Health Care REIT (NYSE:HCN) is bullish on the upside potential of its senior housing RIDEA portfolio based on its location in primary markets despite occupancy challenges that could accompany above-market rents.
The market has been applying a “do no wrong” mentality to HCN’s stock in terms of valuation, which is up about 23% from the beginning of January, said an analyst during the Toledo, Ohio-based REIT’s first quarter earnings call.
There’s no question HCN and its peers—fellow “big three” REITs HCP, Inc. (NYSE:HCP) and Ventas, Inc. (NYSE:VTR)—have done a “very good job,” said Richard Anderson of BMO Capital Markets U.S., citing revenue per available room (RevPAR) about 40% higher than average in Health Care REIT’s RIDEA portfolio.
Same-store net operating income in HCN’s senior housing RIDEA portfolio rose 5.6% in the first quarter from the previous year, compared to a 2.8% NOI growth in the REIT’s triple-net senior housing portfolio.
While Scott Brinker, HCN’s executive vice president of investments, characterized the RIDEA portfolio as “firmly positioned for internal growth,” Anderson questioned whether those expectations are sustainable in the long-term.
“With some unknowns and a lack of a long operating history, what gives you comfort that you didn’t build your RIDEA portfolio right at the peak growth conditions and that the 8% last year goes to 4 to 5[%] this year and then to 2% or less in further years, particularly after capturing all your occupancy upside?” Anderson asked HCN execs. “How do we know that that’s not going to be the trajectory that will be coming down the path?”
The portfolio’s RevPAR has ties to the markets in which properties are located, said George Chapman, CEO and president of HCN.
“We have purposely gone out to invest in the top markets in the country with the top communities as well,” he told Anderson. “So if you look at our RIDEA portfolio, 93% of it are in the top markets in the country. Everything fits, household incomes, housing values, et cetera.”
The excess against the national average is “definitely” being driven by the locations as much as the quality of the services that are being provided, said Brinker.
“The key difference with senior housing, you don’t just have an apartment residence, you also have sort of need-based hospital and health care services, and we tend to get premium pricing on those,” he said. “We actually do think that this is a sector that can provide growth in excess of what most other asset classes can deliver and they can do it on a more resilient and consistent basis.”
Brinker also addressed whether the REIT began investing in its RIDEA portfolio at a high point of the industry cycle.
“We started to feel it’s the opposite. We closed most of these transactions two and three years ago. We’re sort of the trough of the senior housing operating performance,” he said.
Senior housing occupancy has risen steadily post-downturn, Brinker continued.
“REITs have been positive and there’s still room to grow relative to the historical averages,” he said. “So we feel long-term that this is actually a pretty good portfolio to own, in general, because we like senior housing, but more particularly, the quality of these particular assets and operators.”
Written by Alyssa Gerace