Analysts Closely Eyeing Shift to Home as Bellwether for Nursing Homes, REITs

The COVID-19 vaccines being distributed in skilled nursing and long-term care facilities constitute a light at the end of the tunnel, at least in terms of the clinical ravages inflicted in SNFs and other institutional settings. But it’s far from clear what effect that will have on the number of patients and residents in those facilities — a number that will make or break the future for many of those operators.

It’s a number that’s also critical to the real estate investment trusts (REITs) that own SNFs, and a number where some visibility is emerging, given that nursing homes have to report total patients as part of weekly COIVD-19 data submissions to the Centers for Disease Control & Prevention’s (CDC) National Healthcare Safety Network (NHSN).

So far, the pandemic has taken a major toll. Mark Parkinson, the president and CEO of the American Health Care Association — the largest nursing home trade group in the U.S. — estimated the occupancy hit to SNFs nationally at around 13% to 14% after the third COVID-19 wave in November and December, in a discussion at Skilled Nursing News’ virtual Payments, Policy, and Capital conference on February 3.

“A key question for REITs with SNF exposure will be the ability to claw back lost occupancy as government stimulus fades and whether market share lost to home health will be recaptured,” BMO Capital Markets analysts Juan Sanabria and John Kim wrote in a new assessment of post-acute occupancy and its ramifications for several major REITs.

An analysis by the professional services firm CLA found that across the country, SNF occupancy was at 80% or worse for most states to start 2021, with states in the south particularly hard-hit. BMO, for its part, noted that the data from CDC and the Centers for Medicare & Medicaid Services (CMS) shows a 4.4% drop in census from May 31, 2020 to January 24, 2021.

In terms of REIT portfolios, CareTrust REIT (Nasdaq: CTRE) has seen the greatest SNF occupancy drop at 6.4%, while Welltower Inc. (NYSE: WELL) has seen its SNF occupancy remain most stable, with a drop of just 0.4%, BMO said.

“We note current CMS data doesn’t capture the initial ~6% census drop in March/April ’20 when COVID-19 first hit,” the analysts wrote. “CMS’s data also doesn’t capture improvements in skilled mix, which has boosted profitability given the relaxation of the 3-day hospital stay rule.”

The third-quarter REIT data for 2020 show that CareTrust, Omega Healthcare Investors (NYSE: OHI), and Sabra Health Care REIT (Nasdaq: SBRA) have the most SNF exposure, the BMO note indicated. SNFs account for 83% of CareTrust’s net operating income (NOI), 65% of Omega’s NOI, and 63% of Sabra’s.

SNFs account for 38% of NOI at LTC Properties (NYSE: LTC) and 27% of NOI at National Health Investors, Inc. (NYSE: NHI), while Welltower’s NOI from SNFs is at just 9% excluding its holdings in ProMedica Senior Care — which also account for 9% of NOI.

REIT rent coverage for SNFs “was trending slightly down pre-pandemic,” at 1.62x EBITDAR [earnings before interest, taxes, depreciation, amortization and restructuring or rent costs], the analysts pointed out.

“The recent sequential uptick in rent coverage was driven by the inclusion of government assistance, which will eventually dissipate,” they wrote. “We hope REITs will provide greater transparency on coverage with/without government funds.”

BMO’s analysis mapped REIT property addresses against the CMS SNF database to examine occupied units against available beds, capturing on average 84% of the REITs’ portfolios; LTC did not provide property addresses, which the analysts hoped would change for greater investor visibility. They also noted that the current CMS data does not capture the initial census drop that hit in the spring of 2020, a decline of about 6% when COVID-19 first hit the U.S.

Stakeholders across the sector are wondering whether the drop in referrals to the SNF setting — a drop that comes alongside a greater set of diversions to the home — will become permanent or be a temporary effect of the pandemic that fades with more widespread vaccination and control of COVID-19 in communities.

For the BMO analysts, one of the first indicators will be the fourth-quarter earnings reported by the REITs.

“CMS data since the end of May didn’t show a pick-up in SNF occupancy over the late summer/fall when COVID cases moderated and elective procedures picked up off of the trough,” they wrote. “During 4Q earnings we look to gauge whether REITs expect market share shifts to home health will be temporary, or if COVID-19 accelerated prior market share trends that are unlikely to reverse.”