Morgan Stanley Downgrades Welltower, HCP: 'Is Triple Net Sr. Housing The Next Shoe To Drop?'

Morgan Stanley has downgraded
Welltower IncHCN
saying that under-pressure senior housing triple-net rent-coverages pose valuation risk for the stocks over the next 12 months.

Healthcare REIT Sector

The brokerage said, "Over the past year, valuations for Welltower, HCP and Senior Housing Properties have compressed by 10–15 percent on fears of senior housing RIDEA supply risk and operational deterioration in skilled nursing (combined 20–55 percent of NOI)."

"While these concerns are likely to persist, we are incrementally concerned on triple net senior housing assets (30–40 percent of NOI). Our deep dive shows likely deterioration in underlying fundamentals and reduced capacity of tenants to pay rent. We think shares of HCP and HCN could de-rate and see a higher probability of our Bear Case," analyst Vikram Malhotra wrote in a note.

Malhotra's analysis shows that REIT triple net assets are located in weaker, lower-barrier markets than their RIDEA counterparts. High levels of construction and lower senior population density are likely to pressure occupancy.

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In addition, the analyst expects higher costs due to low labor supply and rising wages in multiple markets and the noted that the market does not appreciate the severity of this issue.


Malhotra cut HCP to Underweight, saying, "Our Base Case assumes triple net rent coverage will trend towards 1.0x from 1.07x today."

"We do not anticipate imminent rent cuts but see the market pricing in elevated risk, driving multiple contraction," Malhotra noted.

The analyst added that the HCP's planned spinoff its nursing business is not a material catalyst. Malhotra has a price target of $32 on HCP.

Malhotra also downgraded Welltower to Equal Weight on expectations that triple-net coverages would decline further, resulting in modest multiple contraction.

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"Our work shows that HCN has been thoughtful about choosing high quality assets/markets for the RIDEA structure (unlike several peers), but this has resulted in unfavorable demographics and fundamentals for its triple net assets," the analyst highlighted.

Malhotra, who has a $69 price target on Welltower shares, noted that his bullish out-of consensus view on the company's near-term RIDEA growth played out in the first quarter. In addition, the recent weakness at the company's top skilled nursing tenant, Genesis, may remain an overhang.

However, the analyst still expects Welltower's overall high quality portfolio and strong balance sheet driving superior cash flow growth.

At the time of writing, shares of HCP closed Tuesday's regular trading at $35.01, while Welltower closed at $73.43.

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