2Q 2017 | bloombergbriefs.com

Concept

2Q 2017 | bloombergbriefs.com

Real Estate

Health Care

HEALTH CARE

Obamacare Repeal Good for Health- Care Real Estate Market: DeRosa The repeal of the Affordable Care Act has the potential to benefit health-care landlords and the medical system as a whole, according to Tom DeRosa, chief executive of Welltower, the biggest U.S.-listed health-care REIT. DeRosa says the ACA is keeping too many hospitals open when providers could deliver better service in a different setting. DeRosa was interviewed by Ainslie Chandler on May 5. Comments have been edited and condensed for clarity. Q: Which part of the market do you think offers the biggest opportunities? A: The biggest opportunities are still going to come from senior housing when the demographic wave of the 85-year- old-plus really starts to separate from the rest of the population in 2020. We are focused in major metro markets. If you look at where the population is moving in the U.S., it is moving back to the city. Most of the senior housing infrastruc- ture in this country was built for a gen- eration that lives in the suburbs. Their children no longer move to the suburbs and our growing elderly population want to be near their families. If their chil- dren and grandchildren want to live in Brooklyn, they are going to want to live in Brooklyn. Years ago, their children and grandchildren would have lived in Westchester County, now they are living in Brooklyn. And there is a lack of supply of high-quality senior housing options in the major metro markets in this country. As well as London.

We think there is a real opportu- nity in the outpatient medical space because today in the U.S. … New York Presbyterian or NYU, they own all of their real estate. We believe that in the future they won't own all their real

PHOTOGRAPH VIA WELLTOWER

estate. And that's how we want to grow, we want to be the trusted partner. That's the future of our country. There is $1 trillion of real estate sitting in hospitals and medical office buildings. Eighty-two percent of that is owned by hospitals and physician groups, with only 10 percent owned by REITs. If you look at any other real estate sector, you would see the inverse of that. The need for the health systems to reduce their acute care hos- pital footprint in favor of outpatient medical is going to require a tremendous

amount of capital. There is a huge need to invest in technology for these health systems to remain competitive, so they simply cannot continue to own all of their real estate. We are standing at the very early days of that trend.

Q: Overall, is there an oversupply of senior housing in the U.S.? There has been a lot of construction in recent years. A: Just like in other sectors of real estate, the oversupply is in the markets that wouldn't surprise you, it's in the markets with very low barriers to entry.

We have been very focused on owning senior care assets in the major metropol- itan markets. I saw this week there were spikes in job growth in Jacksonville and Atlanta but they are not places that we choose to own much real estate because they are markets that have very low bar- riers to entry. I don't think those job statistics are necessarily sustainable in those markets.

Q: Are you a net seller of assets at the moment? A: We are an opportunistic investor and in the last quarter, we had an oppor- tunity to sell a portfolio of assets that would not have been strategic for us.

Good assets. This is one of the sectors of real estate where there is very little dif- ferentiation in capitalization rates, if any, between an "A" quality asset and a "B" quality asset. If we can take advantage of that factor, we will. We will always take whatever steps we can to refine our port- folio, to make sure that we own the right assets for the medium-to-long term. Real estate is always for sale.

Issues in the REIT sector occur when you don't exercise the same discipline

in selling assets as you do in buying assets. REITs have a disincentive to sell real estate because it disrupts the resil- ient growth of funds-from-operations per share. But if you don't do it when you can, you will always pay the price at some later date.

There have been lessons learned, if you look at the sector today. There are mall companies that clearly should have been net sellers of assets because now there is no market for them.

Q: What impact did the Affordable Care Act have on your portfolio and what impact would its repeal have? A: We have aligned our strategy to be a facilitator of this move from fee-for-ser- vice health care to a value-based reim- bursement model. That means that we would not invest in hospitals. We think the repeal of Obamacare is really going to help drive this transition from fee-for- service to value-based care. We think it will create a more competitive market.

Health care is going to become more of a consumer product and there is going to be much more choice in terms of how we manage our health-care needs.

On balance, I think the ACA was likely keeping open too many hospitals in this country, keeping the lights on in too many hospitals that need to shut down. We would be able to save so much money if we could stop some hospitals from operating. They are just becom- ing centers of custodial care and we can't afford to offer that any more. I am

hopeful, I am optimistic about the repeal of the ACA and what it will do for our business and what it will do for health- care delivery overall. If you just take a step back I think that we have to focus on better outcomes at a lower cost.

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