This article is republished with permission from REITCafe.
Two of the top three health care real estate investment trusts (REITs) have spun off their struggling skilled-nursing investments into separate REITs.
Ventas spun off its skilled-nursing portfolio into Care Capital Properties in August 2015, and HCP recently finalized its spinoff, Quality Care Properties (QCP); QCP shares will be distributed to shareholders at the end of this month. Another REIT cutting back is Sabra Health Care REIT, which is selling 29 skilled-nursing facilities (SNFs) and outpatient recovery centers in order to reduce exposure. Ventas reported that spinning off its 355 skilled-nursing holdings allowed it to achieve stronger growth, a more stable cash flow, and a greater portion of income from private-pay assets in its portfolio.
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Skilled-nursing facilities have been underperforming due to the changes in medical billing practices implied by the Affordable Care Act (ACA); new payment models, lower reimbursement rates, and shorter patient stays to name a few. Additionally, exposure to Medicare Advantage has greatly increased since 2013. Since these changes are tied to the ACA , experts say that the skilled-nursing facility sector will continue to face these revenue challenges for an indefinite period of time. Consequently, some investors are hesitating to put their money in health care REITs, which has forced these REITs to cut back on underperforming skilled-nursing holdings.
Fitch reported in May that stays at hospitals by Medicare Advantage recipients were as much as 26 percent shorter than those of other patients, and the mean cost per stay has been as much as 14 percent lower since 2013. Because SNF revenues are now mostly composed of Medicare payments or additional payments from other government insurance programs, SNFs are becoming less and less profitable as investments. REITs with heavy exposure to skilled-nursing operators are therefore subject to more risk because the facilities may face pressure in their ability to pay rent if government budgets tighten. According to the Wall Street Journal, a large factor driving this revenue squeeze is that billing practices now focus more on the value of care delivered rather than the volume of services provided, as was the case with the previous models.
Experts say health care REITS focused on skilled-nursing properties may face a rocky road. Medical office buildings and hospitals are now seen as more promising assets because they have more control over the billing changes as well as have steadier incomes. However, it does not appear that the impact of the upcoming volatility will be as drastic as in the late 1990s, when there was a string of SNF bankruptcies filings. The sector does offer some upside: SNFs are priced twice as high as they were a decade ago. SNFs also offer a cheaper alternative to long hospital stays. Still, investors are now more hesitant to invest in REITs holding these assets because their revenues tied to government budgets continue to carry the risk of restriction.
* TREPP-i Survey Loan Spreads levels are based on a survey of balance sheet lenders. For more information, visit Trepp.com.
** – 10 yr. Treasury Yield as of 10/21/2016.
