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All of the recent signs are pointing towards a December rate hike from the Federal Reserve.
Fed Chair Janet Yellen's House testimony boosted confidence that the Federal Open Market Committee would move away from near-zero rates for the first time in years, and the employment situation report furthered that sentiment Nov. 6 as the unemployment rate fell 5.0%.
Yet despite the more recent positive indicators, REIT shares continue to forge an unpredictable pattern rooted in uncertainty.
While attending REIT World 2015 in Las Vegas this week most attendees noted uncertainty and argued that the impending rate hike appears to be priced into shares. In other words, the worst may be over.
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Perhaps there will be a few remaining trimmers but Sherry Rexroad, managing director at BlackRock, and the firm's chief investment officer of the Americas, pointed out that any uptick in rates will likely be gradual, and only modest at first.
Rexroad warned that there will likely be additional volatility in the short term, once the Fed makes a move, but she ultimately was optimistic about what a rate hike means for commercial real estate.
As long as we have the economic growth that goes along with a rising interest rate environment, then you should start to see investors return to REIT investments," Rexroad said. "Good inflation is good for rents and is good for real estate.
One REIT sector that has sold off the hardest year-to-date is Healthcare. While several assisted living operators have shown signs of stress, notably HCR Manorcare and Brookdale, the Healthcare sector as a whole has shown solid growth in earnings and rising dividends.
Ultimately the strength of the Healthcare sector is rooted in strong demographics trends such as an aging population that will generate substantial demand for skilled nursing and assisted living. In addition, physician care will continue to grow due to increased demand spurred by the Affordable Care Act.
Collectively, these ingredients, combined with weaker share prices, has created an attractive margin of safety for investors to tap into outsized income and growth.
Given the more noticeable pullback in the Healthcare sector I believe there is significant value in the larger, diversified Healthcare REITs. All of these companies own diversified portfolios that include assisted living, senior housing, and medical office. Others, own Life Science and Hospitals as well.
Ventas, Inc. (VTR) is trading at $51.59 per share with a dividend yield of 5.7%. The $17.3 billion (market cap) REIT has generated the best dividend growth and is currently trading well below historical earnings valuation levels (currently trading at 11.9 P/FFO).
Welltower (HCN) is also attractively valued with a P/FFO (or price to funds from operations) multiple of 13.9x. The $21 billion (market cap) REIT is trading at $60.55 with a dividend yield of 5.5%.
Finally, HCP, Inc. (HCP) has the deepest discount of the three, trading at 11x P/FFO with a dividend yield of 6.5%. I interviewed HCP’s CEO, Laurelee Martin, at REIT World this week and she articulated a sound investment strategy that should drive performance through 2016 (click here for my videos).
Selecting sound securities with a significant margin of safety remains that value investor’s definitive precautionary measure and these 3 Healthcare REITs are all attractively valued today. All of these REITs have also maintained disciplined risk control through multiple economic cycles and I have a favorable recommendation on all them.
In my newsletter, Forbes Real Estate Investor, I provide coverage on around 100 U.S. Equity REITs. For more information CLICK HERE.
Brad Thomas is the Editor of the Forbes Real Estate Investor and writes for Forbes.com and Seeking Alpha. He is also a frequent guest on Fox Business and he is currently writing a book, Trump: It’s ALL Business, about U.S. presidential candidate Donald J. Trump.
