Health care real estate investment trusts will face new challenges in 2014, including rising rates, higher costs of capital and supply risk versus the past several years, analysts say.
This cautious outlook led BMO Capital Markets to downgrade Ventas (NYSE:VTR) and Health Care REIT (NYSE:HCN), two of the “big three” senior housing REITs last week.
Analysts provided additional insight into the sector in a report released in tandem with the downgrades, pointing to supply and demand factors facing assisted living that will lead to a challenging 2014 for those invested in those communities.
“With senior housing construction activity, driven by assisted living/memory care, running at 5% of existing stock, we think this could introduce pockets of fundamental headwinds,” write BMO’s Richard C. Anderson, Trish Azeez and Joshua Patinkin in the report.
The RIDEA structure, employed largely by the two downgraded REITs, poses additional challenges, they say, likely to mirror the underperformance of RIDEA use by the multifamily REIT sector in recent years.
“While absolute levels of RIDEA growth will likely remain positive, we think it could result in the same fate as the multifamily REIT sector, which underperformed for the past two years despite still strong (yet decelerating) internal growth prospects,” 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 health care REIT investors for 2014.”
The ongoing construction levels of assisted living and other senior living products is also cause for concern, according to BMO’s outlook.
“We see headwinds for the health care REITs to start the New Year, including elevated levels of construction activity (primarily assisted living and memory care) that we think will be a centerpiece of debate,” they says. “We also believe the prospects of rising interest rates will impact the health care REITs in a disproportionate way given the higher income element to the stocks, while an improving economic environment is better for more cyclical property sectors.”
Written by Elizabeth Ecker