The Wall St. Journal reported that "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."
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.
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. 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 reduced revenue to 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.
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., based in Chicago.