This is the third in a three-part series on the Health Care REIT sector.  Two weeks ago I reviewed a somewhat rosy piece from NAREIT on the macro issues facing the sector.  Last week, I looked at the one-year stock performance for all of the publicly traded shares in this sector (and the 5-year performance on many of them).  Readers may remember that returns on those shares were all over the map, and the winners generally had something special or unique, such as a takeover or merger.

Today, I want to look at these shares at a micro level, diving into the 2^nd quarter SEC filings and reporting, at least anecdotally, on what they’re telling Federal regulators about their sectors.  Since I reported FFO, EPS, and stock prices last week, I won’t repeat myself on those topics today.  It is difficult to draw industry-wide comparisons, since for the most part these companies are scattered across the various subsectors of Health Care.  However, certain generalizations do emerge:

• Higher interest rates have an impact across most of the REITs in this sector, although a couple of them have benefitted from interest rate hedges, from being net-lenders in their subsector, or from having strong cash positions.
• Many of these REITs suffer from impairment issues, either directly or as a result of partnerships with troubled operators.  Assisted living facilities seem to be the worst hit.
• Development and acquisition activity is down from 2022, perhaps due to interest rate or credit squeezes, but perhaps more so from lots of money/credit chasing too few choice properties.  Redevelopment of existing facilities seems to be more common.
• While most of these REIT stocks have suffered in the past year, five-year results would suggest that the market has not responded well to macro-forces which should be driving the industry.  While there is little doubt of increasing long-term demand for health care assets, one has to wonder if the market doesn’t think the industry is over-supplied?

I would continue to note that the senior living portion of this sector has been particularly adversely affected by the continuing impact of the COVID-19 pandemic as well as the current economic and market conditions. These conditions continue to have a significant negative impact on results of operations, financial positions, and cash flows. Although there have signs of recovery and increased demand when compared to the low levels during the COVID-19 pandemic, the recovery of senior housing operating portfolios has been slower than previously anticipated.  As such, REITs report that they cannot be sure when or if the senior housing business will return to historic pre-pandemic levels.  Added to this is the burden of rapidly increasing labor costs and labor shortages.  I would note also that there are very few pure-plays on senior care, as many of the Health Care REITs have diversified across property types within the sector (medical offices, clinics, laboratories, etc.).

For example, as I noted last week, Diversified Health Care Trust (DHC) owns medical office buildings (36% of their portfolio) as well as senior living communities (46%), life sciences (13%) wellness centers (4%) and Skilled Nursing (1%).  They own about 27,000 senior living units and about 100 other buildings with about 500 tenants spanning 36 states and DC, with the largest proportion of holdings in the sunbelt, and particularly California, Texas, and Florida In their second quarter filings, DHC reported substantial doubts as to its ability to continue as a going concern, and thus has entered into an agreement to merge with Office Properties Income Trust (OPI) which is expected to close during the 3^rd quarter.

Also, as I noted last week, Welltower (WELL) stock is up 24.16% year-over-year and up about 29% over the past 5 years.   They are also diversified, in many of the same segments as DHC.  They operate through a series of strategic partnerships, and derive no more than 8% of their NOI from any one “relationship” (as they call them).  They acknowledge some exposure to interest rate fluctuations, and debt makes up about 45% of their capital stack.  However, they appear to be aggressively hedging in that arena, and recognize it as a very real risk.

Omega Health Care Investors (OHI) is primarily in the skilled nursing care field, with 893 properties in the forty-two of the US states and the UK with a total of 88,322 beds, the largest concentration being in Florida (11.4%).  As reported last week, their stock is up 10.83% year-over-year, but all of that return has occurred in the most recent 6 months.  Over the past 5 years, the stock has cycled a good bit, but today is basically back where it was 5 years ago.  Over the first six months of 2023, Omega has invested some $27.9 million in new construction and capital improvements but sold 12 Facilities (11 nursing facilities and one office building) for $62.3 million. During that same period, they recorded impairments on six facilities necessitating write-downs of about $60.1 million.  Of this total, nearly all ($57.5 million) was for facilities closed during the year for which the carrying value exceeded the estimated fair value, and $2.6 million related to two facilities held for sale.  In addition, during this period, four partner-operators were placed on a “cash basis” for revenue recognition, as nearly all contractual lease payments due from these operators were not deemed probable.  This brought the total number of operators on a cash basis to 18, constituting 25.8% of total revenues excluding the impact of the write offs.  Also, nine operators were allowed to defer $33.6 million of contractual rent and interest.  Two of these operators were allowed to enter into restructuring agreements.

Caretrust REIT (CTRE) invests in skilled nursing facilities (72% of their portfolio, 148 properties), assisted and independent living facilities (15%, 32 properties) and campuses with a mix of services (12%, 25 properties).  They have 205 properties in 25 states with 22,311 beds total.  Of the total properties, 28% are in California and 23% in Texas.  As of the end of the 2^nd quarter, 36% of revenues came from one partner (Ensign) and 16% from another (Priority Management Group).  As noted last week,  EPS for the 2^nd quarter was a negative $0.01, compared with $0.21 the same quarter last year.  Much of this can be attributed to a recognition of certain impaired real estate assets, attributed to post-pandemic inability of partners to fully meet obligations on certain facilities.  Specifically, in the first six months of 2023, Caretrust recognized an impairment charge of $23.3 million, all related to 15 properties which were held for sale, and recorded an expected credit loss of $4.6 million on two loans receivable that were put on a cash basis.  Caretrust sold 4 properties during this period for a net gain on sale of $1.958 million, and during that same period acquired 12 properties, including 7 skilled nursing facilities, 4 assisted living facilities, and 1 multi-service campus, with a total of 1,280 beds and at a total purchase price of $172.4 million.

Sabra Health Care REIT (SBRA) invests in skilled nursing (55.7% of their portfolio), Senior Housing both managed (15.4%) and leased (10.5%), Behavioral Health (13.6%), Specialty Hospital (4%) and other health care properties (0.8%).  They have 392 properties through 67 partners in the U.S., British Columbia, and Alberta.  Other than the 61 managed Senior Housing communities, all of their properties are triple-net leased to partners.  Debt in the amount of about $2.58 Billion constitutes about 47% of Sabra’s capital stack.  In the first 6 months of this year, they purchased two new senior housing properties, one managed and one leased, at a total consideration of $51.5 million.  There were no transitions of partner-properties to cash-basis during that period, but in the 2^nd half of 2022, Sabra did conclude that their leases with North American Health Care, Inc. had to be written-off to the tune of $15.6 million, and in the first six months of this year, those facilities were transitioned to other partners.  Also, during the first six months of this year, one skilled nursing/transitional care facility was recognized as impaired, resulting in a write-off of $7.1 million, and that facility was subsequently sold.

Global Medical REIT (GMRE) is a net-lease medical office REIT which acquires healthcare facilities and leases those to physicians groups and healthcare systems.  They own 186 buildings with an aggregate of 4.8 million leasable square feet.  Nearly all of their income is from facility rentals.  While debt makes up about 51% of their capital stack, Global substantially reduced this down from 53% during the first six months of the year. The company mainly finances through a $900 million credit facility with JPMorgan Chase, of which about $568 million was used as of June 30.  As of June 30, GMRE had commitments and obligations of about $29.6 million for capital improvements.  In 2022, the company reported approximately $157 million in acquisitions (14 properties) in 2022 and one disposition of $15.9 million during that same period.  For the first six months of 2023, the company reported only one acquisition at $6.7 million, and two dispositions, one of a 4-building portfolio for $66 million resulting in a gain on the sale of $12.8 million, and one of a single building for $4.4 million resulting in a gain on the sale of $0.5 million.

Ventas (VTR) owns 1,392 properties spanning 24 million square feet including senior living (825 properties), life sciences, research & innovation properties (46), medical & outpatient offices (414), skilled nursing (51) and other health care real estate (56) in the US, Canada, and the UK.  Liabilities make up 59% of their capital stack.  During the first half of this year, they sold 6 senior housing communities, three of which were vacant, five outpatient medical buildings, one research center, and 3 triple-net lease properties (two of which were vacant) for $64.4 million, recognizing a gain on the sale of $11.6 million.  As of June 30, 2 other properties were held for sale totaling about $18 million in book value.  During this period, the company recognized $19.2 million in impairments on assets.

Community Health Care Trust (CHCT) owns 184 properties in 34 states totaling about 4 million square feet, including medical office buildings (85 properties), inpatient rehab facilities (7), specialty centers (37), physician clinics 30), acute in-patent behavioral facilities (5), hospitals and surgical centers (10),  behavior specialty facilities (9) and one long-term care hospital.  As of the end of the 2^nd quarter, 91.7% of properties were leased with a weighted average lease term of 7.1 years.  The largest number of their properties is in Ohio (25), followed by Florida (22), Texas (16), Illinois (16), and Pennsylvania (13).  Their largest single tenant by gross investment is Lifepoint Health, with 5 properties constituting an aggregate investment of $82.3 million, and their largest tenant by number of properties is GenesisCare with 9 properties and an aggregate investment of $31 million.  Their debt load is only about 44% of their total capital stack.  In the first half of this year, CHCT was impacted by the bankruptcy of GenesisCare, in which the Court approved the debtors request to reject certain unexpired real property leases including one of 11,000 square feet with CHCT.  Also, GenesisCare was the sole tenant in seven of CHCT’s properties, and a partial tenant in two others, representing 3.1% of CHCT’s total gross real estate, or 119,000 square feet.  However, other than the rejected lease, GenesisCare has continued to meet its lease obligations.  During the first half of the year, CHCT acquired ten medical office buildings totaling 237.4 million square feet and one vacant land parcel.  The total purchase price was about $39 million. 

National Health Investors (NHI) specializes in sale-leasebacks, joint-ventures, mortgage and mezzanine financing of senior housing and other medical properties.  Most of their holdings are in a portfolio of investments in 163 health care properties located in 31 states and triple-net leased to 25 operators.  That portfolio includes 97 senior housing communities, 65 skilled nursing facilities, and one hospital.  They also have two ventures which directly own 15 independent living facilities in 8 states totaling 1,734 units.  Debt makes up about half of their capital stack.  During the first half of this year, they acquired 3 assisted living facilities for about $54.7 million, and disposed of 8 properties for $49.1 million (and a gain on the sale of $12.4 million).  Three of the properties disposed were considered impaired at the time of sale.  Also as of June 30, the company held 5 assets for sale at a net value of $13 million.   The company leases 39 facilities to Bickford, and in 2022, converted those leases to cash-basis as a result of information from Bickford on their financial condition.  As a result, NHI wrote-off $18.1 in rents receivable and $7.1 in lease incentives.  As of June 20, Bickford’s outstanding pandemic-related deferrals were $19.8 million.  In addition, two other operators were put on cash-basis in 2022, and rental income from those two operators totaled $6.5 million for the first half of this year.

LTC Properties (LTC) invests in seniors housing and health care primarily through sale-leasebacks, mortgage financings, joint-ventures, construction financing, and structured finance (preferred, bridge, mezzanine, and tranche lending).  Their current portfolio of 148 properties includes assisted living (57.5%, with 97 properties), skilled nursing (41.6%, 50 properties), and 1 other property (0.9%).  They have 5,570 assisted living beds and 6,349 skilled nursing beds.  Income, however, comes from rentals and interest.  As such, increasing interest rates have impacted their bottom line in a number of ways.  First, they acquired 11 assisted living and memory communities during the first quarter of 2023, and 3 skilled nursing facilities during the third quarter of 2022, and higher interest rates impacted the financing of receivables.   They had higher interest income on mortgage loans made, but lower interest income resulting from the payoff of two mezzanine loans.  Conversely, LTC had higher interest expenses on their revolving credit line as well as $75 million in newly issued senior notes.  Finally, LTC recorded $12.1 million as an impairment loss on two assisted living communities in negotiation for potential sale.  One of those communities is non-revenue generating, and the other produces “minimal rent”. 

Physicians Realty Trust (DOC) owns 227 medical office buildings in 32 states, with approximately 15.6 million leasable square feet, leased to physicians, hospitals, and health delivery systems.  As of the 2^nd quarter, they reported 95% occupancy, and 91% of the leasable square footage was either on a hospital campus or strategically affiliated with a health care system.  During the first six months of this year, DOC acquired $40.5 million in new assets and sold one outpatient medical center for $2.6 million.  Debt makes up about 43% of DOC’s capital stack, of which about $393 million is from a credit facility (17% of total debt) and $1.45 Billion (63% of total debt) in notes payable.  As a result interest expenses were up 19.7% during the 2^nd quarter 2023 compared to the same period last year, hedged partially by interest rate swaps.  As of the end of the 2^nd quarter, DOC was sitting on about $245.7 million in cash and $1.0 Billion of near-term availability on their unsecured credit facility.

Healthpeak Properties (PEAK) invests in lab campuses (3, in San Francisco, Boston, and San Diego totaling 146 properties), outpatient medical usually co-located on hospital campuses (295 properties), continuing care retirement communities (15) and other properties (19).  Lab properties and outpatient medical both report a same store occupancy rate of 97.4%, while for the continuing care retirement communities that is 83.4%.    PEAK’s debt makes up about 54% of its capital stack, of which the majority is in senior unsecured notes.  PEAK acquired two new properties in the first half of 2023, a lab land parcel for $9 million and the remaining 80% interest in an outpatient medical building for $4 million.  PEAK also has commitments of $188 million for development and redevelopment projects.  Also in the first half of this year, PEAK disposed of two lab buildings which had previously been classified as “for sale” for $113 million and two medical buildings for $32 million.  The combined gain on sale of these properties was $81 million.  During the first quarter, PEAK wrote off $9 million from four in-place operating leases with Sorrento Therapeutics which had commenced voluntary reorganization.

Healthcare Realty Trust (HR) owns 680 outpatient medical facilities spanning 39.8 million square feet in 35 states.  The majority of their properties on the campus of or adjacent to an established health care system, and they report an average of 87.4% occupancy, with 89% in same-store properties.  Debt constitutes about 45% of their capital stack, of which nearly all is in Notes and Bonds Payable.  In the first six months of this year, HR disposed of 8 properties totaling 492,000 square feet for a total sale price of $222 million.  However, due to a significant impairment in one of these properties, the net gain was a negative $13.3 million.  As of June 30, the company held three properties for sale totaling a depreciated value of $151,000 (including $3.6 million in impairment charges).  Liabilities associated with these three assets totals $222,000, and thus the properties may likely be sold at a loss.  HR did not report any acquisitions in the first half of the year, but incurred $49 million in expenses toward development and redevelopment of existing properties.

Strawberry Fields REIT (STRW) partners with nine skilled nursing facility operators with a total of 79 properties and 10,189 skilled nursing beds, 63 long-term acute care beds, and 99 assisted living beds in Arkansas, Illinois, Indiana, Kentucky, Michigan, Ohio, Oklahoma, Tennessee and Texas.  Debt makes up over 90% of their capital stack.  As such, they have a significant exposure to interest rate risk.  For example, in the first quarter of 2023, interest expenses increased by 16.7% over the same quarter in 2022, primarily due to an increase in the floating rate on the commercial bank loan facility as well as additional charges on 2023 bond issuances. 

Medical Properties Trust (MPW) is the 2^nd largest non-governmental owner of hospitals in the world.  Their portfolio of 44 properties spans 10 countries.  They have about 44,000 licensed beds, including general acute care (197 facilities), behavioral (70), inpatient rehab (114), and long-term acute care (20) and freestanding ER/urgent care (43). They invest in both sale-leasebacks as well as direct investing.  Debt constitutes about 57% of their capital stack.  As such, in the 2^nd quarter of this year,   Acquisitions in the first half of 2023 totaled $212 million, down from $946 million during the first half of 2022.  In addition, as of June 30, MPW had development commitments on six properties (3 in Spain, 2 in Texas, one in South Carolina) totaling $358 million.  MPW disposed of $12 million in property, recording a net gain of $6 million.  Interest rate expenses in the 2^nd quarter were 19% above the same quarter in 2022 primarily as a result of increased borrowings on their revolver and higher interest rates on their credit facility.

As always, I’m not an investment advisor, and this is not a solicitation or recommendation to invest in anything. Further, I and the entities I’m involved with may have positions or interests in one or more of the securities discussed here. However, if you have any questions about this, please don’t hesitate to reach out.

John A. Kilpatrick, Ph.D., MAI

[email protected]