Skilled Nursing Stocks Tumble Along with Market, But REITs May Have Some Immunity

The stock market was rocked on Monday by a combination of factors, including concerns about the novel coronavirus, with a sharp downturn Monday morning triggering a temporary halt on trading — and the Dow Jones Industrial Average, the S&P 500, and the Nasdaq all ending the day down more than 7%.

But even though the COVID-19 virus outbreak poses a unique danger to the residents of skilled nursing facilities, its impact on the real estate investment trusts (REITs) that own the properties is harder to directly measure.

“Skilled nursing facilities (SNFs) house a vulnerable population (median age >85 years old) that is particularly susceptible to the Coronavirus (mortality rate is higher for seniors),” Green Street Advisors wrote in a note on the health care sector on March 4. “However, REITs are insulated somewhat by long-term triple-net leases. That being said, triple-net leases are only ‘safe’ to the extent that operators can pay the rent.”

Several publicly traded companies with ties to the space saw their stock prices drop with the markets, with leading operator The Ensign Group (Nasdaq: ENSG) sliding 18.52% to $37.13 and Genesis HealthCare (NYSE: GEN) dipping 15.82% to close Monday’s trading at $1.33.

The risk to the health care REITs is if the outbreak escalates, according to a March 2 note from RBC Capital Markets, even though the “pure-play SNFs” — defined as CareTrust REIT (Nasdaq: CTRE), Omega Healthcare Investors (NYSE: OHI) and Sabra Health Care REIT (Nasdaq: SBRA) by RBC — and the “mid-cap REITs” such as LTC Properties (NYSE: LTC) and National Health Investors (NYSE: NHI) have some protection “given the triple-net lease structure,” according to the RBC note.

That’s because the landlords of SNFs aren’t doing to be directly exposed to the problems the COVID-19 virus can cause — at least not at first, according to RBC analyst Michael Carroll.

“The operator is the one that’s exposed to the operational volatility,” he told Skilled Nursing News.

What that might mean for REITs is a hit to capital expenditures; once the earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR) start to drop closer to the amount the operator has to pay in rent, the amount available for capital expenditures begins to drop, and the willingness to reinvest in the property might go down.

“Because they have all have cap-ex requirements they have to put in the lease, which is not included in that coverage ratio, if the cash flow starts dipping below that rental rate, first the ability to pay comes into question,” Carroll said. “It depends on the operator’s liquidity position. Even if they can pay, it comes to a question of: How focused are they on running those operations, and are they going to invest into that property, if they don’t think they’re going to make any money?”

Cash flow is already a source of headaches for SNF operators, even without the problems related to the coronavirus; the consulting firm Plante Moran found earlier this year that while the median margin for SNFs hit break-even, often-shaky Medicaid funding streams remained directly related to their financial viability.

Senior housing appears to be the most vulnerable out of all the various categories in the health care sector, according to Green Street, given the mid-80s age of its population, the month-to-month leases, and high operating leverage. The sector also has suffered from oversupply, cost pressure, and some underperforming operators, according to the note.

A recession this year is likely, Beth Mace, chief economist at the National Investment Center for Seniors Housing & Care (NIC), told SNN, given the financial volatility and widespread fears about the coronavirus — and the effect of those fears on the economy.

But the impact on the SNF sector is harder to assess. While health care business tends to resist recessions due to need, as Donika Schnell of Greystone noted in a recent interview with SNN, seniors and those with multiple comorbidities are uniquely vulnerable to the COVID-19 virus.

“That would be a population [in SNFs] that would be more vulnerable,” Mace noted. “But that said, those operators are going to be under extreme cleanliness protocols, so maybe that could be offset. I do know from speaking to the operators, they’re being hypervigilant.”

The Nasdaq shed nearly 625 points to close down 7.3% on Monday, while the Dow Jones Industrial Average slipped nearly 8% after dropping by more than 2,000 points. The S&P 500 lost almost 226 points to close down 7.6%, all adding up to the worst trading day since the Great Recession in late 2008.

Both operators and REITs have done their best to reduce skilled nursing’s exposure to the public markets in recent years, given the generally volatile nature of government reimbursements, so the sample size is smaller than in other industries. But the handful of publicly traded companies with holdings or operations in the skilled nursing space took bigger beatings than the market as a whole.

In addition to Ensign and Genesis’s plunges in price, Sabra Health Care REIT dropped 14.4%, and Omega Healthcare Investors dipped 10.4%.

Shares of National Health Investors fell 8%, and Welltower Inc. (NYSE: WELL) slid 12%. LTC Properties, Inc. was down 11.3%.

Alex Spanko and Tim Regan contributed reporting.