Healthcare REITs

04/01/2016 9:00 am EST

Focus: REITS

Kenneth Leon

Global Director of Industry & Equity Research, CFRA Research

Select healthcare real estate investment trusts are at net asset value despite posting near 20% funds from operations growth in 2015, suggests Ken Leon, S&P Capital IQ analyst in The Outlook.

We believe those healthcare REITs with a diversified portfolio by property type and geography should achieve operational excellence from newer post-acute facilities, senior housing and medical offices.

Investor concerns rest with the impact from the Affordable Care Act and pressure from the shifting Medicare reimbursement model.

So, why are we positive on these REITs? Most REITs with a higher mix to private versus government reimbursement sourcing are stable and generating positive FFO growth.

Here is our take on some of the leading healthcare REITs.

Medical Properties Trust’s (MPW) strategy is to lease the facilities that it acquires or develops to experienced health care operators pursuant to long-term net leases.

There has been no operational deterioration in MPW's acute hospital properties that comprised 67.5% of its 2015 total portfolio.

The trust's triple net leases require tenants to assume the risk of operating health care facilities and provide a steady flow of revenues and cash flow.

MPW is targeting $900 million of property dispositions that have attracted interest from prospective buyers.

Ventas (VTR) has a well-diversified healthcare portfolio in terms of asset type, geography and tenant base, in our view.

We are positive on 70% of its properties in high barrier to entry areas such as New York City, Los Angeles, Boston and other coastal markets.

VTR tenants and managers derive about 80% of revenues from private pay sources, and less than 20% from government insurance programs.

For 2016, the projected decline in FFO from $4.47 in 2015 is tied to the spin-off of its skilled nursing facilities.

Welltower (HCN) has assembled a portfolio of properties likely to benefit from increased demand from an aging US population; it has triple-net leases and operates in the senior housing sector.

Management is negative on acute care facilities, but sees future growth opportunities with post-acute facilities tied to leading health care centers like John Hopkins Health System.

HCN plans to invest $406 million in redevelopment of existing properties in 2016 that are expected to generate rental yields of 8.2%.

It sees another $1 billion of potential asset sales in 2016 that we see improving the private asset mix versus government funded tenants.

HCN will derive over 90% of its 2016 revenues from private-pay sources, which we view as a positive.

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By Ken Leon, S&P Capital IQ analyst in The Outlook.

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