Healthcare real estate investment trusts (REITs) are companies that own and operate various types of healthcare properties, such as hospitals, medical office buildings, senior housing, skilled nursing facilities, and life science labs. Healthcare REITs generate income from renting or leasing their properties to healthcare providers, operators, or tenants. Healthcare REITs are considered a defensive sector, as they tend to have stable cash flows and high dividend yields, regardless of the economic cycle.
Why are healthcare REITs under pressure?
However, healthcare REITs are also sensitive to interest rate changes, as higher rates increase their borrowing costs and reduce their valuation. Higher rates also make other fixed-income investments more attractive, reducing the demand for REITs. In addition, healthcare REITs face specific challenges related to the COVID-19 pandemic, such as lower occupancy rates, higher operating expenses, and regulatory uncertainties.
According to a recent report by Jefferies Group, healthcare REITs have shown a dichotomy of performance, with some subsectors outperforming and others underperforming the broader REIT market. The report analyzed the performance of 18 healthcare REITs over the past three trading days, and found that six of them lost between 4% and 11.5%, while 11 of them were in the red by a smaller amount. Only one healthcare REIT, Sabra Health Care REIT, gained 0.22%.
Which subsectors are doing well and which are not?
The report identified three subsectors that have performed well: medical office buildings (MOBs), life science, and hospital. These subsectors have benefited from strong demand, resilient occupancy, and favorable rent growth. The report also noted that MOBs and life science properties have low exposure to government reimbursement, which reduces their regulatory risk.
On the other hand, the report highlighted three subsectors that have struggled: senior housing, skilled nursing, and diversified. These subsectors have faced lower occupancy, higher costs, and lower rent collections due to the pandemic. The report also pointed out that senior housing and skilled nursing properties have high exposure to government reimbursement, which increases their regulatory risk.
What are the analysts’ recommendations?
The report issued different ratings and price targets for the healthcare REITs, based on their subsector exposure, valuation, growth prospects, and balance sheet strength. Some of the notable recommendations are:
- Sabra Health Care REIT: upgraded from Hold to Buy, with a price target raised from $11 to $15. The report cited Sabra’s diversified portfolio, attractive valuation, and strong dividend coverage as reasons for the upgrade.
- Caretrust REIT: initiated with a Buy rating and a price target of $23. The report praised Caretrust’s focus on skilled nursing, which has shown a faster recovery than senior housing, as well as its solid balance sheet and growth potential.
- National Health Investors: initiated with a Hold rating and a price target of $52. The report acknowledged National Health Investors’ high-quality portfolio and dividend yield, but also expressed concerns about its high leverage and exposure to senior housing.
- LTC Properties: initiated with a Hold rating and a price target of $29. The report noted LTC Properties’ stable cash flow and dividend, but also warned about its limited growth opportunities and exposure to skilled nursing.
- Welltower: maintained an Outperform rating and a price target raised from $90 to $95. The report highlighted Welltower’s leading position in senior housing, its diversified portfolio, and its strong balance sheet.
