How Senior Housing Occupancy Declines Raise Risk for REITs
- May 20, 2020
Over the next 12-24 months, U.S. health-care REITs risk significantly higher leverage and the potential for multi-notch downgrades, as a sustained decline in senior housing occupancy rates is driven by the coronavirus pandemic.
Occupancy declines are caused by the very efforts senior housing operators and REIT landlords are making to minimize the coronavirus risk within facilities, including stopping in-person tours and limiting move-ins.
Fitch expects a W-shaped recovery at the facility level because the timing that access restrictions are lifted and reinstated will vary across markets due to local coronavirus infection trends. A U-shaped recovery is expected at the portfolio level as some markets will improve while others continue to decline, resulting in relatively flat occupancy rates. Fitch expects resident demand is being deferred, particularly for high-acuity settings, thus we expect it to rebound. Anecdotally, new resident deposits and occupancy growth at re-opened facilities is being reported by REITs.
A meaningful recovery may hinge on the development of a vaccine or a highly effective therapy. However, seeing demand restored to prior levels will require facilities to demonstrate their value proposition. Amid news of facilities with significant infections and fatalities, operators will be expected to show that safety protocols and their focus on social determinants of health resulted in better outcomes for residents versus seniors cared for at home or living independently.
The Impact of Government Support
REITs owning skilled-nursing facilities have until now experienced more cash flow and rating stability because they have received significant government support. This support has provided a partial offset to cash flow declines. The CARES Act provides grants and payroll tax delays while raising effective Medicare rates by eliminating sequestration payment cuts. The Centers for Medicare & Medicaid Services provides Medicare payment advances and boosts funding to Medicaid programs through a temporary 6.2 percent increase in Federal Medical Assistance Percentages. Skilled-nursing REITs recently reported higher rates of rent collection and less deferred rent agreements than senior housing, possibly due in part to government support.
Dispositions and dividend policies are REITs’ best tools to counteract increases in leverage. Some health-care REITs have reduced dividends, but none have suspended distributions or converted cash dividends to stock dividends. Converting to stock dividends could counterbalance declines in EBITDA and free cash flow, potentially maintaining the long-term credit profile.
Britton Costa is a senior director, U.S. Corporates–Healthcare & REITs, for Fitch Ratings Inc.