|USA Healthcare REITs: Sector Focus|
|Monday, 29 September 2014 04:01|
Healthcare: REITs can give the highest yield but this is at the expense of the potential for capital appreciation eg if the assets are subject to long-term indexed-linked leases with an operator, even if the asset increases in value substantially, the REIT will not receive any additional income in the short-to-medium term. On the other side of the equation, the REIT is able to pay very consistent and high yields to the unit-holders. Since health care is by its nature less prone to cycles compared to offices or industrial business, health care REITS are close to being recession proof and so recommended in periods of grave economic uncertainty.
Only 15% of US healthcare real estate is owned by REITs.
While seniors-housing facilities are typically private-pay, with more affluent tenants, Skilled Nursing Facilities mostly depend on government reimbursement through Medicare and Medicaid (adding a layer of risk in an era of uncertain government spending). Therefore, skilled nursing is "generally thought of as the lower-end asset class" among healthcare sub-sectors.
The Affordable Care / ObamaCare Act 2010 requires every American to acquire health insurance by 2014 or be subjected to a tax (those who can't afford health insurance they will be offered subsidies or Medicaid), and so will provide millions of Americans with access to healthcare, creating new revenue streams for companies across the sector. Census Bureau statistics show that approx 50m Americans did not have health insurance in 2009 & total health care spending is projected to grow from an estimated USD$2.8tr in 2012 to USD$4.8tr by 2021 -an increase of 70%.
US Healthcare Industry & Medical Office Market Overview report in early-2013 said that although the healthcare industry has been growing at a strong pace for decades, looking forward the trend is expected to accelerate (as baby boomers reach retirement age and echo boomers begin to establish their own facilities), further increasing the need for physicians, lab technicians & other medical support staff, and MOBs / medical office buildings. Simultaneously, shifting consumer preferences, limited space in hospitals & lower costs for surgical procedures (that have traditionally been performed in hospitals but which are increasingly being done in out-patient facilities), coupled with increased specialization (and hence demand for bespoke medical office facilities suited to the needs of a particular profession), are also all driving-up demand for healthcare properties.
US Healthcare Statistics (2013):
- The US census (2010) estimated that in 2010, there were 40.3m people aged 65+ or about 13% of the population, of which 5.5m were 85+; by 2030 (when the last baby boomers turn 65), there will be 72m people 65+ or 19% of the population; and by 2060 the number of people aged 65+ is expected to more than double from 43m to 92m (accounting for about 20% of the population), and he number residents aged 85+ will triple from just under 6m to a little above 18m (accounting for nearly 4 % of the total population).
- About 44% of the +65s lived alone in 2010.
- The number who need long-term care is expected to increase from approx 12m to 27m by 2050.
- The percentage over 85+ is expected to grow 25%+ by 2030 and 126% by 2050.
- Healthcare spending as a percentage of GDP is 18% but expected to increase to USD$5tr by 2021 or 20% of expected GDP.
- 1 in 3 people aged 85+ has Alzheimer's and 40% need help with 3 or more activities of daily living.
- The under 18 population is set to grow by 20% between 2015 and 2060; the 18-74 group will expand by 25%; the 75-84 group by 120%; and the 85+ group by 188%! That's a massive difference and one that virtually ensures increased demand for medical services and the properties that house such care.
If the Baby Boomers are considered to be those born between 1946-64, then the midway point is 1955, which means that the average will retire in 2020 (with an expected additional 17-20 years of life), when there will be about 72m elderly people / 19% of the population, and numerically more than double the number in 2000 - 12.4%. Furthermore, by 2020 some 25% of the workforce will be at least 55 years old with the Boomers controlling over 80% of personal financial assets and more than 50% of all consumer spending.
Health Care REITs generally don’t operate any of their properties themselves which means low overheads that generate strong returns because tenant defaults are less common than with other equity REITs. They are also relatively recession resistant and less susceptible to the problem of supply overbuilding because, at least in respect of nursing homes, States typically require a "Certificate of Need" prior to granting approving for new facilities.
The sector's 3 largest companies: Ventas, HCP, and health Care REIT (not covered by MLV) have executed acquisitions programs that grew their asset bases by a combined 10-year CAGR 28%. Ten years ago in 2004, combined assets were just over USD$5bn; today, the trio controls $60B. By contrast, the largest Office REITs (BXP, SLG, and VNO) have grown at a CAGR of just under 10%, while the top Shopping Center REITs (KIM, FRT, and DDR) grew at a 6.5% rate.
The 75+ population is growing 6 times faster than the rest of the population, and is expected to increase by 89% by 2030 (compared to 2012). According to the US Census Bureau, the senior population is expected to grow by 144% by 2050:
Some 85% of healthcare real estate still remains in the hands of hospitals and healthcare providers who are not actively monetizing their real estate, so there is still plenty of scope for REITs in the sector to grow organically via acquisitions.
Silver Tsunami: Healthcare: The single greatest issue that will affect the baby-boomers’ quality of life in retirement is the high probability of chronic disease. The Alliance for Aging Research reports that by age 65, nearly 9 out of 10 Americans will have at least one chronic condition. A recent survey by Roper/GfK reveals that most Americans drastically underestimate their chances of getting cancer, heart disease, diabetes, and neurological disorders such as Alzheimer’s disease as they age. When asked about their chances of having a chronic disease by age 65, just 4% of survey respondents selected the correct range (81%–90%). Just 10% of the American public correctly estimates their chances of getting cardiovascular disease (61%-70%). When the baby boomers start turning 65 in 2011, 10,000 people will turn 65 every day—and continue to do so for the next for 20yrs. By 2030, almost 1 out of every 5 Americans—some 72m—will be 65+. By 2050, the 65+ population is projected to be between 80-90m, with those 85+ close to 21m. Not only will there be many more senior Americans, but they’ll be living longer: individual life expectancy is increasing. But a significant proportion of seniors age 65+ suffer from health problems and chronic disease, such as cardiovascular disease, cancer, hypertension, or Alzheimer’s. About 80% of seniors have at least one chronic health condition, and the majority suffer from multiple chronic conditions, robbing them of quality of life, rendering them less productive and running up a huge and unsustainable bill for medical care. More than 80% of health care spending is for people with chronic conditions. Health expenditures are already skyrocketing and are expected to reach USD$16tr by 2030. The only current defense between this growing “age wave” and an already overburdened health care system is the hope that medical research breakthroughs and new technologies can remake the experience of chronic disease—and remake it quickly. Boomers are well advised to take steps to insure their own health but similarly, those who are responsible for setting our national health priorities need to realistically confront and plan for the long-term demands chronic disease will impose on the future, before its overwhelms the national health care system (Preparing for the Silver Tsunami: Mid-2006 – Link).
In "Housing America's Older Adults – Meeting the Needs of an Aging Population," a report by Harvard Joint Center for Housing Studies & the AARP Foundation (late-2014), it was estimated that the 50yrs+ population will increase 70% on 2000 by 2030, though the amount of affordable, physically accessible housing will not. Already, about 33% of the over 50yrs+ & 37% of 80yrs+ have to cut back on food, health care or retirement savings. They also estimate that 70% of the over 45yrs will need some type of long-term care by 65yrs.
Some 10,000 Baby Boomers turn 65 every day, and over the next 15 years, the number of Americans over the age of 50 will swell to 132m. This means unprecedented demand for everything from active retirement communities with golf and tennis lessons to assisted living with full-time nurses.
A Harvard Joint Center for Housing Studies and AARP Foundation "Housing America's Older Adults – Meeting the Needs of an Aging Population" report (ate-20145), estimates that while the 50+ population will reach 133 million by 2030 (up 70%+ on 2000), the amount of physically accessible and affordable housing has not: the rising cost of housing forces about 33% of the 50+ population / 37% of the 80+ population to cut back on food, health care or retirement savings. More worryingly, the Baby Boomers in their 50's now may not even be able to cover their housing costs in retirement due to lower incomes, increased debt, and the rising costs associated with owning a home. It concludes that 70%+ of people aged 45+ prefer to remain in their current homes although probably 70% of them will need some type of long-term care by 65.
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