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Office Space Stocks Get Help From Health Care

22 May 2014 in Trading Ideas

With US financial markets up only a couple of tepid percentage points in 2014, investors have been returning to some classic defensive sectors that they spurned a year ago, when the ascent of equities seemed a little more certain.

One of those now-in-favor sectors is health care real-estate investment trusts, the companies that own clinics and nursing homes that were once seen as one of the safest and most dependable sources of real-estate income.1

Back in April, the Wall Street Journal reported that health-care REITs were among the top performers in the REIT sector, which, at the time was up 10%, as measured by the Dow Jones Equity All REIT Return Index.

A month and a half later, the index is now up by more than 13% in 2014.

Other REIT investments also have performed well this year. The Office Space motif has gained 13.9% in 2014. During that same time, the S&P 500 has risen 3.0%.

 

In the past month, the motif has gained 2.4%; the S&P 500 is up 0.3%. What’s more, in the past month, the healthcare segment of the Office Space motif is up 4.5%.

While the move to defensive equities has been a tailwind, the stocks have done well this year partly because concerns about interest-rate increases have diminished, the Journal said. Last year, when rates rose, shares of health-care REITs were hit harder than any other type of property stock, falling 19% in nine months.

Health-care companies are more sensitive to interest-rate increases than many other REITs because their revenue typically comes from long-term leases, sometimes as long as 10 years, at assisted-living facilities, according to the Journal. When interest rates rise, health-care REITs are unable to quickly raise rents to keep up with the rising cost of borrowing.

But other industry trends also bode well for health-care companies. For example, in March the Senate delayed the enactment of some cuts to Medicare reimbursement. The Journal said the move was welcome news for health-care REITs because cuts might have hit funding for skilled nursing and long-term care, services that are provided at facilities owned by REITs.

Another change has been the rise of urban clusters of biotechnology parks, many of which are owned by health-care REITs. In cities, health-care REITs can charge research and pharmaceutical companies more rent to have their workers near amenities such as popular restaurants and fitness centers.

What is less clear is how President Obama’s Affordable Care Act (Obamacare) will affect the sector going forward. Some health-care industry executives argue that the legislation, by adding millions of newly insured patients, is creating demand for health-care facilities, the Journal said.

But other executives say they are concerned about possible cuts to government reimbursement programs. They have sought to avoid buying facilities with high concentrations of federally insured patients.

Where investors fall on that debate could go a long way to determining whether to scale into – or out of – health-care REIT stocks.

1Robbie Whelan, “Health-Care REITs Get Back On Their Feet,” WSJ.com, April 8, 2014.

Historical performance data provided as of May 22, 2014.

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