Pandemic Likely to Reshape US Health Care Ecosystem

The COVID-19 pandemic may have lasting implications on the US health care ecosystem, according to recent guidance from BTIG.

Health care REITs with exposure to the senior housing sector saw a greater impact from COVID-19 last year, though stability is expected this year as the virus begins to dissipate and more people are vaccinated.  The report also notes that the virus has illuminated both disparities in access to healthcare generally and the below-average health of the US population as a whole.  The resulting stress on America’s healthcare infrastructure could have an impact on policy making post-pandemic, and BTIS predicts it could push the US closer to a single-payer system.

How consumers interact with health care facilities is also likely to continue to evolve: telemedicine continues to advance as a technology and is ranked first among insurer priorities, BTIS analyst David Larsen said in a recent report. And advancements in telehealth and remote monitoring should also continue the time during which seniors can safely live at home.

The effect of the pandemic on health care REITs is clear from the numbers: overall, they dropped 46.1% on a total return basis in march 2020, compared to a 34% decrease for REITs overall. But during the recovery period between March and November 2020, health care REITs posted above-average returns of 40.4%—a metric owing in part to the fact that they collected above-average rents compared to other sectors. 

Health care REIT returns in 2020 tended to be a function of the company’s specific healthcare component and how they were impacted by the pandemic, according to BTIG. The spread between the top performing health care REIT and bottom performing REIT was 6270 bps in 2020, compared to an average spread of 5590 over the previous five years. Returns for REITs in the sector positively correlated with estimated FFO growth, FFO multiple and quarterly estimate revisions.  Generally speaking, large cap REITs with fortress balance sheets were initially best positioned to weather cash flow and rent disruptions wrought by the pandemic, but as buzz builds around vaccine efficacy, BTIG has noted a shift out of high multiple names into discounted small cap health care REITs.

“Widespread inoculation should particularly benefit senior housing residents and consequently, occupancy and move in/out rates,” the report says. “Meanwhile, medical office REITs face potential disruption as the result of secular changes such as telemedicine whose adoption accelerated as a result of the COVID-19 pandemic.”