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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