Morgan Keegan Positive on Healthcare REITs (HCN, HCP, NHP, VTR)
Morgan Keegan is out with an analyst note this morning, where they develop a bullish case for healthcare REITs. They cited a recent investor forum in Chicago, where they spoke with the managements of several healthcare REITs.
Morgan Keegan analysts said, “The healthcare REITs in our coverage entered 2010 with strengthened balance sheets, ample access to capital, and an appetite for accretive acquisitions. Our investment thesis for healthcare REITs is that even without multiple expansion, they can drive higher share prices via accretive acquisitions.”
They further noted that, to date however, “Only two companies in our coverage, Health Care REIT (NYSE: HCN) and Nationwide Health Properties (NYSE: NHP), have been aggressive acquirers. The two largest healthcare REITs, HCP Inc. (NYSE: HCP) and Ventas Inc. (NYSE: VTR) have been fairly quiet. Our takeaway from our meetings is that deal flow will pick up in coming months.”
Companies cited several reasons for the slow progress to date:
• After a substantial hiatus, it takes time to ramp up deals, particularly large complex ones.
• The turmoil in the capital markets have created volatility in not only asset pricing but also sellers’ exit strategies—debt vs. IPO vs. sale to a REIT.
• Not-for-profit hospitals, which we expect will be the major sellers of medical office buildings are prone to protracted decision-making processes
• Pending Medicare rate changes make the outlook for nursing home EBITDAs uncertain
• Purchasers of assets at recent peak valuations are reluctant to sell investments at a loss
• Some operators of assets that are recovering from cyclical nadirs (notably assisted living) are holding out for improved cash flows on which valuations will be based
• Availability of GSE financing in senior housing creates an alternative to REIT capital and an anchor on cap rates
Despite these factors, Morgan analysts said, “Management teams remain confident that they will complete accretive acquisitions in coming months. While we are not big fans of pinning an investment thesis on statements of confidence, we believe that the case for acquisition opportunities remains strong, from hospitals seeking to monetize non-core assets, private equity investors seeking liquidity, operators with limited capital access seeking to expand and consolidate operations, and property owners facing challenging debt refinancing. We expect the acquisition pace for the REITs in our coverage to pick up, warranting our continued Outperform rating.”
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