Skilled Nursing to Bounce Back Faster than Senior Living, But REITs Have ‘Lost Their Patience’ with Genesis

BMO Capital Markets this week downgraded its outlook for several publicly traded landlords of senior housing and skilled nursing facilities, but post-acute care emerged as a rare bright spot in the analysis — with the prediction that the sector will recover faster than its senior living counterparts.

The financial services provider issued downgrades to Welltower Inc. (NYSE: WELL), Ventas Inc. (NYSE: VTR), and National Health Investors (NYSE: NHI), citing concerns about an extended road back to recovery for senior housing operators.

“Based on our proprietary senior housing (SH) industry model, we expect an elongated recovery with cash flows not recovering to pre-pandemic levels until about 2025,” BMO Capital Markets analysts Juan Sanabria and John Kim, along with senior associate Lili Peng, observed in the Thursday analysis.

On the flip side, BMO upgraded its outlook for CareTrust REIT (Nasdaq: CTRE) and Sabra Health Care REIT (Nasdaq: SBRA), specifically calling out the skilled nursing upside for the former REIT.

“Given how supportive the government has been throughout the pandemic and that the Patient-Driven Payment Model (PDPM) is unlikely to be adjusted downward over the next 12 months, we see the potential for modest cap rate compression,” BMO observed.

CareTrust’s heavy concentration of assets operated by the Ensign Group (Nasdaq: ENSG) — which continued to log record revenues during the pandemic and has thus returned all of its federal stimulus money — was also a major upside for the REIT in BMO’s take.

That said, BMO acknowledged the very real questions that remain open for the skilled nursing sector as it looks toward a potential path toward recovery in 2021.

Despite the billions in government support for post-acute and long-term care facilities during the COVID-19 crisis, and the position the sector holds as a more need-driven asset class than independent and assisted living, admissions have declined substantially as seniors increasingly choose to recover at home due to the real risk of infection.

“SNF patient volumes traditionally have come from elective procedures and emergency room visits, which moderated for seniors during the pandemic as people deferred procedures and have not been as active,” BMO noted. “Another key will be watching how permanent the shift in volumes to home health will prove to be with COVID accelerating prior in-place trends. We expect the government to remain supportive, but the recovery may be a delicate balance for weaker operators who were already struggling pre-pandemic.”

BMO also raised concerns about Genesis HealthCare (NYSE: GEN), the nursing home giant that last year sounded the alarm about its ability to continue as a going concern deep into 2021. Several REITs responded by switching the Kennett Square, Pa.-based operator to cash payment terms and taking substantial rent write-downs; BMO cited the provider as a potential “near-term headwind” for Sabra in particular.

The retirement of Genesis CEO George Hager, announced this past Tuesday, is a sign that the company may be working to speed up a previously proposed plan to pursue a restructuring, BMO concluded.

“We sense that REITs may have lost their patience with GEN and may not provide the same level of support they did in 2018 when they cut rents and provided debt financing,” BMO noted. “We see REITs now more likely to sell or transition assets to new operators, which will likely cause modest levels of dilution. Positively, once and if GEN is resolved, we think REITs would benefit from not having GEN-related negative headlines in the press.”