Moody’s: COVID-19 Will Challenge REITs, But SNFs in Better Position Than Senior Housing

Real estate investment trusts (REITs) with a focus on health care are facing risks on all fronts related to the COVID-19 pandemic, but those with investments in senior housing could see the most significant challenges — and their skilled nursing tenants might actually be better poised to come back from the brink, according to an analysis from Moody’s Investors Service released this week.

Senior housing tenants are at risk of rent deferrals and other restructuring moves because of declines in occupancy due to safety concerns, as move-in volumes drop and operators struggle to replace resident turnover, Moody’s argued.

That said, hospitals and SNFs are experiencing the same supply and labor pressures that senior housing tenants currently face.

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“Cash flow is also affected by the deferral of elective surgeries that generate higher profit for hospitals, as well as for SNFs that provide post-acute rehabilitative care,” Lori Marks, Moody’s vice president and senior credit officer, and Philip Kibel, associate managing director, wrote in the report. “Positively, both sectors will benefit from provisions in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which include $100 billion in direct funding for Medicare and Medicaid providers and liquidity support measures. These provisions will not likely fully compensate operators for lost income, but improve their ability to withstand the challenges and ultimately pay rent to REITs.”

But that funding, which focused primarily on Medicare providers in the initial disbursements, isn’t a silver bullet, Marks acknowledged in an April 29 interview with Skilled Nursing News.

“The way that they calculated the disbursements has not been super helpful to most skilled nursing providers by virtue of their payment mix,” she said.

That means though relief will help to some extent, it’s very hard to assess how much of an impact it will have or even how long that impact will last; both depend on the amount of money disbursed by the government and the duration of the COVID-19 pandemic, Marks said.

Six out of the 12 rated health care REITs have negative outlooks, according to Moody’s, due to the risks they face in their senior housing and SNF portfolios — and one is under review for a possible downgrade. Those REITs have the potential for large cash flow declines that could have a prolonged impact on leverage and other credit metrics, according to the report.

“Ventas, Welltower, Healthpeak, Omega, Sabra, and CareTrust each have negative outlooks because of their substantial exposure to senior housing and SNFs and risk of associated cash flow declines that could cause a sharp and prolonged deterioration in the REITs’ credit metrics,” the report noted.

The Centers for Medicare & Medicaid Services (CMS) issued guidelines that include a gradual process for restarting essential care on April 19, and that would benefit both hospitals and SNFs, Moody’s observed.

In addition, CMS has issued a waiver for the three-day stay requirement for Medicare coverage of a SNF stay, and issued its proposal for Medicare payments in fiscal 2021 that would include a 2.3% market-basket rate increase — which could boost SNFs on top of the benefits from the Patient-Driven Payment Model (PDPM). These actions by the government are all helpful, Moody’s noted.

Still, SNFs are likely to face financial pain for a few months, since even with elective surgeries being slowly reinstated, home health care is likely to be the option of choice for such patients if they can go to that setting safely.

“As you think about the impact in this sector versus senior housing operations, at least the leases offer a good amount of cushion before you start necessarily eating into the potential for decline in cash flow, right?” Marks said. “So there is a starting point with cushion there, but we’re going to have to see. This is an industry with a lot of different operators; there’s not a lot of transparency in terms of their operations and their financial positions. You’re really reliant on the disclosure of the REITs.”

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