The Everest Medical Real Estate Strategy delivered solid results in 2018 with the portfolio outperforming the returns of PREA-IPD, NAREIT, the S&P 500, NASDAQ and the Ten-Year Treasury benchmarks.
The underlying drivers of the solid performance has made the firm bullish for the medical office building (MOB) investment strategy into 2019. The investment team believes that this is the opportune time for a medical real estate strategy focusing on providing the physical building infrastructure for healthcare delivery around the United States.
The following table compares the Year-to-Date performance of the Everest Medical Real Estate Strategy as of Dec. 17 to some well-known benchmarks.
What is immediately apparent is the solid outperformance of the Everest Medical Real Estate Strategy, which the firm attributes to creating value through active hands-on management and other value-added activities. In addition, it believes to have invested in the right properties, at the right price, in the right markets, and at the right time. Although the strategy has benefited from an influx of investor demand over the last three years, nearly all of our individual property and portfolio acquisitions were made at attractive going-in capitalization (cap) rates and at-or-below-replacement-costs. Moreover, all properties have contractual long-term two-to-three percent per annum or higher rent increases. These rent increases do not fluctuate like other property sectors such as multifamily, hotel, storage or seniors housing, but are set contractually in place and increase at the stipulated rate, even in slow economic periods or recessions.
Everest Healthcare Properties believes its strategy provides extremely low volatility and is correlated to virtually no other asset class.
Everest Healthcare Properties said to have no negative J-curves in any of its investments. Its buildings are profitable the day it close on them. That is especially important in light of the fact that the current recovery is aging, and it believes now is not the time to be far out on the risk curve, feeding opportunistic investments with extensive capital investment. The majority of its returns are derived from steady, consistent and highly-predictable cash-flows from contractual leases secured by strong, credit-worthy tenants. Because its buildings are mission-critical, our tenants rarely leave. Tenants nearly always renew their leases with minimal tenant improvement allowances.
Everest Healthcare Properties’ properties are located in supply-constrained markets characterized by strong medical demand and robust real estate fundamentals. Each property occupies a unique and defensible position within its submarket—akin to a local medical monopoly. Everest Healthcare Properties believes that medical real estate is the one of the best places to be long-term and at the end of a cycle. In the last Great Recession when all other real estate property sectors suffered rent declines, increased vacancies and tenant defaults, the MOB sector was among the top performers in commercial real estate. Its entire portfolio has performed at or better than our pro forma projections. The cap rates of our properties compressed slightly over the last year despite rising interest rates.
Unlike a traditional real estate investor, Everest Healthcare Properties does not view medical real estate as just another niche strategy. Everest Healthcare Properties sees medical real estate as a horizontal play across the medical industry, riding on and benefitting from the continuing robust, long-term demand growth in medical care and medical technology in the United States.
Everest Healthcare Properties’ thesis is simple: medical out-patient buildings are the infrastructure of medical care in this country. Moreover, because of cost pressures on hospitals, M&A activity, and the general shift from in-patient to out-patient care, our buildings are the preferred physical environment and the materially lower-cost option for patients, doctors and hospitals. Its investment thesis has been validated by the enormous growth and superior cost and profit performance of out-patient medical buildings over the last 20 years.
In looking at 2018 specifically, Everest Healthcare Properties made money across primary markets including the New York metro, Houston, and Chicago, as well as high-demand but under-the-radar markets such as Kansas City, Columbus and Louisville. Its tenant base continued to grow in credit quality, diversity and industry prominence to include: U.S. Health, Catholic Health Initiatives, The Christ Hospital, Ardent, Floyd Memorial Hospital, Banner University Medical Center, Baptist Health, Clara Maass Medical Center, Dignity Health, Premier Health, University of Texas Physicians, Aventiv, OhioHealth, Mount Carmel, Fresenius, Canyon Vista, Tenet, HCA, HSA, St. Petersburg Hospital, Memorial Herman, Hilton Head Regional Healthcare, RWJ Barnabas Health, Seton Medical Center, Parkview Orthopedic Group, SRMC Hospital, St. Elizabeth’s Hospital, United Surgical Partners International, and DaVita.
At its core, the Everest Medical Real Estate Strategy is about capitalizing on the strong long-term growth of the medical sector and the mission-critical nature of our buildings in healthcare delivery. Growth is being fueled by an aging demographic as well as a revolution in medical technologies, practices and procedures. Our focus is identifying those medical operators, hospitals, doctors and specializations with strong credit and operational histories, and who are located in high-medical-demand markets around the country. Everest’s medical buildings are better performing and are located in superior medical markets compared to its industry peers. In our view, it is quite simple—the best way to make money is to invest in the best operators, doctors and specializations in the best buildings and markets around the country.
The Everest investment team remains focused on under-the-radar medical buildings where its continues to see attractive pricing, under-managed properties and the ability to add significant value through active property and asset management, lease-up of vacant space, and physical improvements to the buildings to make them more functional, efficient and appealing. Everest Healthcare Properties has one of the largest medical office investment pipelines in the industry. This year, Everest Healthcare Properties reviewed more than $7 billion in medical real estate, and has closed on approximately 1.5 percent of those buildings, making it one of the most selective and discriminating private equity real estate investors in the industry. In 2019, Everest Healthcare Properties expects to increase our pipeline to $8 billion while being just as stringent in its closing ratio.
The pattern is very clear: medical demand continues to increase around the country and medical tenants continue to expand and require additional space for their mission-critical operations. Because its tenants deliver essential medical services, their place of business is absolutely vital. Even if another competing medical building were to offer a lower rent, our tenants rarely move because of the business disruption impact. Rent or occupancy cost is not a primary consideration. Therefore, he firm’s tenants are extremely sticky and rarely leave our buildings, typically renewing at a rate of 85 percent, one of the highest renewal rates in the real estate industry.
While Everest Healthcare Properties’ strategy is not immune to sector rotations by those with shorter-term investment horizons, its core investment thesis is sound, and it believes is well-positioned to deliver solid returns in 2019 and beyond. The fundamentals of the medical building industry and our portfolio remain strong and there is an abundance of cash-flow and steady NOI growth from our buildings. Business and resulting space growth pressures on its tenants remains unabated. Medical demand is necessity-driven and is not easily impacted by changes in the overall economic environment. Moreover, 92 percent of Americans have some form of healthcare insurance making medical real estate a subsidized asset class.
Supply of new medical buildings is hovering near historically low averages with replacement costs for medical construction soaring in recent years, further discouraging new supply. Occupancy for class A and B medical buildings stands at 94 percent around the country with no softening on the horizon. That said, the firm’s investment team remains highly disciplined in uncovering the best risk/reward opportunities for our investors.