Health and Healthcare

2 Positive Health Care REIT Views

Investors may still be able to find some upside in the health care sector, in the real estate investment trust (REIT) outfits. Physicians Realty Trust (NYSE: DOC) and Health Care REIT (NYSE: HCN) were both given positive analyst views by the analyst team at Canaccord Genuity, with an upside averaging north of 20% on a total return basis. Canaccord Genuity’s analyst covering health care REITs is Paul Morgan.

On Physicians Realty Trust (NYSE: DOC), Morgan was updating the firm’s model to reflect intra-quarter adjustments after the second quarter earnings season. Morgan said:

Our current 2015 and 2016 normalized FFO/share are $0.94 (down 4 cents, which is due almost entirely to later timing of second quarter acquisitions), and $1.14 (down 2 cents, reflecting an anticipated second half of 2015 unsecured note offering).

He maintained his $18 price target, which continues to reflect a 25% premium to Canaccord’s forward net asset value and incorporating a 7.2% applied cap rate. If you add in the current 5.8% dividend yield, that implied a 12-month total return potential of 21% based upon the prior closing price of $15.58. That is now over 25% implied upside if you consider that Monday’s closing bell price was down 7% at $14.49. This $18 price target is just 43-cents shy of the consensus analyst price target average.

Canaccord Genuity’s Paul Morgan also updated his model on Health Care REIT (NYSE: HCN) after its second quarter earnings. The 2015 and 2016 FFO per share estimates were left unchanged at $4.34 and $4.65, respectively.

The $79 price target was based on the average of 17 times expected 2016 funds from operations and a 25% premium to Mr. Morgan’s forward implied net asset value and mixed with a cap rate of 6.65%. This analyst price target is over $2 higher than the $76.60 consensus analyst price target.

Combined with the current 4.8% dividend yield, the implied total return opportunity over the coming 12 months or so was a potential of 20%. Health Care REIT closed down 3.9% at $65.73, so its total return opportunity is now closer to 25% if things pan out according to Canaccord Genuity’s expectations.

One of these REITs is small, and one is not — Physicians Realty Trust has a market cap of right at $1 billion, and HealthCare REIT has a $23 billion market cap.

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