WSJ: Medicare Cuts to Skilled Nursing Hit Health Care REIT Stocks

After news of Medicare’s decision to slash payments to skilled nursing facilities broke on Friday, Health Care REITs are feeling the pain reports the Wall Street Journal.

The steep 11.1% cuts to fiscal year 2012 wasn’t expected and investors started to fear it could impair rent payments from skilled nursing tenants.

Omega Healthcare Investors recently lost 11.8% to $17.31 and Sabra Healthcare REIT declined 25.6% to $10.74. The two real estate investment trusts are nearly 100% exposed to skilled nursing tenants, according to a report by Keefe Bruyette & Woods.


Despite a drop in revenue, broad-scale rent defaults by skilled nursing operators are pretty low because landlords typically build a cushion in lease agreements by setting rental rates below the operator’s cash flow, analysts say.

“The longer-term concern is that skilled nursing operators will see their existing income fall relative to their in-place rent,” possibly putting valuations of skilled nursing portfolios at risk, says Daniel Cooney, an analyst at Keefe Bruyette.

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Medicare Rate Cut Is Bad Medicine For Health Care REIT Stocks