Realty Check

How Obamacare Ruling May Affect Some REIT Investors

Investors in health care real estate have been reaping huge rewards of late, as the baby boom generation ages and as the sheer diversity of the sector makes it a darling of the stock market. 

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Health care real estate investment trusts (REITs) are up significantly in the past year.  That is why sector investors are waiting cautiously for the Supreme Court's decision on President Obama's health care law.

Analysts say whatever way the decision goes, health care REITs would see a modest impact, depending on how heavily invested they are in the different health-real estate subsets. 

Overall, REIT holdings break down as follows:  40 percent in senior housing, 30 percent in skilled nursing facilities, 20 percent in medical office buildings and 10 percent in biotech and other facilities.

Senior housing would be unaffected, according to Jim Sullivan of Green Street Advisors, because senior housing has a lot more to do with the overall economy than it does health care.  In fact, it has a lot to do with and the housing market.  Older Americans need to be able to sell their homes for enough to move in to senior living facilities, and their children, who often help foot the bill, need to be employed.

Skilled nursing, however, is very much dependent on the high court's decision.

"Medicare and Medicaidare two very important revenue sources for skilled nursing facilities, and the government’s willingness to pay that tab, pay that bill or not is very important to the business," says Sullivan.  "To the extent that the Supreme Court ruling goes against the law, that probably has to be bad news for the skilled nursing homes, the skilled nursing operators and therefore those who own the skilled nursing real estate.

While skilled nursing may be just 20 percent of overall REIT investment, Omega Health Care is a pure play nursing home company; that makes Omega particularly vulnerable.  The bright side though, according to Sullivan, is that skilled nursing facilities trade at very high yields, relative to most commercial real estate, so Omega may have a lot of that possibility already priced into its share price.

Big players in the health care REIT sector such as Ventas, HCP and Health Care REIT have well-diversified portfolios, weighted toward senior living, which again would be unaffected by this law. 

Medical office buildings are something of a double-edged sword.  If Mr. Obama's plan were upheld, that would mean more insured people in the system, creating more demand at medical office buildings.  It would also mean doctors being paid less due to cuts in Medicare.  If doctors make less, they can't pay as much rent to the owners of the medical office buildings.

"It would be a modest positive if the law were upheld and a modest negative if law is overturned," notes Sullivan on medical office buildings. 

Overall he is quite bullish on the sector and its enviably fragmented nature.  The stock market has given these companies a very cheap cost of equity, and that in turn has allowed them to buy billions of dollars’ worth of health care real estate over the last couple of years.

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