Fitch Ratings announced Tuesday that it “has affirmed and withdrawn all ratings of Welltower, Inc. (NYSE: WELL), including the Long-Term Issuer Default Ratings (IDRs) at ‘BBB+’.”
The credit ratings provider also said that the rating outlook for the Toledo, Ohio-based real estate investment trust (REIT) is “Negative,” a reflection of its “elevated leverage profile above Fitch’s negative rating sensitivities.”
The ratings were withdrawn for commercial reasons, the agency said in its update.
Fitch withdraws ratings when it “deems the amount of information available to be inadequate for rating purposes, or when an obligation matures, is called, or refinanced, or for any other reason Fitch Ratings deems sufficient,” according to Accuity Bankers Almanac, a brand of the LexisNexis Risk Solutions Group.
For Welltower, Fitch projected its leverage — defined as net debt to recurring operating Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) — could remain in the low-7x to high-6x range through 2022 without any offsetting actions. This is “above the 6.0x level that Fitch views as more consistent with a lower IDR.”
“In its rating case, Fitch also assumes that a 30% permanent cut in rents might be necessary to stabilize the rents for around one-third of SH and SNF operators in the long run, which equals a permanent rent reduction of 10% starting in 2021,” the agency said in the update.
Fitch previously made that 30% rent-cut assumption in a different update that upgraded fellow REIT Sabra Health Care REIT (Nasdaq: SBRA) from negative to stable.
Welltower’s management has shown “a willingness to make meaningful adjustments to capital allocation to preserve the credit profile through dispositions” — including a transition of properties from the troubled operator Genesis HealthCare that was announced at the start of March — and reductions of capital expenditure commitments and dividend cuts, but the REIT’s leverage is still projected to stay elevated through next year, Fitch said.
“The vaccine roll-out and more effective therapy protocols will likely put a floor on further occupancy losses beyond 1Q21 and Fitch’s projections assume that 1Q21 SHOP [senior housing operating] occupancy losses are regained by YE2021,” the update said. “Fitch assumes gradual low-single digit improvements to SHOP occupancy annually thereafter, but Fitch does not expect portfolio EBITDA to be restored to 2019 levels until 2023-2024.”
Welltower’s senior housing operating occupancy declined 1,170 basis points year-over-year by February of this year, mostly because of move-in slow-downs and steady move-outs, the agency noted. It also expects rent reductions for triple-net leases, with significant uncertainty around how quickly tenant profitability can recover.
Though “the extent of government aid to [skilled nursing facilities] has far exceeded Fitch’s expectations at the onset of the pandemic and has been the main driver of high rent-collection rates,” the agency is not assuming any more government relief, a point it also made in its upgrade for Sabra.
“This heightens the risk that some operators might require significant rent relief before occupancy and, consequently, underlying cashflows recover to pre-coronavirus levels,” Fitch said in the Welltower update. “Since leases tend to be the largest form of financing and one of the largest expenses for operators, REITs are an obvious partner to provide relief if government funding runs out before underlying cashflows rebound to pre-coronavirus levels.”
That said, Fitch did join other financial analyses in expressing some longer-term optimism about the wider senior housing and care sector — particularly the parts that provide care for the sickest and most vulnerable residents.
“While occupancy rates declined meaningfully since 1Q20, Fitch believes that SH will retain its place in the continuum of care in the U.S. healthcare system,” the agency observed. “Fitch believes that senior housing demand will rebound to pre-pandemic levels, particularly for higher acuity, less discretionary settings. Therefore, Fitch expects an eventual restoration of operating fundamentals.”