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2011 Fitch Outlook for Health Care REITs


In its 2011 Outlook for U.S. equity REITs, Fitch Ratings maintains a decidedly "positive" outlook for health care REITs, on the basis of stable property market fundamentals and favorable access to capital:

In contrast to other commercial real estate sectors, nearly all Fitch-rated health care REITs have reported positive same store NOI growth during 2010 relative to 2009.

Fitch-rated health care REITs have made the bulk of their health care facility investments in recent years in facilities funded by non-government sources, and thus their exposure to government reimbursement risk continues to decline.

Operating conditions in senior housing will likely improve in 2011, as the pipeline of new construction is expected to drop below 2% of existing stock.

Each medical office property typically has a granular tenant base, with lower tenant turnover than a comparable office building.  These dynamics create fairly stable operating performance for medical office properties.

Capital access for life science tenants remains strong.  While some operators coudl continue to consolidate facilities, the industry continues to grow and long-term demand for well-constructed space in key locations is expected to remain solid.

While many sectors within health care real estate are affected to some degree by challenging macroeconomic conditions, the property sector is affected less so because of the sheer volume of population growth in the over-70 age cohort.  When combined with limited new development activity, operating conditions have been far healthier than in most other major property types.
In terms of access to capital,
Most health care REITs rated by Fitch have good liquidity and strong balance sheets, with significant availability under revolving lines of credit, well-laddered debt maturities, and large unencumbered asset pools.  Additionally, health care REITs have demonstrated access to a variety of capital sources including secured and unsecured debt financing and the follow-on common equity market.  The unsecured bond market remains open for health care companies and banks continue to be interested in lending to health care REITs.
In short,
Strong long-term demographic trends are helping support demand, with fewer challenges at the property level than other sectors have experienced.  Many health care REITs have been active investors in 2010 and they are in a strong position to take advantage of opportunities to further grow and diversify their portfolios.
The 12 publicly traded health care REITs (from largest to smallest) are HCP (NYSE:HCP), Ventas (NYSE:VTR), Health Care REIT (HCN), Nationwide Health Properties (NYSE:NHP), Senior Housing Properties Trust (NYSE:SNH), Omega Healthcare Investors (NYSE:OHI), Healthcare Realty Trust (NYSE:HR), National Health Investors (NYSE:NHI), Medical Properties Trust (NYSE:MPW), LTC Properties (NYSE:LTC), Universal Health Realty Income Trust (NYSE:UHT), and Cogdell Spencer (NASDAQ:CSA).  Fitch's coverage universe includes HCP, VTR, HCN, NHP, and HR.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: Author is long Vanguard REIT Index Fund and ING Real Estate Fund.