As Skilled Nursing Lease Coverages Stabilize, Many Operators Can Meet Rent Without More Stimulus: Fitch

Despite grim numbers around COVID-19 rates and cratering occupancy in skilled nursing facilities, a variety of factors conspired to improve top operators’ lease coverage in the third quarter of 2020 — with a tentatively brighter outlook for the start of next year.

An increase in skilled mix, normalization of pandemic-related costs, and the return of non-elective surgery volumes led to more stable financial numbers among nursing care providers with sufficient available data, according to a new report from Fitch Ratings.

“Fitch Ratings’ analysis of 3Q20 SNF operators with public financials found that performance improved relative to 2Q20, though not to pre-pandemic levels,” Fitch noted in its analysis.


The ratings agency analyzed the performance of Diversicare (OTC: DVCR), The Ensign Group (Nasdaq: ENSG), National Healthcare Corporation (NYSE American: NHC), Genesis HealthCare (NYSE: GEN), and ProMedica Senior Care.

Though Fitch acknowledged that these five companies, which unlike many providers disclose key operating statistics, represent only a small portion of the overall post-acute and long-term care market, the trends could spell relief for both operators and their real estate investment trust (REIT) partners — without additional help from the Washington.

“Assuming that REIT tenants have similar underlying facility-level cash flow profiles as the five operators in our study (less than 10% of beds nationally), tenants have sufficient cash flows to pay rent without government subsidies,” Fitch observed in its report.


Four of those five companies have taken advantage of federal relief under the CARES Act and other sources, with only the San Juan Capistrano, Calif.-based Ensign returning the government aid.

The analysis comes at a fluid time for both the operational and financial health of the sector. After declining during the summer, COVID-19 infection rates in nursing homes have shot past the highs posted in the spring; American Health Care Association (AHCA) CEO Mark Parkinson last Monday predicted that weekly case counts of 20,000 could soon be the norm, far surpassing the April peak of about 10,000, as the novel coronavirus continues to spread largely unchecked across the country.

A second stimulus package, meanwhile, remains in limbo as lawmakers in Washington continue to fight over contentious issues such as liability shields and the exact amount of direct support to citizens.

At the same time, the Food and Drug Administration’s decision to grant emergency approval to Pfizer’s COVID-19 vaccine late Friday provided a jolt of hope that the space could start inching back to normalcy.

In Fitch’s view, the exploding case counts will lead to short-term coverage strain in the fourth quarter of this year, followed by gradual recovery once vaccination against the virus becomes more common.

“Fitch expects skilled mix and occupancy rates will slowly return to pre-pandemic levels after a vaccine is widely available, through a normalization in elective surgery volumes, a stable recovery in admissions of custodial and post-acute patients, and offset in part but not full by declines in Medicare reimbursement for COVID-19 patients,” the ratings agency noted.

Like other voices on the financial side of post-acute and long-term care, Fitch’s ultimate conclusion upholds the necessity of skilled nursing in the overall care landscape.

“However, in the long-term, Fitch believes that SNFs retain their place in the continuum of care in the U.S. health care system,” the ratings agency noted.

Companies featured in this article: