Fitch Ratings on Wednesday revised its rating outlook for Welltower Inc. (NYSE: WELL) to “Negative,” down from “Stable,” while affirming the rating at “BBB+.”
The Toledo, Ohio-based Welltower has a portfolio in which senior housing facilities accounted for 62% of net operating income as of March 31, while skilled nursing facilities account for about 15% — when ProMedica, owner of nursing home chain HCR ManorCare, is included.
That mix led Fitch to expect that Welltower’s earnings before interest, taxes, depreciation and amortization (EBITDA) and its leverage will be negatively affected by the COVID-19 pandemic.
“The Negative Outlook reflects Fitch’s view that the forthcoming erosion in NOI for the senior housing operating portfolio, and reductions in cash rent in the triple net portfolio will be so significant that growth in the medical office building segment and reductions in net debt via asset sales will be insufficient to maintain leverage between 5.0x-6.0x,” the agency said in its commentary.
In its first-quarter earnings call, held May 7, Welltower reported that senior living occupancy dropped 70 basis points in March and another 240 basis points in April; chief financial officer Tim McHugh projected declines of 500 to 600 basis points through the end of June.
For its part, Fitch projected occupancy would decline 550 basis points in the second quarter, 250 basis points in the third quarter, and stabilize in the fourth quarter of this year.
The portfolio could stabilize as a result of facilities in some markets being able to accept new residents even as COVID-19 outbreaks in other markets lead to residents moving out of facilities, Fitch observed.
In addition to the adverse effect from the occupancy drops, Welltower’s operating income is also pressured by increased operating expenses, the ratings agency pointed out.
“Occupancy declines will continue until facilities are willing to and/or allowed to accept new residents en masse and ensure residents’ and employees’ safety,” Fitch said. “Operating income is further pressured by elevated operating expenses, principally labor and inventory.”