Analysts Worry 'Frothy' Market for Health Care Real Estate May Erode Yields, Leave Some Buyers With Bad Case of Debt

Some analysts, however, are concerned that certain investors may end up in traction. While the most recent acquisitions highlight the segment's continued rapid growth, Fitch Ratings recently issued a report raising questions about the risk that a growing pool of buyers from all end of the investment spectrum may end up overpaying for properties, pursue higher-yield, higher-risk assets, or go into debt to maintain the frenzied growth pace that investors have come to expect from the sector.

To date, publicly traded health care REITs, the largest suppliers of investment capital, have funded their growth conservatively and without significant leverage, benefiting from opportunistic equity raises at substantial premiums to net asset value (NAV), Fitch said. But the rating agency warned that growth expectations for this sector may be difficult to maintain.

"We believe the premiums reflect shareholders' expectations of continued growth, and continuing to satisfy these expectations may prove challenging," according to research headed by Fitch Director Britton O. Costa.

While publicly traded REITs remain the largest suppliers of health-care property capital, private buyers such as non-traded REITs are also jumping into the game, aggressively buying properties and keeping capitalization rates low and prices high, said PJ Camp, principal with Hammond Hanlon Camp LLC, a health care-focused independent investment banking and advisory firm.

"Clearly there are more players in the market than ever before. It's hard to find anyone who doesn't want to be in the space," Camp said during a presentation on MOB mergers and acquisition activity this week by Levin & Associates.

Medical office buildings, assisted-living facilities and other health care real estate were ranked as the most attractive property investment this year and over the next 12 months, for the first time surpassing multifamily and industrial assets, according to DLA Piper's 2014 State of the Market Survey released earlier this month.

However, despite their favored status, health-care properties are still not producing yields as high as some other asset classes, DLA Piper noted. The firm cited research from Green Street Advisors that the average cap rate on health care properties was about 6.8% in July -- down from about 7.2% a year earlier but still nearly two percentage points higher than average yields on office or apartment buildings.

Meanwhile, investors continue to raise cash and pour money into the health-care space, with the REIT sector being particularly active, including property acquisitions, M&A deals and initial public offerings.

Health Care REIT, Inc. (NYSE:HCN) announced recently that it anticipates acquiring about $1.7 billion of properties in the second half of 2014, including the previously announced deals to acquire HealthLease Properties REIT for $950 million, the $257 million transaction with Sunrise Senior Living to buy Gracewell Healthcare. HCN expects to invest $535 million in new deals expected to consummate before the end of the year.

Read the original here:

TOO HOT? Feverish Health Care Investment By REITs Poses Risks for Investors