Health-Care Owners Shun Nursing Homes

by | May 31, 2013

Some of the nation’s largest health-care landlords are pulling back from nursing homes on concerns they will be less profitable in an era of steep Medicare and Medicaid cuts.

Health Care REIT Inc., which leases to about 250 nursing homes nationwide, and Senior Housing Properties Trust, which is the landlord to nearly 50 nursing homes, have indicated they are greatly reducing their exposure or that they might exit the sector.

Ventas Inc., one of the largest health-care landlords in the U.S., said it is comfortable with the approximately 300 nursing homes it already houses but won’t make major new acquisitions in the sector until there is more clarity on Medicare rates. Instead, Ventas plans to expand into assisted-living properties that aren’t dependent on government subsidies.

The retreat comes as the outlook for nursing homes remains cloudy. A growing number of cash-strapped states are scaling back Medicaid reimbursement payments to nursing homes, while the federal government cut Medicare rates by 2% on April 1 as part of across-the-board budget cuts known as sequestration. These entitlement programs combined make up about 90% of nursing-home revenue. If they are diminished, some nursing homes could have difficulty paying their rent.

David Hegarty, president of Senior Housing Properties Trust, a real-estate investment trust based in Newton, Mass., said the company hasn’t raised rents on most nursing-home tenants in five years mostly because their business operations have been under financial strain in a sputtering economy.

Mr. Hegarty said the company is considering selling its 48 stand-alone nursing-home properties, which account for 4% of its net operating income and about 12% of the total number of properties Senior Housing owns. The company is now focusing on private-pay facilities including medical-office buildings and assisted-living properties.

There are more than 1.5 million nursing-home beds nationwide that provide intensive health- and personal-care services to the elderly.

Medicare pays for patients admitted for post-surgery rehabilitation for stays around 90 days or less. Medicaid, accounting for about 70% of most nursing-homes’ revenue, subsidizes longer stays for indigent elderly patients.

The sequester will result in $11 billion in lost revenue to all Medicare providers. That is on top of an estimated $7 billion shortfall in Medicaid reimbursements nationwide last year, a 14.3% jump from 2011, according to the American Health Care Association.

“In the last couple of years, because of the Medicare cuts, we thought…that [it] would be wiser to reduce that exposure,” said George Chapman, chief executive of Health Care REIT. Instead, the company plans to focus on properties where tenants pay out-of-pocket for expenses, such as medical-office buildings, assisted-living properties and independent-living centers.

The Toledo-based company is negotiating to sell approximately $250 million in nursing-home properties to several of its operators. The company sold 64 nursing homes valued at about $325 million last year.

Health Care REIT plans to reduce its nursing-home exposure to between 12% and 15% of its portfolio, from 18% and 25% at the end of 2011. Its largest nursing-home tenant is Genesis HealthCare, which operates more than 80% of the REIT’s skilled-nursing portfolio.

Debra Cafaro, chief executive of Chicago-based Ventas, said the company hasn’t disposed a significant amount of its nursing-home facilities, which represent 16% of its balance sheet. But, it has aggressively expanded into private-pay assisted-living properties and medical-office buildings, which account for nearly 80% of its investments.

“We have good cash flow coverage on our skilled nursing portfolio,” Ms. Cafaro said. “We are cautious about committing large amounts of capital right now in skilled nursing until there is a little bit more visibility on federal and state reimbursements to our tenant customers.”

Some nursing-home landlords say the market risk is overstated. If the sequester-induced cuts do occur, “We don’t believe it will have a big impact on the operators profitability,” said Craig Bernfield, chief executive and founder of Aviv REIT Inc.,AVIV +1.11% based in Chicago.

Aviv owns 257 properties across the country, and 87% of its rents are derived from skilled-nursing tenants.

So far, REIT equity investors remain attracted to nursing-home landlords, in part because of their relatively high dividend yields.

Health Care REIT’s share price is up 22.6% so far this year and it pays a dividend yield of 4%, higher than the 3.3% yield for the overall REIT sector.

From: Wall Street Journal

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