Raymond James Downgrades Sabra Health Care REIT, Prefers These Healthcare REITs

Healthcare REIT stocks have been extremely volatile year-to-date, with the sector index declining 18 percent in early February, and up 3 percent for the year. Raymond James’ Jonathan Hughes attributed the volatility to concerns over tenant financial health in the skilled nursing sector.

Analyst Jonathan Hughes noted that issues facing some individual operators are not necessarily sector-wide headwinds. He wrote, “While we do not expect a significant spike in interest rates, we believe investors should selectively approach committing new capital to the healthcare REIT sector given current valuations and their sensitivity to interest rate fluctuations.”

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Hughes recommended investment in other real estate segments that are less sensitive to interest rate fluctuations, less dependent on external growth, and are poised for stronger earnings growth in 2016 and 2017. The healthcare REITs are expected to register merely 3.7 percent and 2 percent FFO per share growth in 2016 and 2017, respectively.

The analyst believes that there are some select opportunities in the healthcare REIT segment, especially certain smaller cap companies given their ability “to move the needle through acquisitions” and those REITs that have higher exposure to healthcare real estate asset classes “that face more favorable supply/demand dynamics like medical office buildings (MOBs) and skilled nursing facilities (SNFs).”

Sabra Health Care REIT

Hughes downgraded the rating for Sabra Health Care REIT Inc SBRA from Outperform to Market Perform, saying the current risk/reward profile appears balanced.

Although efforts are being made to resolve the Forest Park investments, Sabra’s cost of capital advantage has dissipated, resulting in a significant impact on its earnings growth profile.

“Further, its 34% exposure to top tenant Genesis leaves us cautious given the chance of regulator investigations into the nation’s largest skilled nursing operator,” the Raymond James report mentioned.

Caretrust REIT

The analyst maintained an Outperform rating for Caretrust REIT Inc CTRE, while raising the price target from $13 to $14. Hughes believes that management’s differentiated background and focus on qualitative metrics and acquisitions with upside potential provide a “margin of safety” and improving rent coverage ratios.

The company’s strategy of acquiring off-market assets will continue to offer compelling risk-adjusted returns, the report added.

Physicians Realty Trust

Hughes maintained an Outperform rating for Physicians Realty Trust DOC, while raising the price target from $17.50 to $20.

“We believe stable tenant demand and an investment-grade balance sheet will continue to fuel outsized growth due to a more favorable cost of capital vs. larger, diversified healthcare REIT peers,” the analyst wrote.