1 Data-Driven Way To Play REITs

In a new report, Morgan Stanley analyst Vikram Malhotra explored senior housing REITs and discussed where he sees a buying opportunity for investors after a disappointing 2015 thus far. Malhotra sees risks remaining in the space and believes that REIT selection is critical.

Market Concerns

Healthcare REITs have underperformed the slumping REIT group in 2015, and Malhotra blames the lag on market fears surrounding rising interest rates and lower external growth.

“Elevated senior housing supply and the impact on RIDEA SS-NOI growth has emerged as a third concern with 1H15 growth below expectations,” Malhotra added.

Related Link: To Healthcare, With Leverage

Name-By-Name Analysis Required

Malhotra believes that these concerns are justified for the broad Healthcare REIT market, but not for top names in the space. He argued that local-level analysis is required to determine the type of impact that bearish construction statistics could have on specific REITs.

Unequal Risk

Morgan Stanley’s analysis indicates much less market supply risk for Overweight-rated Healthcare REIT Welltower than for Equal Weight-rated HCP, Inc. HCP.

Morgan Stanley found that Welltower is exposed to markets with a weighted average construction as a percent of inventory at only 3.8 percent, well below HCP’s 6.1 percent. In addition, only 25 percent of Welltower’s RIDEA portfolio is located in markets that Morgan Stanley deems to have “current risk” from new supply, while about half of the properties of peers are currently located in such markets.

Welltower is Morgan Stanley’s top Healthcare REIT pick at this time.

Disclosure: The author holds no position in the stocks mentioned.