With the 75-plus age group set to grow at an annual rate between 4% and 5% from 2020 through 2030, it's easy to understand why health care real estate investment trusts (REITs) attract considerable investor attention. As of May 2019, they comprise roughly 13% of the U.S. REIT sector by market capitalization. As well as favorable demographics, these REITs pay some of the most attractive dividend yields within the S&P 500 Index.
Despite the rosy long-term outlook, this health care subsector is not without its challenges. Construction of health care real estate – in particular senior housing – has surged since 2015 as developers anticipate the aging baby boomer cohort. Projected supply growth of 4% per year from 2015 to 2022 could result in oversupply issues.
Furthermore, health care REITs remain vulnerable to political risk in the leadup to the 2020 election. Amendments or a full repeal of the Affordable Care Act and debate surrounding "Medicare for All" proposals have the potential to alter government spending and reimbursement policies.
From a technical standpoint, several large-cap health care REITs have fallen below trendline support after making new 52-week highs in April. Moreover, bearish divergences have formed between price and the relative strength index (RSI) that add conviction to the breakdowns.
Welltower Inc. (WELL)
Toledo, Ohio-based Welltower Inc. (WELL) owns a diversified health care portfolio of over 1,500 properties that includes senior housing, medical offices and skilled nursing/post-acute care centers. Its properties sit in high-growth markets in the United States, Canada and the United Kingdom. The REIT recently provided capital in exchange for a 75% ownership in Charlotte, North Carolina-based Pappas Properties' midtown mixed-use project, which includes two buildings anchored by Atrium Health. Analysts have a 12-month price target on Welltower stock at $77.44, just 1.8% above Thursday's $76.08 closing price. As of May 10, 2019, Welltower shares have a market cap of $30.81 billion, issue a 4.67% dividend yield and are trading up 10.86% year to date (YTD).
Welltower's share price broke the support a long-term trendline in mid-April, which indicates that sellers may now have control of price action. A bearish divergence between the most recent swing high and the RSI indicator's latest peak points to dwindling upside momentum. A retracement to the uptrend line that now acts as resistance provides a suitable short sale entry point. Those who take the trade should consider buying to cover if price falls to the 200-day simple moving average (SMA). Manage risk by placing a stop-loss order just above the mid-March swing high at $78.24.
Ventas, Inc. (VTR)
Ventas, Inc. (VTR), which has a market value of $22.29 billion, owns a diverse portfolio of approximately 1,200 assets in the United States, Canada and the United Kingdom. The health care real estate company's assets consist of senior housing, medical offices, hospitals, life science and post-acute care facilities. Analysts see full-year 2019 earnings growing 18.4%, but with a price-to-earnings ratio (P/E ratio) of 47.3 versus the 23.7 industry average, the share price may have already factored in the upside. Trading at $61.69 and paying a dividend yield over 5%, Ventas shares have registered a YTD gain of 6.64%, underperforming the REIT health care facilities industry average by 2.69% over the same period as of May 10, 2019.
While Ventas shares have trended upward over the last 12 months, they have had several deep pullbacks to the 200-day SMA. A triple top that formed between December and March confirmed in the middle of last month when the REIT broke down below the pattern's neckline. More recently, the price has rallied upwards to test this now crucial resistance area. Traders who open a short position here should book profits if the REIT's price tumbles back down to the $58 level – an area where price may catch a bid from the April swing low. Cut losses if the stock closes above the pattern's neckline at $63.
HCP, Inc. (HCP)
HCP, Inc. (HCP), the first health care REIT selected to the S&P 500 index, invests in real estate serving the health care industry in the United States. Its portfolio includes over 600 properties spread across senior housing, medical offices, hospitals and skilled nursing facilities. While the REIT surpassed analysts' first quarter 2019 funds from operations (FFO) estimate by a penny, it missed revenue forecasts for the period due to a decline in rental and related revenues. HCP has a market cap of $14.54 billion and is up just over 10% on the year as of May 10, 2019. Investors receive a 4.97% dividend yield.
HCP shares set a new 52-week high at $31.84 on March 22 before quickly retreating below the support of a seven-month uptrend line. As the REIT reached its high, the RSI made a lower high in comparison, which forewarns a possible bull trap. Traders currently have the opportunity to fade a pullback to the 50-day SMA and uptrend line. Those who short HCP should set a take-profit order at $26, where a horizontal line provides crucial support. Think about positioning a stop order just above the uptrend line at $31 and moving it to the breakeven point if price falls below the 200-day SMA.