Fitch: Skilled Nursing REITs Can Withstand COVID-19 Crisis — To a Point

Most of the real estate investment trusts (REITs) with holdings in skilled nursing and senior housing facilities can weather the financial strains caused by COVID-19, a major credit rating agency affirmed this week — but only if current trends hold.

Various REITs have responded to the pressures of the coronavirus pandemic by taking steps to bolster liquidity while substantially paring back new acquisitions and developments, Fitch Ratings noted in a Tuesday update that saw the agency hold steady its ratings for National Health Investors (NYSE: NHI), Omega Healthcare Investors (NYSE: OHI), Sabra Health Care REIT (Nasdaq: SBRA), Welltower Inc. (NYSE: WELL), and Ventas Inc. (NYSE: VTR).

Only Ventas received an outlook drop to “negative” based on its already high levels of leverage prior to the onset of the coronavirus strain.

“The majority of Fitch’s rated portfolio can withstand the resultant increase in leverage without meaningfully and persistently exceeding levels considered appropriate for their current rating,” Fitch observed. “However, should the actual or expected impact exceed our revised assumptions and absent offsets, there would likely be negative rating actions.”

That doesn’t mean it’s going to be easy going for the REITs over the coming months. Fitch’s assumptions for the ongoing coronavirus impact include a 10% deferral for triple-net leases on skilled nursing facilities with EBITDAR coverage below 1.3 times, as well as a 300 basis-point decrease in occupancy at senior housing properties.

Fitch also predicted that REITs will likely continue to pull back their acquisition and development pipelines through 2021 while facing that raft of challenges as the pandemic progresses.

“U.S. health care REITs are exposed to senior housing and skilled nursing properties that will see higher resident fatalities, reduced new resident admissions, weaker rate growth, and higher operating expenses as a result of the coronavirus pandemic,” Fitch noted.

Early public statements from the REITs have been cautiously optimistic about the short- and long-term effects of the crisis on their portfolios. The Hunt Valley, Md.-based Omega, for instance, late last week released an update in which CEO Taylor Pickett said he was “heartened” by a variety of federal and state relief initiatives for nursing homes — and that the REIT had not yet experienced “any material change in the financial performance of our business.”

Omega reported 57 confirmed cases of COVID-19 in its facilities as of March 27, consisting of 42 residents and 15 employees. SNF assets accounted for all but one of the infections, according to Pickett.

“In addition, many of our operators are experiencing significant cost increases as a result of the pandemic. These increases primarily stem from elevated labor costs, including increased use of overtime and bonus pay, as well as a significant increase in both the cost and usage of personal protective equipment and supplies,” Pickett said. “In terms of occupancy levels, we are seeing mixed impacts, with some operators reporting a modest decline and others seeing a slight uptick.”

Omega earlier last month drew $300 million on its $1.25 billion credit facility, and announced a plan to repurchase up to $200 million of its outstanding common stock.

“While we believe our actions to date provide us with significant liquidity and flexibility to weather a potential pronounced and prolonged impact to our business, we will continue to evaluate any additional steps that may be needed to maintain adequate liquidity,” Pickett said.

The Toledo, Ohio-based Welltower landed a new $1 billion unsecured term loan toward the end of March, adding to its existing $1.5 billion in revolving credit.

“While we maintain unwavering confidence in our balance sheet, we believe it is prudent to take further steps to enhance our liquidity profile given current capital market conditions and the uncertain impact of the COVID-19 pandemic,” Welltower chief financial officer Tim McHugh said in a March 23 statement.

Welltower on Wednesday additionally announced the establishment of a personal protective equipment (PPE) warehouse in Dallas, with the goal of distributing 400,000 pairs of gloves, 250,000 face masks, and 120,000 gowns, among other supplies to the operators in its portfolio.

Rick Matros, CEO of the Irvine, Calif.-based Sabra, praised Fitch’s rating affirmation in a statement released this week.

“We are pleased with the improvements we have made to our balance sheet over the last year and will continue to put a high priority on a healthy balance sheet and our ratings,” Matros said.