Occupancy Recovery, Waning Government Support Key Factors for REIT Rent Coverage

After skilled nursing occupancy recovery declined in September for the first time in seven months, some analysts are concerned that consistent staffing shortages will impact the real estate investment trusts who are landlords to operators nationwide, at least in the near-term, according to a Dec. 8 note from BMO Capital Markets.

National data collected from nursing homes by the Centers for Medicare & Medicaid Services (CMS) through November shows that while real estate investments trusts (REITs) saw monthly occupancy recovery since mid-February, growing by 50 basis points per month on average, sequential monthly occupancy declined by 60 basis points last month.

The previous month saw occupancy grow by 70 basis points, according to the BMO note.

“We remain more positive on senior housing vs. SNFs given a steeper occupancy recovery and less severe labor challenge,” BMO analysts Juan Sanabria and John Kim wrote.

Over the past month Welltower (Nasdaq: WELL) saw the largest and only occupancy growth among the REITs at 260 basis points, followed by Sabra Health Care REIT (Nasdaq: SBRA) which was down 170 basis points, LTC Properties (Nasdaq: LTC) down 160 basis points and National Health Investors (Nasdaq: NHI) was down 350 basis points.

Citing REIT data from the third quarter of 2021, BMO pointed out that CareTrust REIT, Inc. (Nasdaq: CTRE), Omega Healthcare Investors (Nasdaq: OHI) and Sabra have the most SNF exposure in terms of percentage of net operating income, with CareTrust at 84%, Omega at 77% and Sabra at 67%.

The analysts felt the pace of occupancy recovery and waning government support, which has been “instrumental” in helping operators survive, will be key in maintaining rents.

That being said, census data doesn’t capture improvements in skilled mix, which has boosted profitability, but whose benefits are likely to wane as COVID cases decrease, the BMO note added.

Since the mid-February trough, Welltower’s SNF portfolio has seen the strongest occupancy growth (up 930 basis points) followed by NHI (up 610 basis points) and Omega (up 460 basis points), while LTC (up 240 basis points) and Sabra (up 340 basis points) have lagged.

“With COVID case counts unfortunately rising again and the omicron variant uncertainty looming over the industry, we could see pressure on select tenants’ ability to pay rents,” the analysts said.