Mention the words “triple net properties,” and what could come to mind are the Starbucks down the street, or the Dollar General store across town. In truth, most property types can have triple net tenants. Smaller medical assets, in fact are attractive net lease investments. Stand-alone urgent care centers, surgical centers and plasma clinics can offer low-entry price points, credit-worthy tenants and steady income flow.
Among this sector type are kidney care and dialysis centers, with DaVita Inc. and Fresenius Medical Care’s Fresenius Kidney Care division as the major players. In many cases, these centers operate under triple net lease agreements. The growing demand for services provided by these clinics could mean a nice rate of return for their property owners.
Kidneys: From the Medical Side
Recent information from the Centers for Disease Control (CDC) indicated that 30 million people in the United States have chronic kidney disease (CKD). This means 15% of all U.S. adults – one in seven individuals – suffers from some kind of kidney disease.
Digging more deeply into the numbers, the National Kidney Foundation reported that 660,000 Americans annually are being treated for kidney failure. Seventy-one percent of that population – 468,000 individuals – require dialysis, a process that assists the kidneys in filtering wastes from blood. Patients can either visit outpatient clinics for treatment, or perform the process at home.
DaVita and Fresenius together represent the highest market share when it comes to supplying services to the CKD population. Furthermore, as baby boomers continue to age and are diagnosed with CKD or end-stage renal disease, demand for dialysis will likely increase.
Kidneys: From the Property Side
DaVita operates 2,293 clinics throughout the United States, followed closely by Fresenius, with its 2,277 locations. These outpatient centers tend to be far from traditional hospital campuses, operating primarily in office complexes, retail centers and as stand-alone real estate in heavily trafficked areas. In fact, high foot traffic and abundant parking are ideal factors for a dialysis clinic’s success.
There are many reasons why net lease dialysis centers can be good investments.
Tenant retention. Medical tenants build out spaces to exacting specifications; DaVita and Fresenius centers are no exception. That large monetary investment can be a huge incentive for a tenant to renew the lease when the time comes. This means that the property owner won’t need to worry about re-tenanting a vacant space.
Reliable income stream. Dialysis treatment isn’t a “one-and-done” scenario. The process requires routine and recurrent appointments, whether the patients receive on-site or at-home treatments. Frequent visits can mean more income flow to the investor.
Low-cost investment. Investors can acquire a NNN healthcare facility, such as a stand-alone surgery center or dialysis clinic, for just under $3 million, at an average cap rate of 6.5%. The average cap rate for a DaVita facility is just under 6.9%, while competitor Fresenius’ is 7.7%, according to Calkain. The limited supply of dialysis clinics, combined with high demand for services, is likely to further compress cap rates and increase values. For the time being, these clinics have provided an average 7% return on investment.
Stability, Longevity, ROI
As of now, medical properties don’t make up a huge portion of the net lease sector. But medical centers, including dialysis clinics, represent a stable and growing property type. With the medical industry poised for future growth from shifting demographics and changing trends in healthcare delivery, net lease investors could find dialysis centers to be logical and stable additions to their portfolios.