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Mizuho Updates Macro & Rate Outlook, 3 Health Care REITs To Buy

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Mizuho Updates Macro & Rate Outlook, 3 Health Care REITs To Buy

On Tuesday, Mizuho Securities USA released a note updating the U.S. REIT sector based upon macro views on the economy and interest rates by its Chief Economist Steve Ricchiuto.

The Mizuho outlook suggests that the 'Fed Lift-Off' will be "pushed back to 2016," and the 10-Year Treasury to remain in a range of 1.75 to 2.25 percent – a win/win for REITs in general.

Extrapolating this to healthcare REITs (one of the highest yielding and therefore particularly interest rate sensitive REIT sectors) resulted in Mizuho upgrading and raising price targets on two REITs and reiterating its Buy rating on a third:

  • Health Care REIT, Inc. (NYSE: HCN): $24.9 billion cap, 4.66 percent yield.
  • Ventas, Inc. (NYSE: VTR): $22.6 billion cap, 3.4 percent yield.
  • Healthcare Trust Of America Inc (NYSE: HTA): $3.1 billion cap, 4.65 percent yield.
  • Healthcare Realty Trust Inc (NYSE: HR): $2.4 billion cap, 4.96 percent yield.

Tale Of The Tape: Past Year

mizuho_-_ychart_healthcare_reits_may_26.jpg

Mizuho feels that healthcare REIT underperformance was mainly due to interest rate fears, and a 10-year Treasury at 2.25 percent or below, could represent a "buying opportunity."

Related Link: Billionaire-Tracking ETF Just Bulked Up On Healthcare

Mizuho: Historical Spreads

mizuho_-_10-yr_note_vs_reit_spread_ex_1.jpg

Mizuho noted that the approximately 150 bps spread between the 10-year Note and broader REIT sector dividend yield (3.7 percent) remains close to historical averages.

Mizuho–HCN: Upgrade Neutral To Buy; PT Increased $74 To $80

The new Mizuho price target represents a potential 12.9 percent upside from Health Care REIT prior close of $70.86 per share.

  • Basis: The Mizuho $80 PT "is based on a 2015 AFFO multiple range of 19x-21x."
  • Most Accretive: Health Care REIT has been the most accretive of its peers, with Q1 acquisition cap rates ranging from "the low-5's to mid-7's," mostly in senior housing and post-acute nursing assets.
  • Vantage Advantage: Mizuho noted that the Heath Care REIT proprietary "Vantage" property management system was "the real deal" and sees it as a competitive advantage.
  • Price Target Risk: The main PT risk noted by Mizuho was "if the company's significant exposure to the RIDEA structure results in declining same store prospects in the face of new supply growth, our price target may not be achieved."

Related Link: Top 4 NYSE Stocks In The REIT Healthcare Facilities Industry

Mizuho–HR: Upgrade Neutral To Buy; PT Increased $26 To $28

The new Mizuho price target represents a potential 15.8 percent upside from Healthcare Realty Trust's prior close of $24.18 per share.

  • Basis: The Mizuho $28 PT "is based on a 2016 AFFO multiple range of 17x-20x."
  • Peer Comparison: Mizuho sees Healthcare Realty Trust being oversold YTD, down 11.5 percent, as compared with its MOB (medical office building) peer Healthcare Trust of America (Mizuho: Neutral), only down 7.4 percent during the same period, making HR the better pick currently.
  • Peer Comparison: Mizuho also noted Healthcare Realty Trust's "more granular/analytical approach" to the MOB business, and longer track-record as a public REIT, as compared with sector rival Healthcare Trust of America.
  • The Drivers: Mizuho sees positive fundamentals driving the MOB sector, including: increased utilization due to the Affordable Care Act, very high rent coverage ratios giving dividend protection, as well as consolidation of practices and alignment of strong hospital groups/on-campus locations.
  • Price Target Risk: The main PT risk noted by Mizuho was if "the company's same store growth fail[s] to maintain its historic pace of performance."

Mizuho–Ventas: Reiterate Buy; Maintain $85 PT

The Mizuho target price represents a potential 24.5 percent upside from Ventas' previous close of $68.28 per share.

  • Basis: The Mizuho $85 PT "is based on a 2015 AFFO multiple range of 19x-21x."
  • "Blue Chip": Mizuho noted that similar to Health Care REIT, Ventas is a "blue-chip" healthcare REIT with a top management team.
  • Achievement Estimates: Mizuho sees Ventas achieving its FY 2015 growth goal of 3 to 5 percent, noting it was a wide range.
  • Advantages: Ventas' planned Care Capital Properties spinout is "forward thinking" according to Mizuho; also noting that MOB "Doc-Fix" as a positive and post-acute nursing "pay-for" as appearing manageable.
  • Price Target Risk: The post-acute nursing segment was noted as the biggest risk; however, Ventas 1.5x rent coverage with Kindred helps to mitigate that risk moving forward.

Related Link: Bill Ackman's Latest Moves In Healthcare

Mizuho's Bottom Line

The healthcare REIT sector, based upon current lower valuations and an economic forecast of a relatively benign rate and macro environment, should represent an opportunity for investors during 2H 2015.

Large caps Ventas and Health Care REIT, along with mid-cap Healthcare Realty Trust, are the top ways to play the sector for investors who agree with the Mizuho economic thesis.

Image Credit: Public Domain

Latest Ratings for HCN

DateFirmActionFromTo
Feb 2018CitigroupMaintainsNeutralNeutral
Feb 2018Stifel NicolausMaintainsBuyBuy
Nov 2017Stifel NicolausMaintainsBuy

View More Analyst Ratings for HCN
View the Latest Analyst Ratings

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