Fundamental trends are solid for health care REITs as they continue to have an advantage in terms of cost of capital over many of their private-sector peers, their balance sheets are in good shape, and they’re able to benefit from opportunities across various health care sectors, such as senior housing, medical office buildings and life sciences, says James Milam, an Associate Director at Sandler O’Neill + Partners, L.P.
“We have seen transaction pricing compress over the last 12 to 18 months, so it’s maybe been a little bit harder for them to win deals than when they were really dominant in 2011, but I still think the public capital markets are supportive of the acquisitions that these companies are doing,” he said.
Milam says LTC Properties Inc. (LTC) is his top pick in the health care REIT sector. It’s a smaller company that’s trading at somewhat of a discount to the group, which he believes is partly related to size, however he says LTC is disciplined in terms of how it executes its growth strategy.
“They have a phenomenal balance sheet with very little leverage. They’re essentially acquiring skilled nursing facilities, and also doing some standalone memory care development, which they can fund with low-cost debt, probably around 5%, and investment yields are around 9% or 10% for them. So that’s a story we continue to like,” Milam said.
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