Why is the UK health sector attractive to US REITs?

The first Care Conversation of the Autumn featured Jeremy Tasker, Managing Director and Founder of the Colliers International Healthcare team and Keith Crockett, Vice President – Investments at Health Care REIT (NYSE: HCN) on the subject of US based healthcare REITs and the strong growth prospects within the UK market.

Mr. Tasker opened the session by setting the stage about the increased focus of US healthcare REITs (real estate investment trusts) on international markets given the relative maturity of the US care home and medical real estate market for US healthcare REITs. “This means that US based groups are looking at opportunities to expand in high growth international markets, including the UK”, Tasker told delegates. 

As the UK market offers attractive returns and cultural similarities to the US that are more like the US relative to other countries, the UK is seen as a bridge to opportunities in mainland Europe. In the US and Canada, healthcare focused REITs tend to invest across the healthcare continuum at care levels beginning with Independent Living, Assisted Living and Memory Care, Skilled Nursing, high quality Hospitals, Medical Office Buildings, outpatient care facilities, and life science research properties. Crockett added, “Although the terminology might differ between countries, there are many opportunities to replicate successful investment models that can increase care delivery in international markets”.

US based REITs looking to invest outside of the US tend to gravitate towards similar fundamentals and the private, rather than state, sector. Additionally, as provider quality is a critical component in driving value in property investment in the care sector, investors are sometimes more interested in the quality of the operator than the quality of the real estate all else being equal”, he explained. While Assisted Living/Skilled Nursing is a major sector in the UK, the care home properties tend to be older and have a lower percentage of private pay as a component of revenue, and as quality issues also exist within the properties with the lowest acuity residents, Independent Living, hospitals are likely to rank highly as an attractive investment option.

“There is great growth potential for US REITs who are focused on quality operators with a proven track record, and are inclined toward investing in UK markets, such as London and the South East, that have fundamentals and demographics similar to preferred markets for investment in the US”.

With around 1,200 properties in 46 states and 3 countries (US, Canada, & UK), Health Care REIT is a S&P 500 company headquartered in Toledo, Ohio and is one of the largest REITs and investors in healthcare property in the world. ‘We’re relationship-focused and very much see ourselves as a capital partner rather than just a capital provider,” Crockett told delegates. “We focus on building successful partnerships with the sector’s best operators and aligning these relationships to maximize long term mutual growth potential for us and our partners.”

“We see underlying demographic trends in the UK that are very similar to the US, and the economies of both countries track one another in a relatively close fashion”, he said. “There are many similarities between the UK market and the US market around 10-15 years ago.’

Investment across the healthcare acuity spectrum and across many different partners gives diversification to Health Care REIT’s portfolio, and provides resilient returns which protect against downside in the market, Crockett said. Furthermore, Crockett indicated that having a high quality real estate portfolio, 83% of revenue from private pay sources, and a significant presence in strong markets such as Toronto, New York, Philadelphia, and Los Angeles. “Our investments in the UK are comprised of properties that are larger and newer than most of the existing property stock, with 93% of revenue in these properties coming from private pay sources”.

Health Care REIT continues to expect “Consistent and resilient growth far into the future”, Crockett told delegates. “We’ve invested $1bn per quarter for the last 14 quarters in the US – but also now in Canada and the UK as well,” Crockett said, with 74% of investment in the last four quarters coming from existing partners, adding to the strength of the company’s platform which has an enterprise value of over $30bn. Success in growing with existing partners as well as new partners who are well positioned, is directly attributable to Health Care REIT’s relationship investment strategy, Crockett added.

“The UK is an attractive market, but the quality of the physical plant of the properties is a little lower due to the age of the buildings,” he acknowledged, “But this provides an opportunity to replace older, outdated properties with newer ones that help to serve the next generation of resident needs. Building age and quality is already beginning to change as high quality groups with high quality properties, having a high percentage of private pay as a source of revenue, and located high quality markets, are an expanding presence in the UK,” Crockett said.

“We invest in the long-term, and in a way that helps our partners to continue to grow and provide the best care possible,” Crockett told the seminar. “We assess the longevity of a property, and properties that could be obsolete in ten years are less attractive to us, even if they’re delivering good cash flow now.”