With a combination of strong federal relief and a seemingly safe place in the wider health care continuum, skilled nursing facilities have repeatedly emerged as bright spots in an otherwise hazy financial outlook for players in the senior housing and care sector.
Fitch Ratings on Tuesday added to that trend in awarding a BBB- rating and stable outlook to unsecured notes issued by National Health Investors (NYSE: NHI), a major publicly traded landlord in the space.
The agency predicted that NHI will face short-term headaches due to temporary rent deferrals for its tenants, which Fitch estimated at about 9% of the real estate investment trust’s (REIT) revenue from senior housing and skilled nursing facilities in 2021.
“Since leases tend to be operators’ largest form of financing and one of the largest expenses, REITs are an obvious partner to provide relief if government funding runs out before underlying cashflows rebound to pre-coronavirus levels,” Fitch observed.
And while Fitch expressed optimism that both sides of the house will recover from the coronavirus challenges of low occupancy and elevated expenses, the agency was cautious about projecting a future for senior living.
“While government programs, including forgivable loans under the Paycheck Protection Program (PPP) and CARES Act grants (which excludes purely independent living facilities) have provided some liquidity to senior housing operators, Fitch does not assume any incremental government relief beyond what has been committed to date,” the agency observed. “Thus, a prolonged period of low occupancy heightens the risk that some operators might require significant rent relief before operating fundamentals recover to pre-coronavirus levels.”
Nursing homes received substantially more aid from the federal government through multiple CARES Act distributions. Operators have varied widely in their deployment of those funds, Fitch noted, with NHI tenant The Ensign Group (Nasdaq: ESNG) notably returning all of its federal aid amid record-high revenues — while fellow NHI operator National HealthCare Corporation (NYSE American: NHC) used the cash to help pay rent before net operating income recovered in the third quarter of 2020.
Given NHI’s overall liquidity and high concentration of Ensign and NHC facilities in its SNF portfolio, Fitch doesn’t see significant deferrals for the REIT’s nursing care tenants ahead — the 9% figure did not include either Ensign or NHC — while also envisioning a clearer path back to recovery.
“Despite these challenges to their operating fundamentals, SNFs retain their place in the continuum of care in the U.S. health care system,” the agency observed. “Fitch believes that certain need-driven and complex post-acute care will continue to be best delivered in a SNF setting. Therefore, Fitch considers the current declines in occupancy rates for SNFs temporary and expects an eventual restoration of operating fundamentals to pre-coronavirus levels.”
With the setting’s reliance on government reimbursements and perceived liability risks, SNFs have historically been less appealing to the general investing public than more lightly regulated assisted and independent living providers, which also derive most of their income from private-pay sources.
But the effects of COVID-19, and the federal government’s willingness to spend billions on propping up nursing homes, has flipped that script for some observers over the past year.
Just last week, BMO Capital Markets highlighted federal support for nursing homes as a positive in an otherwise negative report that saw downgrades for NHI and fellow REITs Welltower Inc. (NYSE: WELL) and Ventas Inc. (NYSE: VTR).
NHI CEO Eric Mendelsohn himself described the dynamic last fall on a public earnings call.
“The difference between skilled nursing and senior housing is like a tale of two cities,” Mendelsohn said. “You’ve got skilled nursing being showered with government subsidies if they want them, and you also have a conscious effort to treat COVID-19 patients at skilled nursing — which seems counterintuitive, based on what we’ve seen at some other skilled nursing operators, but we know that Ensign is admitting COVID patients and treating them and making money at that. So I feel like skilled nursing is doing just fine.”
Not everyone has agreed that the two business lines have swapped places. Rick Matros, CEO of Sabra Health Care REIT (Nasdaq: SBRA) told SNN last year that while COVID prompted some to rethink the severity of SNFs’ “stroke-of-the-pen” regulatory risk, it won’t be enough to cause a sea change in sentiment.
“What we’re hearing from investors is: Hey, maybe it’s not so bad after all to be dependent upon government reimbursement, because they’ve been there for the space,” Matros said. “That said, I don’t think it’s enough to really flip it.”
Zooming out even further, Walker & Dunlop managing director of real estate finance Kevin Giusti framed the COVID relief push as making both skilled nursing and senior living operators more attractive to investors who had previously focused on even more tumultuous real estate segments like retail and office space.
“I think people will look back in skilled nursing and senior housing and be like, you know what? That actually did fairly well in this wild environment,” Guisti said last October. “You know what? Maybe it’s not as risky, and maybe we’re in an era where the government is going to get bigger and bigger and keep funding the operations.”