NEW YORK CITY—As acute care hospitals increasingly look to monetize their real estate portfolios, REITs are likely candidates to provide them with incremental capital, Fitch Ratings says. The “beachhead” $1.4-billion investment Ventas Inc. made in Ardent Health Services provides the highest-profile example of healthcare REIT activity in a sector it traditionally has underweighted, says Fitch.

Ventas' deal for Ardent's real estate and a noncontrolling interest in its operator comprises “the first material hospital investment by one of the Big Three healthcare REITs in recent years,” according to Fitch's report. The Chicago-based REIT's investment stems from the belief that “demographic tailwinds, improving margins and patient volumes under the Affordable Care Act and hospitals' critical role in the health care continuum offset the regulatory incentives to shift procedures to lower-cost settings.”

Fitch expects each of the Big Three—including Health Care REIT and HCP Inc. as well as Ventas—to take different approaches toward hospitals, in keeping with their dissimilar approaches toward REIT Investment Diversification and Empowerment Act structured senior housing investments. While Ventas has been “explicit” in its growth plans since the Ardent deal, “hospitals do not coincide with Health Care REIT's focus on lower cost settings and high private-pay exposure,” according to Fitch.

Meanwhile, Fitch says HCP's openness to hospital investment falls somewhere between the other two REITS. “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,” the report states.??

REITs would seem to be a natural partner for hospitals seeking to raise capital by selling their real estate, Fitch says. Until recently, though, real estate trusts' participation in the acute care segment of the healthcare industry was primarily limited to outpatient settings like medical office buildings “due to concerns surrounding reimbursement, operator margins and real estate financeability.” ??

The acute care hospital industry's consolidation is expected to continue thanks to “various secular shifts” encouraging larger, integrated care delivery systems. “Hospital systems will likely make considerable investments to capitalize on the opportunity,” says Fitch. “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 and imaging centers.” ?

Additionally, the ratings agency sees the recently announced mergers among the largest health insurers—such as the 437-billion combination announced in July by Aetna Inc. and Humana Inc.—as providing further 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,” the report states. “Thus, Fitch expects insurer consolidation will incentivize hospitals to do the same, especially for smaller, non-dominant operators that will face more pressure” from an increasingly small pool of the very largest insurers.?

Fitch notes that consolidation in the hospital industry is occurring alongside an improving fundamental outlook. “The acute care segment has a better reimbursement outlook than most segments that have historically seen more REIT participation, including the spectrum of post-acute care,” according to the report. “This is partly because the Affordable Care Act has resulted in more paying customers for acute care hospitals. Improving macroeconomic conditions and vertical consolidation have also resulted in an improved outlook for the industry.”