Senior housing and care operators that had been struggling prior to the COVID-19 pandemic may need permanent rent cuts of 30% to survive in the long term, a top financial ratings agency noted — but even that hit is unlikely to hurt one of the top landlords in the sector.
Fitch Ratings on Monday upgraded its outlook for Sabra Health Care REIT (Nasdaq: SBRA) from negative to stable, citing the real estate investment trust’s (REIT) quick actions to stave off coronavirus-related strains, while also maintaining Sabra’s overall BBB- rating.
The agency in particular contrasted Sabra’s COVID-19 strategy with its moves after its 2017 merger with fellow REIT Care Capital Properties, which Fitch viewed as too flexible and over-levered; Fitch praised Sabra for reducing leverage in the years leading up to the COVID-19 crisis.
“The company also responded swiftly to the uncertainties of the coronavirus pandemic, cutting its dividend by 33%, curtailing acquisitions and shoring up its leverage cushion, further demonstrating its commitment to its financial policies,” Fitch observed.
The Irvine, Calif.-based Sabra is one of the primary players in long-term and post-acute care real estate, deriving 63% of its net operating income from skilled nursing facilities and 25% from senior living buildings, Fitch noted.
Fitch’s upbeat analysis for Sabra comes even as its short-term outlook for senior housing and care appears stressed: The agency assumed that permanent rent cuts of 30% would be necessary for about 30% of operators, particularly those with EBIDARM coverage under 1.65 times. That works out to a reduction of 9% in 2021, with additional one-time rent relief totaling 9% of 2021 revenues.
The agency is also assuming that the federal government will provide no further assistance to operators on top of the billions already sent out, which served to stabilize cash flows amid spiking expenses and decreased admissions.
“There is significant uncertainty in the speed of a recovery in tenant profitability,” Fitch noted. “The extent of government aid to SNFs has far exceeded Fitch’s expectations at the onset of the pandemic and has been the main driver for health care REIT’s high rent-collection rates from their SNF portfolios.”
That said, Fitch echoed the sentiment that skilled nursing facilities have a permanent place in the overall U.S. health care landscape, a view that has gained steam in the wake of the novel coronavirus; while future federal aid is uncertain, the fact that Washington stepped up to keep operators afloat during a once-in-a-lifetime crisis has prompted multiple observers to assert that the sector’s long-term prospects remain bright.
“Fitch believes sufficient volumes of need-driven and complex post-acute care will continue to be best delivered in a SNF setting and senior housing demand will rebound to pre-pandemic levels, particularly for higher acuity, less discretionary settings,” the agency noted. “Therefore, Fitch considers the current declines in occupancy rates temporary, and expects an eventual restoration of operating fundamentals.”
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