Despite strong performance over the past several years, senior housing REITs may face considerable headwinds including the RIDEA structure two of the “Big Three” REITs use in a substantial percentage of their portfolios.
A heavy investment in RIDEA among other factors led BMO Capital Markets analysts to downgrade the stocks of Ventas REIT (NYSE: VTR) and Health Care REIT (NYSE: HCN) Tuesday, from “market perform” to “underperform.” The analysts maintained a “market perform” rating for the third “Big Three,” REIT, HCP, citing HCP’s 3% RIDEA exposure versus 33% and 28% of the portfolios for HCN and VTR, respectively.
Additional headwinds noted by BMO include rising levels of development and higher costs of capital within the sector and signs of a full recovery ahead for the U.S. economy.
“Factors behind this [rating] change include more visibility into rising levels of senior housing development and incremental signs that the US economy is at the cusp of a full recovery,” write BMO Capital’s Richard C. Anderson, Paul E. Adornato, and Mark A. Lutenski in an industry ratings report published Thursday. “We also think the ability for the companies to continue to grow has been hampered by a higher cost of capital. While we believe a more modest pace of investing would ultimately be a good thing, we also think it served as a lightening rod of attention that, for the most part, served investors well.”
BMO has revised its price targets to $49 for Health Care REIT and $52 for Ventas.
The analysts detailed concerns with the RIDEA operating structure including a shift in investor attention.
“The RIDEA structure has not been full-cycle tested yet, and 2014 could reveal some chinks in its armor,” they write. “We acknowledge that portfolio diversification into other property types and triple net structures provides a layer of protection for both HCN and VTR, but we think the performance of the operating portfolios will be the centerpiece of attention from investors this year.”
Written by Elizabeth Ecker