Green Street Analyst Says Deals Driving Up Valuations of Health Care Real Estate

Michael Knott, managing director with Green Street Advisors, joined REIT.com for a video interview at REITWorld 2014: NAREIT’s Annual Convention for All Things REIT at the Atlanta Marriott Marquis.

Knott offered an assessment of the valuations of health care properties in the current market. Deals that have taken place in the health care REIT sector in 2014 have helped to drive the value of health care real estate assets up “dramatically” and boosted the interest of capital markets in the sector, according to Knott.

Knott singled out a handful of property types within the health care sector that have captured the attention of investors. Knott said Green Street is focusing on areas that are seeing an influx of new supply, including senior housing.

“We think that you could have a small wave of new supply build-up over the next 24 to 36 months that could really start to decelerate [net operating income] growth and cause NOI growth to slow from the really white-hot level that it has been at,” Knott said. Knott observed that senior housing had maintained strong market fundamentals through the last market downturn, further attracting new development.

Another theme that Green Street is watching in the health care sector, according to Knott, is cost of capital.

“Until the last surge in share prices, you had started to see health care REIT [net asset values] start to approximate where the shares are trading,” he noted. “That could have an adverse impact on where and how the companies can allocate capital. Over the last several years, it has really been an all-you-can-eat buffet for the health care REITs. They’ve had gigantic cost of capital advantages in terms of sizable NAV premiums, and those bets have really paid off.”

With NAV premiums narrowing, external growth could slow in the health care sector, Knott said.