Size isn’t everything when it comes to investing in the right market, analysts say, as smaller markets can offer viable strategies and advantages to real estate investment trusts (REITs) that may not be found in larger metro areas.
Healthcare facilities in large markets offer “above-average” revenues in high income areas, making them appealing to big-cap REITs, says an industry update report from brokerage and investment banking firm Stifel Nicolaus.
Ventas (NYSE: VTR) has noted in earnings reports that 193 of its 223 senior living communities owned in joint ventures with Atria and Sunrise are in the top 100 metropolitan statistical areas (MSAs). Additionally, Health Care REIT (NYSE: HCN) points out that 93% of its RIDEA assets are on the two coasts or in the top 31 MSAs.
However, the top MSAs feature high barriers to entry for smaller healthcare REITs, according to the Stifel report. While larger markets clearly have their appeal to the ‘Big Three,’ smaller marketplaces have also caught the attention of REITs like National Health Investors (NYSE: NHI) and Sabra Health Care REIT (Nasdaq: SBRA), who have focused their RIDEA projects in smaller markets.
Investing in smaller buildings doesn’t necessarily translate to small margins, says Stifel.
A 50-unit small-market facility can generate margins similar to one twice its size in a large market, the report notes. With fewer units, residents move out less frequently, making occupancy more sustainable. Operating performance in small markets has also exceeded that of large markets, with occupancy levels being higher according to data from the National Investment Center for the Seniors Housing & Care Industry.
Also, lower construction and land costs, as well as easier planning and zoning approvals, help accelerate development and only add to the value of smaller markets, Stifel suggests.
Despite the advantages that smaller markets pose for investment opportunity and future growth, the loss of a single employer or closure of a key hospital in the area can dramatically change the outlook.
“We are not suggesting that small markets are superior, nor that they can match large-market cap rates,” write Stifel researchers. “But we feel a small-market strategy, in the right market and the right operator, can generate solid returns.”
Written by Jason Oliva