The True Commodity Asset of Health-Care Net Lease

Stan Johnson Co. Associate Director Colin Cornell reveals what has driven net lease investor interest in dialysis clinics and what variables affect their valuations.
Colin Cornell, Stan Johnson Co.

Dialysis, dental, and urgent care clinics have always been closest to a commodity asset within the health care net lease sector, but recently, dialysis product has separated itself from the pack. While the dental and urgent care industries remain fragmented, two clear industry leaders, along with a third smaller but still significant operator, have emerged in the dialysis sector. DaVita Kidney Care and Fresenius Medical Care are the two primary operators, with U.S. Renal Care being a third key player. By looking at the development strategies employed by these tenants, we begin to see what has driven investor interest in this space and what variables ultimately affect the valuation of a clinic.

Investor Demand

When retail dynamics began to shift in 2015, so did 1031 exchange needs. Those of us who primarily represent sellers started to receive calls from buyers’ brokers who were seeking out “internet-proof” investments, and that search was leading them to the commodity health care sector. These buyers were looking for service-based industries—investment products considered insulated from Amazon and other web-based competitors. And for retail investors that were accustomed to underwriting assets based on credit ratings, location and lease economics, dialysis clinics were able to offer them a comfortable and familiar alternative to traditional retail investments.

The timing of buyers seeking “internet-proof” investments coincided well with a boom in the development and delivery of new, free-standing dialysis clinics. In a race to grab market share, DaVita and Fresenius, as well as some smaller operators like U.S. Renal Care, have been rapidly expanding and developing new clinics.

Sources of Capital and Development Strategies

Along with the acquisition of competitors, all three of the main operators have been expanding their footprints by using a combination of self-development and private development strategies. While self-development is fairly straight-forward, private development typically comes in four forms: institutional developers; regionally based preferred developers; one-off equity partners or first-time developers; and physician development. Because of the benefits to the operator and the investor, the latter strategy has become popular. By allowing physicians to own the real estate behind the practice, the physicians are tied to the operator and their respective markets, ensuring the long-term viability of the operation.

As far as a long-term holding strategy, we have seen DaVita and Fresenius begin to execute sale-leaseback transactions for their self-developed assets. U.S. Renal Care, however, has yet to make clear if they will follow suit, or employ a different holding strategy.

Valuation of Assets

As with any investment property, a variety of factors can influence an asset’s value: lease term remaining; rental rate increases; what entity guarantees the lease; and how the expenses are structured. These all can add or subtract from the value as perceived by the marketplace. But like dialysis centers’ counterparts in the commodity retail space, having comparably structured leases and similarly constructed facilities can provide investors with a level of familiarity and comfort as they consider their next investments.

While no industry is immune from technological advances that could jeopardize future growth, dialysis services are projected to increase. As more patients with end-stage renal disease need care, widespread access to the latest treatments and services will be crucial. We expect to see continued development of new dialysis facilities by all operators as they look to gain market share, and this expansion will translate to new opportunities for investors. Every clinic has its nuances, so investors should always seek the guidance of advisors who understand the industry and what factors can influence value of those individual assets.