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REIT Report: Analysts wary of healthcare REITs

But the sector is likely to remain an attractive investment for long-term investors

By John B. Mugford

Publicly traded healthcare real estate investment trusts (REITs) have been a popular investment in recent years, as they offer all the usual benefits of REITs – most notably high dividend yields – coupled with the demographic attractiveness of the healthcare business.

However, in terms of stock prices, healthcare REITs have been the weakest performing real estate sector during the past year. As shown in the HREI™ REIT Index below, the sector as a whole has lost about 19.3 percent of its value during that time, mostly due to rising interest rates and uncertainty regarding U.S. healthcare policy.

Consequently, the sector has fallen out of favor with many securities analysts. One such detractor is one of the best-known public REIT investors, Houston-based Chilton Capital Management, which manages the Chilton REIT Composite.

As of March 31, Chilton did not hold any healthcare REITs in its portfolio and expressed a bearish view of the sector.

In an April 9 article titled “Negative prognosis for healthcare REITs,” posted to the investor website SeekingAlpha.com, Chilton said that its most recent analysis of healthcare REITs found that, at current share prices, the risks they face outweigh their long-term growth potential.

Chilton makes such an assessment despite the fact that it remains bullish on publicly traded REITs in general, calling them “superior vehicles for investing in real estate due to their liquidity, transparency and total return characteristics.”

For its most recent assessment of healthcare REITs, the company says it met with “20 REITs and key tenants, touring multiple properties, and looking for opportunities in the beleaguered space. What we found was not inspiring.” However, Chilton’s apprehension about healthcare REITs appears to be centered on those that invest in “higher-risk properties, such as senior housing, skilled nursing facilities (SNFs) and hospitals,” which it says are trading at some of the lowest multiples in the REIT universe.

REITs focused on MOBs and the life sciences have generally fared better during the past year. Meanwhile, the REITs that have historically focused on SNFs and acute care hospitals have been actively adjusting their portfolios to reduce their exposure in those challenging areas.

Thus it appears that healthcare REITs are likely to remain an attractive investment with significant growth potential for longterm investors who are willing to accept the risks associated with uncertainty over interest rates and government policy.

Disclaimer: The author has no financial positions in the companies mentioned and the article does not constitute an investment recommendation.

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