The medical sector is one of the more underrated sectors of the net lease world. That notwithstanding, it continues to quietly provide investors with solid options to grow their portfolio and secure solid returns. The medical sector is a service industry where consumers are required to see doctors and other medical professionals face-to-face, therefore creating a need for brick and mortar locations. These locations usually sign long-term leases with options.
Medical facilities require unique build-outs along with specialty equipment such as X-ray machines for urgent care facilities or dialysis machines for a dialysis clinic, which can be difficult and costly to move. Further, due to their proximity to their patients moving to a new location is as difficult on their patient base as it is on them. Taken together, this means that the likelihood of physicians or medical services providers renewing their leases is high.
The rise of urgent care, and other specialty facilities (MRI, X-Ray etc…) has seen a geographic expansion of these properties further and further away from the traditional medical corridors. Urgent care facilities can be found as end caps on retail centers, or freestanding buildings located in main thoroughfares.
Even with the onset of doctor care done remotely there will always be a need for the in-person site visits with your physician, minimizing the risk to the land/building owner.
Each section of the Medical sector is made up of a variety of unique tenants. The dialysis market is dominated by DaVita Dialysis and Fresenius Medical Care, while the dental and urgent care portion is more evenly split between a variety of companies/practices.
Currently DaVita and Fresenius have similar credit ratings, with Fresenius rated slightly higher with a BBB S&P rating and Baa3 Moody’s rating versus DaVita, ratings of BB and Ba2. Year over year, DaVita locations that were sold had a longer average remaining lease term than Fresenius properties, which explains the lower cap rate for DaVita locations with 10+ years remaining.
DaVita and Fresenius locations also provide value to the property owners by way of incorporating rental escalations throughout the term along with options to extend the lease beyond its original end date. As mentioned earlier it can be difficult to move to another location and they tend to stay in place. Receiving a new permit of use may also factor into the decision to not move, as this is typically approved by local or state regulatory authorities.
The Medical sector has traded at slightly higher cap rates than the Single Tenant Net Lease (STNL) average. This is due mainly to the concentration of higher credit rated tenants in the QSR space, and the plurality of properties being sold in the QSR segment as well.
The Medical sector has traded at slightly higher cap rates than the Single Tenant Net Lease (STNL) average. This is due mainly to the concentration of higher credit rated tenants in the medical space, and the plurality of properties being sold in the medical segment as well.