American Healthcare REIT: Capitalizing On Supply And Demand Imbalance In Healthcare Real Estate

seekingalpha10-04

American Healthcare REIT is a top choice due to its diverse portfolio, strong management, and strategic capital allocation, benefiting from demographic tailwinds and supply-demand imbalances. ...

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Among the healthcare REITs I've previously explored, American Healthcare REIT (NYSE:AHR) is my preferred choice in the space thanks to its diverse portfolio and management team committed to sustainable growth and balanced capital allocation. With improving occupancy rates, growing same-store NOI, and poised to benefit from a supply and demand imbalance in healthcare facilities in real estate, I believe that American Healthcare REIT offers a compelling way to tap into the that landscape. In this article, I’ll explore what makes American Healthcare REIT a great choice for investors looking to benefit from this trend. Company Overview American Healthcare REIT is a real estate investment trust focused on acquiring, owning, and managing a diverse portfolio of healthcare-related properties. This includes a mix of outpatient medical office buildings, skilled nursing facilities, and senior housing communities. It was formed through the merger of Griffin-American Healthcare REIT III and IV, along with the acquisition of American Healthcare Investors. It boasts a skilled management team of over 100 professionals, many of which have been working closely for several decades. The REIT's management team is led by decent capital allocators that are focused on growing the company's portfolio and benefitting from some of the demographic tailwinds that will support increasing demand for healthcare-related services.  At its core, American Healthcare REIT's business model revolves around leasing properties to experienced healthcare operators and it does this by creating a reliable revenue stream through long-term leases; longer than what's typically normal for a REIT. As of the company's most recent filing date for its quarterly results, American Healthcare REIT had 126 integrated senior health campuses (ISHC), 83 outpatient medical properties, 64 seniors housing operating properties (SHOP), and 28 triple-net leased properties. Part of the ISHCs included a consolidated JV that the company had a 76% interest in, where American Healthcare REIT had an option contract to buy out the remaining minority share of Trilogy at an attractive value through the end of September 2025. Just last week, the company announced that it was purchasing the remaining 24% minority membership interest for $258 million, thus effectively dissolving the JV and and making Trilogy fully-owned by American Healthcare REIT.  Trilogy Overview (Investor Presentation)Overall, American Healthcare REIT's diversification is an advantage. This diversification across property type limits the company's exposure in one particular vertical or category and ensures that it can be flexible in terms of where it should allocate new capital to achieve strong risk-adjusted returns in taking an opportunistic approach, but also so that cash flows can be more predictable and resilient.    NOI by Segment (Investor Presentation)Demographic Tailwinds It's no secret that the population of the United States is getting older. Like many G7 countries, the general population has been aging due to a multitude of factors which includes increased access to birth control, growing awareness of the realities of parenthood, higher cost of living, and changing societal attitudes towards reproduction. According to data from the United States Census Bureau, it's estimated that started in 2030, older Americans (when all boomers will be above the age of 65) will represent 21% of the population, up from 15%, the level at which it currently sits at today. In the most recent census which was conducted in 2020 (the next one will be in 2025), it was found that the U.S. older population grew at its fastest rate from 2010 to 2020, since the period from 1880 to 1890. Why this is important is it doesn't just mean that the pace is accelerating or that the total number itself is increasing. As shown below, the proportion of seniors to the rest of the population is also growing, with an expectation by the Census Bureau that there'll be more older Americans than kids in the next ten years. U.S. Census BureauWith an aging population across the United States, this should translate to higher demand for senior's housing, medical properties, and other healthcare related facilities and other physical real estate needs to support this growth. On the demand side, for medical outpatient space, net absorption was 16.5 million square feet in 2023, up from 15.8 million square feet in 2022 according to a recent report by Colliers. In addition, average pricing continues to climb year to year, highlighted by the fact that demand continues to outpace supply.  ColliersSupply Constraints  We've discussed the demand drivers at play with respect to an aging population and favorable demographic tailwinds, but equally important are the supply constraints and mechanics that ensure leasing rates and rents rise and vacancies continue to remain low. As demonstrated in the chart below, inventory growth has not caught up to the pace of absorption and this has been a persistent trend for over two decades.  Investor PresentationMoreover, given the fact that construction costs have increased 37% over the course of the last few years as a result of inflation brought on by the pandemic, new construction starts have languished, which has meant that there aren't many projects being built today. Given the fact that many of these projects take years to build (typical construction timelines range between 24-36 months) and because financing costs are high for developers, the existing supply that's on the market today seems to suggest that pricing growth should continue. My expectation is that the combination of regular and sustained demand over the long-term coupled with limited supply growth in the near-term are tailwinds that bode well for healthcare REITs in general. With American Healthcare REIT in particular, same-store occupancy continues to improve up 97bps in Trilogy/ISHC and 694bps in SHOP, on a year over year basis as of the latest quarter.  Capital Allocation and Development Pipeline I've discussed other healthcare-related REITs in the past and haven't been particular bullish on peers like Welltower (WELL), which I covered here, and Universal Healthcare Realty (UHT), which I covered here. I passed on each for different reasons (one on valuation and the other on expense growth concerns), however one reason I particularly like American Healthcare REIT is because of its capital allocation framework and development pipeline.  With respect to capital allocation, aside from the purchase of the minority portion of the company's JV that was announced last week, I'd characterize the company's strategy as being careful and disciplined with respect to making new investments or selling property. On the company's Q2'24 earnings call, management noted that they are planning to sell approximately $50 million in noncore properties which they expect will help recycle capital and focus on higher-performing assets. Prior to the quarter, the company has already had sales and dispositions totaling $15 million.  The integrated senior health campus segment continues to perform really strongly for American Healthcare REIT, as they reported a 24.1% increase in same-store NOI growth compared to last year. I expect them to continue investing in this area, especially given that they exercised purchase options on three campuses for about $46 million this quarter to reduce reduce facility rent expenses and improve control over its real estate holdings. The growth forecast for this segment has been adjusted to 18% to 20% for the full year 2024 which I think is quite impressive versus other healthcare REITs.  Integrated Senior Health Campuses (Company Filings)Regarding the company's financial position, the balance sheet looks to be in good shape, highlighted by a reduction in its Net Debt to EBITDA ratio coming down from 6.4x last quarter to 5.9x this quarter. The improvement is attributed to organic internal earnings growth, driven by strong same-store NOI growth of 15.7% across the portfolio, but we should keep in mind that this doesn't include the impact of paying for the remaining portion of Trilogy. In the press release, management noted that most of the purchase was being funded via equity, with some of the equity proceeds also being used to pay down $194 million in debt, mostly lines of credit.  As for the risks to the investment thesis, one of the big ones would be on interest expenses increasing. The company continues to manage its debt levels carefully and have a low cost of debt, but higher interest expenses are a headwind due to rising borrowing costs and delays in asset sales. While the Fed did cut 50bps on Sept 18, and the general direction of interest rates going forward looks to be going down, the company's combined pro-rata weighted average interest rate is 4.92%, which doesn't look sustainable when the ten-year treasury yield is sitting at 3.81%. In my view, it will be important to monitor interest coverage ratios going forward to assess leverage and credit capacity. At the end of the quarter, American Healthcare REIT had EBITDAR coverage for skilled nursing and senior housing leased segments reported at 1.34x and 1.11x, respectively. Despite being a relatively new publicly traded company, American Healthcare REIT does pay a dividend, which currently sits at $0.25 per quarter. With a guidance range for 2024 normalized funds from operations between $1.23 to $1.27 per fully diluted share, this implies a payout ratio of 80% at the midpoint of the range, so the dividend looks to be safe.  Seeking AlphaValuation and Wrap Up Healthcare REITs don't come cheap but I think American Healthcare REIT's valuation looks attractive. With analyst estimates for $1.24 of FFO for 2024 and $1.44 for 2025, the company trades at 20.3x FFO and 17.4x on a forward basis. In my view, compared to peers which trade at 14.4x TTM and 14.6x forward, that might seem expensive, but compared to Welltower at 29x forward and Universal Health Realty at 14x, the valuation doesn't look unreasonable considering FFO growth in the high single digits.  Despite the fact that shares have more than doubled since February, analysts seem to still see the company as having good upside from here. Of the 8 analysts who cover the stock, 7 have 'buy' ratings with just one 'hold'. The average price target is $27.00 which implies about 7.7% upside over the next year, before factoring in the implied dividend yield of 4.4%.  Seeking Alpha As healthcare services continue to be in high demand amidst an aging population, demand for healthcare-related facilities is only going to increase and limited supply should support growth for REITs like American Healthcare REIT. In my view, compared to the other healthcare-focused REITs I've looked at, American Healthcare REIT stands out as my preferred name in the space because of its diversified portfolio of assets, improving occupancies, and steady growth in rental revenues and NOI. With an aging U.S. population and ongoing supply constraints, it's clear that demand for healthcare facilities is going to rise and I believe that American Healthcare REIT is a solid way to play that long-term trend. At a reasonable valuation of 17.4x forward FFO, I rate shares of American Healthcare REIT as a 'buy'.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.0","shortVersion":"4.29.0","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2472464546"}