Medical Office Buildings: Chilton Capital's November 2024 REIT Outlook

MOBs: Office but No Need for Life Support

Chilton Capital Management LLC November 2024 #REIT Outlook

The office sector has faced significant challenges, but Medical Office Buildings (MOBs)—now often referred to as Medical Outpatient Buildings—are thriving. Here’s a breakdown of why this niche is gaining traction in today’s market:

Key Drivers for Investment in MOBs ??

* In-Person Requirement: Unlike traditional offices, healthcare needs face-to-face interactions, minimizing the risk of remote work.

* Shift to Outpatient Services: Outpatient care is gaining ground over inpatient settings due to cost-effectiveness and better patient outcomes.

* Aging Population: The rapidly increasing elderly demographic in the U.S. drives higher healthcare demand.

Healthcare REIT Exposure ??

* As of October 31, 2024, our composite’s exposure to healthcare REITs stands at 20.8%, significantly higher than the 13.9% benchmark (MSCI US REIT Index).

* This marks a shift from zero healthcare exposure prior to the pandemic, highlighting our strategic pivot to capitalize on recovery opportunities.

Work From Home Impact ??

* Limited Telehealth Adoption: Only 10% of healthcare employees worked from home during the pandemic, with a higher need for in-office visits, especially for complex cases.

* Stable Demand: High-quality, well-located MOBs are less susceptible to the risks associated with remote work trends.

Chilton Capital Investment Strategy in MOBs ??

Hold a 6.5% average exposure to MOBs, double that of the RMZ, achieved through investments in major players like:

* American Healthcare REIT (AHR)

* Ventas, Inc. (VTR)

* Welltower? Inc. (NYSE:WELL) (WELL)

* Healthcare Realty (HR)

* Sila Realty Trust, Inc. (SILA)

Types of Leases:

Multi-Tenant vs. Single-Tenant: Multi-tenant buildings benefit from outpatient service demand, while single-tenant buildings (often under triple net leases) have lower operational intensity.

The Aging Population: A Critical Factor ??

The population over 65 years is projected to grow from 15% today to 20% by 2030, leading to increased healthcare spending—expected to outpace GDP growth.

Outpatient vs. Inpatient Care ??

Trend Toward Outpatient: More procedures are moving to outpatient facilities, with outpatient volumes projected to grow by 10% over the next five years, compared to a decline in inpatient procedures.

Importance of Location and Clustering ??

Proximity to major medical campuses enhances patient flow and operational efficiency for healthcare providers, contributing to better leasing outcomes.

Specialty Practices and Tenant Quality ??

Higher acuity practices tend to have better lease stability due to costly buildouts and specialized equipment, reducing their mobility compared to primary care practices.

Supply Constraints and Rent Growth ??

Limited new construction—only 2.2% of existing supply is newly developed MOBs—creates upward pressure on rents, which are increasing at 3-4% annually compared to historical averages of 2-3%.

Rent Coverage and Tenant Stability ??

Strong rent coverage ratios (some exceeding 10x for specialized outpatient buildings) indicate that these tenants can absorb rental increases more effectively than other sectors.

Return of Private Capital ??

Private capital is re-entering the MOB space, with significant transactions and joint ventures with public REITs, indicating strong market confidence.

Conclusion

Medical Outpatient Buildings present an attractive investment opportunity in the REIT landscape, driven by robust demand, limited supply growth, and the aging U.S. population. Chilton Capital expects strong earnings growth from well-positioned MOB REITs, while single-tenant models may also outperform due to favorable acquisition spreads. ??

https://chiltoncapital.com/2024/11/01/slicing-the-healthcare-continuum-fundamental-trends-support-outpatient-medical-november-2024/