Battered by rising interest rates, healthcare real estate investment trusts watched their stock prices plunge last year.
When interest rates rose, investors began demanding higher yields, making it harder for REITs to find healthcare investments that made economic sense, said Jan Kasun, a partner with the accounting and consulting firm of Kenneth Leventhal & Co., Los Angeles.
Overall, "it was a tough market," said Michael Sgro, a REIT analyst with NatWest Securities Corp., New York.
But compared with other investments, healthcare REITs remain a good bet. Stock analysts continue to recommend many healthcare trusts for their above-average total returns.
According to NatWest, healthcare REITs' total returns, which include dividends paid to investors, beat the Standard & Poor's 500, an index based on the performance of 500 widely held common stocks (See chart).
Last year's total return of 3.9% is respectable, but it pales in comparison with previous years. In 1991, 1992 and 1993, healthcare REITs provided investors with total returns of 63%, 4.95% and 22%, respectively, Sgro said.
And although stock prices didn't show it, a number of healthcare REITs reported record earnings last year. Analysts attributed the year-end results to the strength of the trusts' existing investments.
Long-term-care investments remained healthcare REITs' favorite. These trusts are attracted to nursing home investments because demand for nursing home beds is rising while the supply of new beds is constrained by state moratoriums and stringent certificate-of-need requirements.
"There's so much product out there," Sgro said of the number of long-term-care facilities that may need mortgage financing. Small nursing home operators, which have limited access to other financing sources, make up 60% of the long-term-care industry, he said.
As of mid-February, REIT stock prices were up 2.2% for the year, but interest rates continue to clobber prices of all REIT stocks.
Because interest rates drive REITs' cost of capital, "I think growth is going to be relatively slow," Kasun said. However, if a number of providers choose REITs to free up capital, "that could help the REIT market grow. (Chief financial officers) of healthcare providers really should be looking at those assets," she said.