The continued consolidation of the US healthcare industry is encouraging healthcare REITs to finance newly integrated hospital systems and acquire assets through sale-leasebacks.
One of the ‘Big 3’ healthcare REITs, Ventas, plans to acquire $1.4bn of hospital assets from a private equity firm, and plans among four of the nation’s biggest health insurers to merge into two will only encourage more acquisitions.
“The secular incentives for hospital operators to consolidate have been increased by the mergers of the largest US healthcare insurance providers… and REITs will likely become a source of incremental capital to fund the expansion and consolidation,” Britton Costa, a director in Fitch’s US REITs group, told Real Estate Capital.
Leading healthcare insurance company Anthem agreed to acquire Cigna for $48bn earlier this summer, and Aetna has announced its plan to buy Humana for $37bn, encouraging hospitals to streamline operations.
Hospitals across the country are increasing physician headcounts and vertically integrating outpatient, medical office buildings, ambulatory surgery centers and imaging centers, allowing REITs to step in, finance the acquisitions and take ownership of the assets through sale-leaseback arrangements, according to a new Fitch report.
The acquisitions make sense for the healthcare REITs in order to meet financial objectives and maintain their credit ratings. They have experienced significant stock declines, well below their 52-week highs, at a time when they must limit portfolio leverage. The ‘Big 3’ — Ventas, HCP and Health Care REIT — are nearing Fitch’s 6.0x leverage sensitivity for negative momentum, up from 4.5x-5.5x over the last few years.
“We believe the largest healthcare REITs have limited cushion in their leverage metrics at their current ratings,” Costa said.
Given these conditions, equity issuances are less likely, making the higher-yielding, riskier hospital assets more appealing to REITs than the lower-yielding assets they have gravitated towards in recent years — like senior housing or medical office buildings.
“Hospitals would require REITs to raise less equity to maintain their leverage,” Costa said, helping them to meet financial objectives and maintain credit ratings.
Because hospitals trade for higher cap rates, he explained, they result in lower leverage on a debt/EBITDA basis than lower yielding assets, assuming the same split between debt and equity proceeds.
“The sale-leasebacks which typically occurred in piecemeal fashion over an extended period of time could now occur in portfolio transactions at the time deals are announced,” he said.