Property owners in the medical real estate sector are benefiting from a low cost of capital, increased access to capital and a still-fragmented industry’s growth opportunities, says Daniel Bernstein, CFA, an Analyst at Stifel, Nicolaus & Co., Inc., however, he has been cautious on some of the valuations in the sector due to the macroeconomic environment.
“I think with the cost of capital decreasing, mainly because of the decrease in the 10-year Treasury, particularly for large portfolios of high-quality senior housing and medical office, we are continuing to see and expect further cap rate compression, perhaps 25 to 50 basis points of compression from the acquisition rates that we saw some of the large caps make last year,” he said. “The increasing real estate value is, I think, an indicator of potential for increased stock prices in the health care REIT sector.”
Bernstein has Sabra Health Care REIT, Inc. (SBRA) as his top pick on the health care REIT side. He says Sabra was created from the split of the property from the operator at Sun Healthcare in late 2010, and he likes SBRA despite some risk affiliated with the company due to about 70% of the NOI is with one tenant, currently Sun Healthcare.
“But as Sabra diversifies its tenant mix away from Sun, and also potentially later on, maybe a year or two out, begins to diversify away from postacute/skilled nursing and into senior housing, as their cost of capital comes down, we think there’s potential for Sabra’s multiple to increase from where it is today,” Bernstein said.