Healthcare REITs Are Sick

Nov. 22, 2017 7:36 AM ETDOC, GENN, PEAK, HR, IYR, MPW, NHI, VNQ, OHI, SBRA, WELL, VTR124 Comments

Summary

  • The healthcare real estate landscape has undergone a seismic shift since the Affordable Care Act initiated in 2010. The ACA began to shift the financial risk from payers to providers.
  • In an effort to contain runaway costs, the ACA has taken aim at the higher-cost providers of healthcare, including skilled nursing operators. SNF REITs are struggling amid deteriorating fundamentals.
  • Meanwhile, private-pay healthcare REITs are facing a different set of challenges. While longer-term demographics remain highly favorable, supply growth continues to outpace demand for senior housing facilities.
  • Broader trends of oversupply and tenant troubles across the healthcare REIT space continued into 3Q17. The benefits of the aging population are substantial, but still 5 to 10 years away.
  • Amid the dislocation, we believe skilled nursing REITs may see short-term pain but longer-term gain. For senior housing, however, we worry that boomers have a desire to “age in place”.

REIT Rankings: Healthcare

In our REIT Rankings series, we analyze one of the fifteen real estate sectors. We rank REITs within the sectors based on both common and unique valuation metrics, presenting investors with numerous options that fit their own investing style and risk/return objectives. We update these rankings every quarter with new developments for existing readers.

healthcare REITs

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Healthcare Sector Overview

Healthcare REITs comprise roughly 12% of the REIT Indexes (VNQ and IYR). Within our market value-weighted healthcare index, we track 10 of the largest REITs within the sector, which account for roughly $90 billion in market value: HCP (HCP) Healthcare Realty (HR), Healthcare Trust (HTA), Omega Healthcare (OHI), Ventas (VTR), Welltower (HCN), Physicians Realty Trust (DOC), Medical Properties (MPW), National Health (NHI), and Sabra (SBRA).

There are four distinct subsectors within the Healthcare REIT category: senior housing, medical office building, skilled nursing, and hospitals. Each of these subsectors has separate risk/return characteristics.

Skilled nursing and hospital REITs assume the most policy-related risk, followed by senior housing. Medical office building REITs are generally the most predictable and stable. As we'll discuss in more detail shortly, the Affordable Care Act pushed more of the financial risk from payers (insurers and government) onto healthcare providers (doctors, hospitals, healthcare facilities), which has pressured the healthcare real estate sector, particularly at the higher-cost end of the spectrum.

Recent Developments and Performance

Healthcare REITs have underperformed the broader REIT sector since the start of earnings season. The sector has fallen nearly 8% over the past six months and is roughly flat YTD.

healthcare REIT performance

Healthcare REITs delivered results that were generally

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