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REITs See $350 Billion Hospital Property Market as Prescription for Growth

Health-Care REITs Look to Diversify Portfolios by Acquiring Smaller Hospitals, Clinics
April 8, 2015
With its $1.75 billion agreement this week to buy one of the nation's largest hospital chains, Ventas, Inc. (NYSE: VTR) is staking a claim in hospital properties, which make up more than one-third of the health care real estate market but have long been overshadowed by institutional investor preference for medical office building (MOB) properties and senior care facilities.

Ventas earlier this week announced the agreement to buy Nashville-based Ardent Health Services Inc., one of the 10 largest hospital operators in the U.S. Ventas also plans to spin off its lower-margin skilled nursing facilities into a separate REIT, a move that Wall Street sees as a growth opportunity for Ventas, a $35 billion company that has long hinted at entering the hospital market.

Analysts see hospital-related real estate as a $35 billion opportunity for investors that has been relatively underrepresented in the public REIT arena, largely because the large numbers of nonprofit hospital operators who have been reluctant to part with their real estate and enter into sale-leaseback agreements to monetize their assets, according to Citi REIT analysts Smedes Rose and Michael Bilerman.

In addition to establishing a beachhead in owning hospital property, the planned spinoff in second-half 2015 of most of Ventas's 355-property, triple-net leased skilled-nursing portfolio is expected to help Ventas focus on buying more hospitals and growing its higher-margin MOB portfolio, Citi said.

Fitch Ratings affirmed its ratings on Ventas, noting that the transactions collectively reduce reimbursement risk and continue the company's efforts toward portfolio diversification.

"Secular trends such as increased hospital expenditures and emergency room visits should support the need for acute care hospitals," Fitch said, noting that the Ardent hospital portfolio includes acute care facilities in Amarillo, TX, Tulsa, OK and Albuquerque, NM -- regions in which these hospitals have a dominant market share.

More Investors Jumping In

Other investors are jumping into hospital real estate. Last week, Community Healthcare Trust, a newly formed REIT focused on acquiring non-urban health care properties, filed with the SEC to raise up to $144 million in an initial public offering. The company will focus on acquiring surgical care centers, mental health facilities and acute-care hospitals and specialty hospitals dedicated to cardiovascular and orthopedic surgery, among other properties.

"We believe the continued shift in the delivery of health care services to outpatient facilities will increase the need for smaller, more specialized and efficient hospitals and outpatient facilities that more effectively accommodate those services," Community Healthcare said in its prospectus.

In addition, the trust believes expanded healthcare coverage under Obamacare will result in an additional 30 million Americans having health insurance by 2020, which "will result in the need for health care providers to invest in the expansion of medical, outpatient and smaller specialty hospital facilities."

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