Health care real estate investment trusts are taking on a modern mantra: Green is good for business.
Recent research shows that companies with higher sustainability scores actually outperform their peers, and REITs like Ventas (NYSE: VTR) are investing heavily to improve their sustainability profiles.
Earlier this fall, Ventas was named the 2015 Healthcare Sector Global Leader and North American Leader by Global Real Estate Sustainability Benchmark (GRESB), an industry organization that measures the sustainability performance of real estate portfolios. GRESB awarded Ventas a performance rating score of 71, compared to the global average of 56 and North American score of 54.
Some of the green projects highlighted by GRESB were in Ventas’ properties with senior housing operator Sunrise Senior Living, including a $3.8 million investment to install high efficiency and energy equipment in 20 communities located in New York, Pennsylvania and New Jersey. From replacing the lighting, mechanical, electrical and plumbing systems, the efforts will reduce energy consumption and utility costs.
Large REITs like Ventas are making investments in green projects because companies with higher GRESB scores tend to do better, according to a study by the National Association of Real Estate Investments Trusts (NAREIT), an industry advocacy and information group that represents worldwide REITs.
“Recent research demonstrated that REITs with strong engagement on sustainability measures financially outperform their peers,” Dan Winters, senior fellow of business strategy & finance with the U.S. Green Building Council, told Senior Housing News. “The REIT industry continues to demonstrate strong year-over-year growth in sustainability efforts.”
The Bottom Line
As the owner of a vast number of properties, there’s a lot to be gained by reducing costs across a REIT’s portfolio.
“The U.S. publicly-traded REIT industry represents approximately $900 billion in equity capital across roughly 35,000 properties,” Winters told SHN. “As long-term property holders, REITs have a significant stake in pursuing high levels of sustainability to develop and operate competitive properties providing their stockholders a good investment profile.”
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The return on investment is fairly straightforward for many projects. For example, investments made by Ventas in 2014 will reduce 52 million gallons of water consumption, 3.5 million pounds of waste and 17 million kilowatt hours of electricity consumption per year across Ventas’ portfolio, according to Brian Fry, director of asset management at Ventas, who also heads up the REIT’s sustainability efforts.
Return on investment is a top priority for REITs that fund green projects, but an overall sustainability profile—and score—can include things that aren’t measurable, says Fry.
“In terms of the financial return, we look at metrics such as the payback period,” Fry told SHN. “Our 2014 sustainability projects should provide for a quick payback of less than four years. That is a good risk-adjusted return on our capital. We also look at through a little bit of a different lens than just dollars and cents, which includes improving building quality and promoting healthier living and care environments.”
Sheldon Groner, executive vice president at NAREIT, agrees that there are many immediate benefits for REITs to be gained from green projects and higher sustainability scores, including generating higher asking rent prices, greater tenant retention and appealing to a broader set of tenants. Welltower Inc. (NYSE: HCN), formerly known as Health Care REIT, told NAREIT last year that its sustainability profile helps bolster its recruiting tactics.
However, Groner also notes that there are benefits beyond ROI measures that come into play for these initiatives.
“ROI is a mathematical calculation, but I think there are softer things,” Groner told SHN. “[When] deploying capital for green initiatives, there are softer things at play as well tied to the REIT’s overall sustainability profile.”
Putting the Green in Green Initiatives
With greater access to capital and a high incentive to develop competitive properties, REITs are a natural partner to fund sustainability efforts across their portfolios and should arguably be the leaders in the green industry.
Ventas provides the capital for its green projects across its portfolio, noting that it works through a collaborative process with its operators.
“As a top REIT, we are a capital provider to leading providers of care,” Fry told SHN. “Sustainability initiatives are a prime example of how we can partner with our leading operators to provide capital for projects that will improve the operational efficiency of our business, manage costs, improve margins and promote environments that benefit our customers and the patients and residents that they serve.”
While some REITs can directly benefit on green initiatives by providing the capital for projects to its operators, there are other methods of financing popping up across the industry. One such option is a green bond, an emerging product in real estate that requires additional regulatory disclosures. In the second quarter of 2014, two major publicly-traded REITs raised a combined $700 million to invest in real estate development and retrofit projects through green bonds, according to the U.S. Green Building Council.
Another option is through Property Assessed Clean Energy (PACE) legislation, which finances green projects through property taxes. Twenty-nine states and the District of Columbia have adopted PACE laws, providing up to 100% of the financing for project costs.
As these options become more widely available and the benefits of higher sustainability scores are understood, REITs are likely to increase their role in green initiatives.
Investors, too, want to see sustainability profiles, says Groner. Regulations may not require companies to disclose much of their sustainability initiatives, but GRESB scores or other green survey results are becoming increasingly important. NAREIT also has its own Leader in the Light Award that is given to a member that has demonstrated superior sustainability practices that uses GRESB scores as a baseline. Groner expects this trend to continue, and says companies that already have sustainability efforts underway are ahead of the curve.
“Companies that have either done nothing or dipped their toe in the water I believe will be more engaged [in the future] than where they are today,” Groner predicts. “It’s good business. When you break sustainability down to its components, whether its water use, greenhouse gas emissions, it’s good business.”
Written by Amy Baxter