Look Past Near Term for Healthcare REITs' Value
We see long-term tailwinds and attractive dividend yields.
We have lowered our economic moat ratings for the healthcare real estate investment trusts we cover-- HCP (HCP), Ventas (VTR), and Welltower (WELL)--to none from narrow. However, we believe there is significant value to be found in these companies’ high-quality, well-diversified portfolios. All three have sold off in the past few months because of factors that are either short term or already baked into our long-term views, and we believe the market is ignoring long-term industry tailwinds. We see Welltower and Ventas as the most attractive names, given their management teams’ exemplary stewardship, and we have a slight preference for Welltower, as we believe its strategy of smaller-scale acquisitions is more viable. All three companies currently have a dividend yield over 6%, and we see their dividends as well covered.
After transferring coverage, we have lowered our fair value estimates for Ventas to $65 per share from $67 and for HCP to $25 per share from $26. We are maintaining our $74 fair value estimate for Welltower. These changes are the net result of some offsetting changes in our near- and long-term assumptions. While we had previously recognized that 2018 would be a down year for senior housing fundamentals and the next two years would also see slower growth in net operating income, we’ve lowered our near-term expectations further based on how the situation has developed.
Kevin Brown does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.