SNF Occupancy Recovery Continues, But Pace Is Critical for REIT Rent Coverage

Though skilled nursing occupancy continues to tick upwards, the growth decelerated recently, which could have significant implications for the real estate investment trusts who are landlords to operators across the U.S., according to a June 6 note from BMO Capital Markets.

The national data collected from nursing homes by the Centers for Medicare & Medicaid Services (CMS) between April and May shows that while monthly occupancy recovered, it grew by 50 basis points, which represents a slowdown from 100 basis-point growth in the prior month, according to the BMO note.

“Although the improvement is positive for skilled nursing (SNF)s, we see the deceleration as a modest disappointment,” BMO analysts Juan Sanabria and John Kim wrote. “We will continue to monitor the pace of recovery with the duration unclear given significant damage to census from COVID-19.”

Omega Healthcare Investors (NYSE: OHI) saw the largest occupancy increase, at 330 basis points for the month, with National Health Investors (NYSE: NHI) following at 120 basis points for the same time period.

The rent coverage for SNF tenants of REITs has been supported by government funds, but those will eventually be phased out as the public health emergency comes to a close, Sanabria and Kim noted. Plus, REIT rent coverage was trending down before the pandemic, they wrote.

Citing REIT data from the first quarter of 2021, BMO pointed out that CareTrust REIT, Inc. (Nasdaq: CTRE), Omega and Sabra Health Care REIT (Nasdaq: SBRA) have the most SNF exposure in terms of percentage of net operating income, with CareTrust at 84%, Omega at 79% and Sabra at 66%. In addition, Omega raised the possibility of potential cash flow strains in the second half of the year without further government support, Sanabria and Kim noted.

“The recent uptick in coverage has been driven by government funds, which are beginning to fade,” they wrote. “The pace of the occupancy recovery and waning government support will be key in maintaining REIT rents.”

That said, the census data does not capture skilled mix improvements, which have helped offset some of the hits to occupancy and boost SNF profitability, the BMO note added.

However, the benefits of the improved skilled mix are fading with decreasing COVID-19 cases, Sanabria and Kim cautioned. And though REITs are skeptical that there will be permanent market share shifts to home health due to COVID-induced elective procedure delays and “less general senior activity stimulating [emergency room] visits,” they stressed the need to keep an eye on market share trends.

“We see the COVID-19 related rationale for lower patient volumes as less relevant with every passing day given high senior vaccination levels and the re-opening economy,” Sanabria and Kim wrote. “Although we agree SNFs are an important part of the health care continuum and more frail seniors can’t be cared for effectively at home, market share trends remain key to monitor as we analyze the pace and quantum of the occupancy recovery.”