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Health Care Consolidation to Continue at Slower Pace

12/04/2012 | By Allen Kenney

Jeff Theiler, analyst with Green Street advisors, joined REIT.com for a video interview at REITWorld 2012: NAREIT's Annual Convention for All Things REIT at the Manchester Grand Hyatt in San Diego.

Based in Newport Beach, Calif., Green Street Advisors has been in business more than 25 years providing research and advice to investors on REIT stocks and real estate companies.

Theiler discussed the consolidation trend in the health care industry, which he said is the result of health care REITs' low cost of capital and a fragmented industry overall.

"Following the recession, what you saw was that investors gave health care REITs a bit of a safety premium, because they're perceived as defensive and less likely to be tied to the general economy," he said. "The health care REITs took that safety premium and lowered cost of capital and went out and started acquiring properties."

Theiler said that with those factors in place, it has been hard to compete against health care REITs. He said he expects the consolidation trend to continue in the future.

However, Theiler said it may slow down and not continue at the same pace witnessed in recent years. He also noted that consolidation may occur in different property types within the health care industry.

"So far, it has been senior housing and skilled nursing. I can see a scenario where maybe they start to look at hospitals as health care systems and try to adapt to the challenges of Obamacare," he said. "That might be a few more years down the road, but that might be the direction it goes in."

Among the various property types within the health care industry, Theiler said many sectors are currently underbuilt. While there continues to be a growing retirement population with the baby boomers turning 65 years old, Theiler said skilled nursing beds have decreased over the past six years.

As a result, he said an argument can be made for the need for more skilled nursing facilities as well as medical office buildings.

"Under Obamacare, you have got 30 to 35 million more people in the system. They are going to need places to go see their doctors," Theiler said.

However, he added that he anticipates the next wave of new supply coming in the senior housing sector.

"That's purely a result of the outsized NOI growth and operating fundamentals that they have been putting forth," Theiler said.