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Buy Healthcare REITs, It's The Best Time To Do It In 18 Months: Canaccord

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Buy Healthcare REITs, It's The Best Time To Do It In 18 Months: Canaccord
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On July 8, Canaccord Genuity analysts Paul Morgan and Joseph Ng initiated coverage of U.S. healthcare (HC) REIT sector.

Within a detailed report, they tackled the issue of REITs and interest rates, noting, "downside risk from a shift in Fed policy is largely priced into healthcare REITs, which are down 21% from their 2015 peak."

The firm believes this is the best HC REIT entry point in the past 18 months.

Top Picks

Health Care REIT (NYSE: HCN) $24 billion cap, 4.9 percent yield.
New Senior Investment Group (NYSE: SNR) $1.2 billion cap, 7.6 percent yield.
Three additional Buy rated HC REITs include:

  • CareTrust REIT (NYSE: CTRE) $401 million cap, 5 percent yield.
  • Physicians Realty Trust (NYSE: DOC) $1.1 billion cap, 5.6 percent yield.
  • LTC Properties Inc. (NYSE: LTC) $1.5 billion cap, 4.7 percent yield.

Demographic Tailwind

The 65 - 80 year old demographic growth will be 5x that of the general population over the next decade.

cg_-_babyboomer_chart_july_8.jpg

However, while aging populations will demand more services, governments will be seeking ways to cap reimbursement payments.

Coverage Thesis

One notable similarity is that all of these HC REIT picks have a majority focus in one area of healthcare.

Canaccord believes that it will be the nimble "sharpshooter" REITs, who will thrive; cautioning to avoid "dumb money" bets on healthcare real estate.

cg_-_hc_reit_pie_charts_july_8.jpg

Canaccord also pointed out how asset quality matters more in a post-RIDEA (REIT Diversification and Empowerment Act) landscape; where HC REITs are able to participate directly in the cash flows of senior housing assets, in addition to triple-net leases with operators.

Health Care REIT: Buy Rated, $79 PT, Top Pick

  • The HCN $79 target price represents a potential ~24 percent total return, including the ~5 percent dividend yield.
  • The $79 PT is based on an average of 17x 2016E FFO per share, representing a 25 percent premium to Canaccord's forward NAV per share, which also equates to a cap rate of 6.75 percent based on the firm's forward NOI estimate.

Notably, HCN has a large seniors housing portfolio with an average age of only 12 years and strong demographics in the U.S., Canada and UK; and strong operator relationships.

New Senior Investment: Buy Rated, $18 PT, Top Pick

  • The SNR $18 target price represents a potential ~40 percent total return, including the 7.6 percent dividend yield.
  • The $18 PT is based on an average of 11x 2016E NFFO per share, representing 100 percent of analysts' forward NAV per share, which also equates to a cap rate of 6.7 percent based on the firm's forward NOI estimate.
  • Notably, SNR was recently spun out of Newcastle Investment as a private-pay focused seniors housing REIT; externally managed by PE firm Fortress, who also owns Holiday Retirement, a top private operator.

CareTrust REIT: Buy Rated, $15 PT

  • The CTRE $15 target price represents a potential ~25 percent total return, including the 5 percent dividend yield.
  • The $15 PT is based on an average of 12x 2016E FFO per share, representing a 20 percent premium to [CG's] forward NAV per share, which also equates to a cap rate of 8.75 percent based on a forward NOI estimate.
  • Notably, "...CareTrust spun out of leading SNF-operator Ensign Group in June 2014 and in [CG's] view is now well-positioned to grow earnings and NAV through accretive acquisitions that are sourced off the radar screen of larger healthcare REIT peers."

Physicians Realty Trust: Buy Rated, $18 PT

  • The DOC $18 target price represents a potential ~18 percent total return, including the 5.6 percent dividend yield.
  • The $18 PT is based on a 25 percent premium to forward NAV per share forecasts, which also equates to a cap rate of 7.1 percent based on analysts' forward NOI estimate.
  • Canaccord also noted that its 2015 FFO estimate was 3 cents below consensus, while it 2016 FFO estimate was 2 cents above consensus.
  • The DOC IPO took place in 2013, with a laser focus on medical office buildings (MOBs); CEO John Thomas formally ran HCN's Medical Facilities Group, where he doubled its asset base to $5 billion in just four years.

LTC Properties: Buy Rated, $47 PT

  • The LTC $47 target price represents a potential ~15 percent total return, including the 4.7 percent dividend.
  • The $47 PT is based on an average of 15.9x 2016E FFO per share, representing a 25 percent premium to the analysts' forward NAV per share, which also equates to a cap rate of 7.8 percent based on Canaccord's forward NOI estimate.
  • LTC is primarily focused on the long term care segment of skilled nursing homes (SNFs). "Over the next decade, the number of Alzheimer's cases is projected to grow by 40% to 7.1 million… LTC's development program is leveraging the growth in memory care demand and includes four projects currently in lease-up and four others under construction."

Latest Ratings for HCN

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

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