Fitch: REIT Financing to Aid US Hospital Consolidation

NEW YORK--(BUSINESS WIRE)-- Link to Fitch Ratings' Report: Hospital Consolidation to Continue; REITs to Fund

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=870982

The monetization of real estate portfolios is not a new trend among operators of acute care hospitals, but it has recently become a larger part of their growth strategy, according to Fitch Ratings. REITs will likely become a source of incremental capital to fund expansion and consolidation.

REITs would seem to be a natural partner for hospitals looking to raise capital through the sale of real estate, but until recently, REIT participation in the acute care segment of the healthcare industry was primarily limited to outpatient settings like medical office buildings (MOBs) due to concerns surrounding reimbursement, operator margins and real estate financeability.

The acute care hospital industry's consolidation is expected to continue as various secular shifts encourage larger, integrated care delivery systems. Hospital systems will likely make considerable investments to capitalize on the opportunity. These include amassing horizontal scale in operations, increasing physician employment and building a vertically aligned system of outpatient settings, such as MOBs, ambulatory surgery centers (ASCs) and imaging centers.

Moreover, we believe announced mergers among the largest health insurers should add incentive for hospital consolidation. Regardless of whether insurer consolidation was in response to leverage held by market-dominant hospital operators or not, any change to the relative balance of power will likely cause a response. Thus, Fitch expects insurer consolidation will incentivize hospitals to do the same, especially for smaller, non-dominant operators that will face more pressure from the potential "big three" insurers.

Well-capitalized operators of acute care hospitals, both for profit and not for profit, have historically owned the majority of their real estate, and Fitch does not expect this to change. Most of the recent sellers of acute care hospitals to REITs have been relatively less well-capitalized operators. Many of these are private equity-owned for-profit companies that do not benefit from access to public equity markets. They are also typically higher leveraged and lower rated than their publically traded counterparts, making debt financing more expensive and increasing the attractiveness of the sale-and-leaseback option.

Fitch expects each of the "Big 3" healthcare REITs will take different approaches toward hospitals, similar to their differing approaches toward REIT Investment Diversification and Empowerment Act (RIDEA) structured senior housing investments. Ventas has been explicit in its growth plans since its recent $1.4 billion hospital acquisition. Conversely, hospitals do not coincide with Health Care REIT's focus on lower cost settings and high private-pay exposure. Meanwhile, Fitch views HCP, Inc.'s receptivity to hospitals as somewhere in between Ventas and Health Care REIT. While HCP has not invested in the sector recently, it has above-average skilled nursing exposure and, thus, may be more comfortable with reimbursement risk than its peers.

Last year, we highlighted the risk that, to maintain their rapid growth, REITs may end up paying premium pricing, pursuing higher yielding assets (i.e. higher risk) or employing more leverage, which has generally come to fruition. Hospitals may look attractive given their high yield, particularly as yields in other healthcare property type subsectors have compressed. Further, the Big 3 have limited cushion to increase leverage further to improve returns, with leverage at 5.5x-6.0x up from 4.5x - 5.5x and near the 6.0x sensitivity for negative momentum.

For more information on this topic, see Fitch's special report titled "Hospital Consolidation to Continue; REITs to Fund," available at www.fitchratings.com

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20150914005882/en/

Fitch Ratings
Britton Costa, CFA
Director
U.S. Corporates, REITs
+1 212-908-0524
Fitch Ratings
33 Whitehall Street
New York, NY
or
Megan Neuburger, CFA
Managing Director, Corporates
+1 212-908-0501
or
Kellie Geressy-Nilsen
Senior Director
Fitch Wire
+1 212-908-9123
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
[email protected]
Sandro Scenga, +1 212-908-0278
[email protected]

Source: Fitch Ratings

---

Serious News for Serious Traders! Try StreetInsider.com Premium Free!

---

You May Also Be Interested In

• Goldman Sachs to acquire LCN Capital Partners for up to $410 million
• Arbella Insurance Group Returns as Presenting Sponsor for 24th Annual WEEI/NESN Jimmy Fund Radio-Telethon
• Harvard Business School's Linda Hill to Receive Lifetime Award from the Institute for Management Studies