Given current recovery trends, skilled nursing facilities may continue to prove a safer near-term bet for investors than the traditionally more attractive senior living landscape, according to a new analysis from Mizuho Securities USA — but 2022 and beyond remains deeply uncertain.
Speaking at Mizuho’s virtual health care REIT summit on Tuesday, American Health Care Association (AHCA) CEO Mark Parkinson predicted that nursing home occupancy could return to normal over the next 12 months, managing director Omotayo Okusanya and associate Corey DeVito noted in a summary of the event.
Parkinson, whose lobbying and trade group represents for-profit nursing home operators across the country, based that prediction on current trends showing a monthly census gain of about 100 basis points per month — and a total occupancy decline during the pandemic of 1,200 basis points.
“Mr. Parkinson’s early views are that skilled nursing returns to pre-COVID occupancy in a year with senior housing taking 12-24 months,” Okusanya and DeVito observed. “If this bears out, tenant credit in skilled nursing would improve faster than we are anticipating.”
The pace of senior housing recovery has more variables at play than the more needs-dependent skilled nursing sector, the Mizuho analysis determined. Parkinson in particular cited several factors that could delay a return of residents to lower-acuity senior housing communities — including a fourth wave of COVID-19 and continued consumer unease about institutional care settings.
A permanent shift to remote work could also facilitate more family-based caregiving in the home, suppressing demand for assisted living and other senior living properties, Parkinson observed per the Mizuho note.
That disconnect prompted Mizuho to assert that “risk/reward seems to favor skilled nursing over senior housing”; predictions of a return to pre-pandemic senior living census between 2021 and 2022 “may prove too aggressive,” the firm determined.
“Occupancy recovery to pre-COVID levels within a year seems more likely in skilled nursing given occupancy trends since the January lows and the higher acuity resident involved,” the Mizuho analysts wrote.
Part of the near-term skilled nursing optimism rests on the continued availability of coronavirus-era relief through the CARES Act and other stimulus programs, as well as other potential government decisions. Significant changes to the Patient-Driven Payment Model (PDPM) are “unlikely” in fiscal 2022, Mizuho predicted; that outcome would mark the second straight year of status quo under the new Medicare payment system for SNFs, which appears to have generally increased reimbursements to providers overall.
The industry also expects to pull down a “significant amount” of the $10 billion remaining in the Provider Relief Fund, Parkinson said during the Mizuho event.
“Another year of strong government support should provide a buffer should occupancy recover slower than anticipated,” Okusanya and DeVito wrote.
The Mizuho analysis builds on growing investor sentiment that Washington’s support for nursing homes makes the asset class more attractive than senior living, at least for now.
“My overarching thought on skilled nursing is before the pandemic, people were worried about what they called ‘stroke-of-the-pen risk’ — by that I mean CMS or other payer programs just unilaterally cutting payment terms,” National Health Investors (NYSE: NHI) Eric Mendelsohn said recently. “Now you’ve had the opposite of that. You’ve had a unilateral assistance from the government in a positive way, so the reactions from the market could be skilled nursing becomes more valuable [and] cap rates go down because it is less of a perceived risk.”
But the federal gravy train won’t last forever, Mizuho warned, with coronavirus relief bound to dry up — and the Biden administration strongly supporting substantial investments in home- and community-based services designed to keep seniors out of institutional settings such as nursing homes.
Mizuho also wouldn’t rule the potential for additional lease restructurings and rent deferrals among major real estate investment trusts (REITs) if occupancy is slower to recover, speculating that “earnings may still have not troughed.”
“That said, 2022 could be met with a wall of investor worry in skilled nursing given the PDPM reimbursement methodology may be recalibrated for FY ’23, government financial support mechanisms probably start being eliminated, and also if the proposed $400B funding to home health under Biden’s proposed infrastructure bill enables home health to gain market share at the expense of skilled nursing in the world of post-acute care health care delivery,” Mizuho concluded.
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