OREANDA-NEWS. The monetization of real estate portfolios is not a new trend among operators of acute care hospitals, but it has recently become a larger part of their growth strategy, according to Fitch Ratings. REITs will likely become a source of incremental capital to fund expansion and consolidation.

REITs would seem to be a natural partner for hospitals looking to raise capital through the sale of real estate, but until recently, REIT participation in the acute care segment of the healthcare industry was primarily limited to outpatient settings like medical office buildings (MOBs) due to concerns surrounding reimbursement, operator margins and real estate financeability.

The acute care hospital industry's consolidation is expected to continue as various secular shifts encourage larger, integrated care delivery systems. Hospital systems will likely make considerable investments to capitalize on the opportunity. These include amassing horizontal scale in operations, increasing physician employment and building a vertically aligned system of outpatient settings, such as MOBs, ambulatory surgery centers (ASCs) and imaging centers.

Moreover, we believe announced mergers among the largest health insurers should add incentive for hospital consolidation. Regardless of whether insurer consolidation was in response to leverage held by market-dominant hospital operators or not, any change to the relative balance of power will likely cause a response. Thus, Fitch expects insurer consolidation will incentivize hospitals to do the same, especially for smaller, non-dominant operators that will face more pressure from the potential "big three" insurers.

Well-capitalized operators of acute care hospitals, both for profit and not for profit, have historically owned the majority of their real estate, and Fitch does not expect this to change. Most of the recent sellers of acute care hospitals to REITs have been relatively less well-capitalized operators. Many of these are private equity-owned for-profit companies that do not benefit from access to public equity markets. They are also typically higher leveraged and lower rated than their publically traded counterparts, making debt financing more expensive and increasing the attractiveness of the sale-and-leaseback option.

Fitch expects each of the "Big 3" healthcare REITs will take different approaches toward hospitals, similar to their differing approaches toward REIT Investment Diversification and Empowerment Act (RIDEA) structured senior housing investments. Ventas has been explicit in its growth plans since its recent \\$1.4 billion hospital acquisition. Conversely, hospitals do not coincide with Health Care REIT's focus on lower cost settings and high private-pay exposure. Meanwhile, Fitch views HCP, Inc.'s receptivity to hospitals as somewhere in between Ventas and Health Care REIT. While HCP has not invested in the sector recently, it has above-average skilled nursing exposure and, thus, may be more comfortable with reimbursement risk than its peers.

Last year, we highlighted the risk that, to maintain their rapid growth, REITs may end up paying premium pricing, pursuing higher yielding assets (i.e. higher risk) or employing more leverage, which has generally come to fruition. Hospitals may look attractive given their high yield, particularly as yields in other healthcare property type subsectors have compressed. Further, the Big 3 have limited cushion to increase leverage further to improve returns, with leverage at 5.5x-6.0x up from 4.5x - 5.5x and near the 6.0x sensitivity for negative momentum.