RBC Capital Markets Isolates UK Trends That Matter To US REIT Investors
On June 18, RBC Capital Markets analysts Michael Carroll and Rich Moore published the latest edition of their healthcare REIT pulse, "UK private market is growing; NHS is still the queen."
Many investors are attracted to healthcare (HC) REITs because of high yields and demographic tailwinds from aging populations, there are also potential red flags for some asset classes due to government policies, regulations and reimbursements.
In the RBC coverage universe, there are four U.S. healthcare REITs with exposure to UK markets:
- Health Care REIT, Inc. (NYSE: HCN) - Outperform; $24 billion cap, 4.84 percent yield.
- HCP, Inc. (NYSE: HCP) - Underperform; $17.6 billion cap, 5.93 percent yield.
- Medical Properties Trust (NYSE: MPW) - Outperform; $2.8 billion cap, 6.5 percent yield.
- Ventas, Inc. (NYSE: VTR) - Outperform; $21.3 billion cap, 4.9 percent yield.
Tale Of The Tape - Past Year
The MSCI REIT Index (RMZ) is a good proxy for the broader equity REIT sector.
RBC - UK HC REIT Exposure
Health Care REIT has the largest U.K. exposure with 8.3 percent, and recently increased its exposure to Canada with its 2014 acquisition of Canadian REIT HealthLease Properties.
Notably, while MPW has limited exposure to the UK, it has a ~16 percent exposure to Germany.
RBC - UK Healthcare Overview
Originally established in 1948, "The United Kingdom (UK) has four separate publicly funded healthcare systems that are generally referred to as the National Health Service (NHS). Each one of the health care systems provide benefits to specific geographical areas of the UK and include the NHS England, Health and Social Care in Northern Ireland, NHS Scotland, and NHS Wales."
RBC pointed out, "There is a vibrant private healthcare market in the UK with annual revenues exceeding £24 billion."
However, RBC believes the passage of the Care Act 2014, which is due to become implemented in 2016, "… could cause significant dislocation in the [care home] market." One of the main concerns for U.S. REITs would be if local councils "…interpret this new duty as a duty to arrange care at the usual cost rather than the going private rate…"
RBC Report - Investor Highlights
- Room To Grow: RBC believes that "the REITs have several opportunities to grow their respective portfolio as we estimate the US REITs only own 13% of the private hospital market and 16% of the care home market."
- Sale Leasebacks: According to the report, "there may be more opportunity to buy the underlying real estate as the sale lease back model is much more accepted in the UK compared to the US."
- Development Opportunity: Given the budget constraints in the UK, RBC noted that the "…private healthcare market should expand meaningfully giving the REITS ample development opportunities."
- Hospital Opportunity: RBC noted that "in the UK, there are 198 overnight hospitals and 258 day facilities," with current U.S. REIT investment of ~$600 million, or about 13 percent.
- Care Homes: This may represent the largest opportunity, with a highly fragmented market, and ample private market. "The NHS and local authorities still fund roughly ~60% of the care home residents and the other ~40% is privately funded." RBC estimates the total market to be roughly worth £27 billion.
The ability to navigate the waters in foreign countries profitably requires a skilled captain at the helm; one who can make the proper adjustments, given the shifting regulatory winds.
While risks posed by a rising rate environment are first and foremost on most investors' minds when it comes to healthcare REITs; the quality and sophistication of the management team is a critical component for long-term success.
The healthcare REIT sector requires a much higher level of sophistication than many investors may realize.
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