Two investment firms provided opposite takes on the stocks of publicly traded real estate investment trusts (REITs) with skilled nursing portfolios, with Mizuho Securities USA downgrading two of the REITs and Jefferies upgrading the same two firms.
The two REITs involved were Omega Healthcare Investors (NYSE: OHI) and Sabra Health Care REIT (Nasdaq: SBRA).
“We are taking a neutral stance on the skilled nursing (SNF) REIT segment in 2021 and downgrading OHI and SBRA to Neutral from Buy,” Mizuho managing director Omotayo Okusanya and assistant vice president Zachary Silverberg wrote in a January 13 note. “While we continue to believe the U.S. government will support the sector through the COVID-19 pandemic, we are entering a new administration and it is somewhat unclear if future stimulus packages will provide additional funding as robust as the CARES Act. A slow vaccine roll-out in the U.S is also likely to delay the recovery of the skilled nursing segment.”
The rollout of COVID-19 vaccinations has been progressing more slowly than anticipated, even though an advisory committee of the Centers for Disease Control & Prevention (CDC) voted in December to prioritize SNF residents and health care workers in the first round of immunizations.
Jefferies, for its part, upgraded both Omega and Sabra to “Buy.” The firm cited the government support that SNFs have received over the course of the pandemic as “a bridge back to normal” for the REITs, since it proves a willingness to help SNF operators and has allowed them to stay current on their rents.
Specifically, Omega and Sabra have collected nearly all rent due from their SNF operators because of the $175 billion Provider Relief Fund. The Consolidated Appropriations Act of 2021, recently passed by Congress, added $3 billion to that fund, and $33 billion is still unallocated.
“Of that amount, we expect OHI and SBRA’s operators to receive a distribution similar to recent rounds,” Jefferies equity analyst Jonathan Petersen and equity associate Joe Dickstein wrote. “Looking ahead, we expect that a Democratic-controlled Congress will continue to support the sector until occupancy recovers to pre- pandemic levels.”
While Mizuho agreed that SNFs will continue to receive government support throughout the COVID-19 pandemic, Okusanya and Silverberg argued that it is unclear if that will be as strong as the support provided by the CARES Act.
“We note health care operators were allocated only an additional $3B in the recent $900B stimulus,” they wrote. “It is also unclear if SNFs will be subject to additional regulation to get additional funding going forward.”
President-elect Joe Biden has also expressed a pro-home health stance, proposing $775 billion in funding for the home-health-supporting “21st-Century Caregiving and Education Workforce” plan and decrying low wages for home health workers, both Okusanya and Silverberg noted.
In addition, it’s not clear if 2021 will bring an attempt by the Centers for Medicare & Medicaid Services (CMS) to recalibrate the Patient-Driven Payment Model method of reimbursement, after delaying this due to the COVID-19 pandemic.
Jeffries argued that both Omega and Sabra have strong balance sheets and access to capital, which could lead them to take advantage of acquisition opportunities driven by “some dislocation in the markets.”
Petersen and Dickstein also argued that Sabra and Omega will see higher SNF occupancy in the long run, given demographics driving demand for SNFs over the next decade — combined with limited supply due to various regulatory restrictions.
Mizuho was not so sure on this point.
“We remain particularly concerned over the rise of the Home Health segment as the preferred post-acute care setting by hospitals and patients alike in lieu of a traditional SNF given the current public-safety concerns amidst the COVID-19 pandemic,” Okusanya and Silverberg wrote.
Because SNF care has traditionally been considered need-based, the demand was expected to be relatively inelastic — but occupancy fell 15% nationally in SNFs during COVID-19, they pointed out.
It “remains stubbornly low,” and both Okusanya and Silverberg argued that home health’s stock is rising relative to nursing homes.
“Although home health has always been an alternative setting, we don’t believe that it can entirely replace the SNF segment in the long-term given the intimate access to health care professionals at a SNF,” they wrote. “However, we are concerned in the near-term about the market share loss to the home health segment, especially if the pandemic remains prolonged.”