Stifel Weighs In On Healthcare REITs - Interest Rates & Top Picks

On March 18, Stifel released a timely update on Healthcare REITs (HCREITs) noting that interest rates are "The Tail That Wags The Dog," on a day the Fed signaled it was getting closer to raising short-term rates, perhaps as soon as June. Stifel is taking a neutral stance on HCREITs as a group, and expects increased volatility in this REIT sector mainly due to interest rate related price movements. The big three HCREITs by market cap are: Health Care REIT

at $25.8 billion, 4.4 percent yield, Ventas, Inc.

at $23 billion, 3.3 percent yield and HCP, Inc.

at $18.7 billion, 5.5 percent yield. Tale Of The Tape

The Vanguard REIT Index ETF

is a good proxy for the REIT sector. According to Stifel during the past year Health Care REIT, Ventas and HCP, Inc. are up 26.7 percent, 15.7 percent and 9.7 percent respectively vs. 18.2 percent for the broader REIT sector. Stifel - Ventas, Inc. Maintains Buy Rating, New $80 PT  Stifel also announced that it is reducing its price target on Ventas from $88 to $80 per share, which still represents a 12 percent upside from $70.29.  The Stifel $80 PT was based in part on an 18.3x 2015 FAD, or AFFO multiple.  Stifel noted the rise in the 10-Year Treasury Note rates to over 2 percent as being a factor. Stifel - HCP, Inc. Maintains Hold Rating  Stifel noted that it has rent coverage concerns with HCP's largest tenant HCR ManorCare, and does not expect to see any near-term resolution with what are now considered to be fairly risky leases.  In fact, ManorCare represents ~29 percent of HCP's revenues, with the next largest tenant being Brookdale Senior Living at ~19 percent. Stifel - Health Care REIT Maintains Buy Rating  Stifel views both HCN and Ventas as likely outperformers relative to HCP, Inc. in the near term. Stifel - Consider These Smaller HCREITs In light of potential interest rate hikes, Stifel suggests that these three smaller, faster growing HCREITs could pay off for investors:  Sabra Health Care REIT

$1.9 billion cap - Buy Rated, Stifel Select List, Current Yield - 4.9 percent.  Omega Healthcare Investors

$5.5 billion cap - Buy Rated, Current Yield 3.7 percent.  National Health Investors

$2.6 billion cap - Buy Rated, Current Yield 4.9 percent.

In addition to faster growth rates helping to mitigate interest rate risk, Stifel also views M&A to be another potential catalyst for these smaller HCREITs to outperform.