in at
least a decade, keeping it at $1.20 a
share. Carla Baca, head of investor rela-
tions, says income growth stagnated
because most properties were rented to
single tenants for 10-year terms. But
more than 90% of the portfolio is now
in multitenant leases with shorter
terms and 3% to 4% rent increases
when leases are renewed. The dividend
is well covered, she says, and “we’re in
a better place to discuss increasing it.”
BMO’s Kim likes the stock for its
income and asset-base stability.
“There’s a fine line between off-
campus properties and suburban
office space,” he says. “If a physician
group leaves off campus, it can be
more challenging to release the space,
whereas on campus is more defen-
sive.” He expects the stock to hit $
over the next year, implying a 27%
gain from a recent $30.
Even if the stock doesn’t budge, it
yields 4%, a healthy payout in today’s
low-rate climate.B
No Waiting
For Medical
Real Estate
With hospitals, clinics, and
doctors’ offices getting back to
normal activity, these three REITs
are worth a close examination
The Doctors Are In
Three REITs that specialize in health-care facilities to consider.
Community Healthcare Physicians
Healthcare Realty Realty
Key Data Trust / CHCT Trust / HR Trust / DOC
Recent Price $47.72 $29.57 $17.
2021E Price / AFFO 21.4 21.9 17.
2021E AFFO Growth 10.6% 3.5% 2.9%
Dividend Yield 3.5% 4.1% 5.3%
AFFO=Adjusted funds from operations. E=Estimate. Source: Bloomberg
“As long as
there’s
demand for
health care,
there will
beaneed
for office
space.”
Tim Wallace, CEO
of Community
Healthcare Trust
By DAREN FONDA
T
o deal with the Covid-
pandemic, Tim Wallace,
CEO ofCommunity
Healthcare Trust,had
to make a few changes.
Community, which
owns medical offices and
other health-care facilities, has now
equipped buildings with “needlepoint
bipolar ionization” air-filtration sys-
tems to kill the virus. Clinics and doc-
tors’ offices are getting higher-speed
internet to handle more telemedicine.
And its chief building inspector trav-
els in a recreational vehicle, rather
than flying, to check out properties
before an acquisition.
“As long as there’s demand for
health care, there will be a need for
office space,” says Wallace, 62, who
has run medical real estate properties
since the 1990s. “That isn’t going
to change until we get one of those
devices that Bones used inStar Trek
to fix any medical issue.”
Hospitals, clinics, and doctors’ of-
fices aren’t filling up to prepandemic
levels. But with health services getting
back to normal, demand for medical
real estate is holding steady. Landlords
say rents are being collected at nearly
100% of pre-Covid-19 levels. Acquisi-
tions are ramping up, and interest rates
remain low—conditions that should
fuel dividend and asset growth.
Those trends could help lift returns
for real estate investment trusts, or
REITs, that specialize in health-care
facilities. Three to consider are Com-
munity Healthcare Trust (ticker:
CHCT),Physicians Realty Trust
(DOC), andHealthcare Realty Trust
(HR). The stocks should hold up bet-
Illustration by Jasper Rietmanter than nursing facility and senior