What Will Happen to Cash Flows for Skilled Nursing Facilities?
Cash flows for healthcare REITs have exceeded Fitch Ratings’ expectations since the onset of the coronavirus pandemic, primarily due to greater than anticipated federal and state government financial support for skilled nursing facilities (SNFs). However, the ratings agency says this strong cash-flow position is subject to change.
REITs with meaningful SNF exposure will be challenged “due to the likely need to grant temporary rent deferrals or permanent rent cuts to some SNFs in 2021 if government funding runs out before SNF underlying cash flows recover to pre-coronavirus levels,” says Fitch.
“We estimate Fitch-rated REITs with significant SNF exposure can sustain an approximate 10% reduction in portfolio revenues in aggregate without materially altering long-term credit profiles,” Fitch says. “Dividend reductions, the conversion from cash to stock dividends and asset sales are levers to retain cash flow.”
Even as SNF occupancy “has declined materially and operating expenses have risen significantly due to the pandemic,” rent collections for Fitch-rated U.S. healthcare REITs with large SNF portfolios have remained in the 97% to 99% range. Based on second-quarter facility-level cash flow, some public operators have relied on Coronavirus Aid, Relief and Economic Security (CARES) Act funding to service rent payments.
For some operators, NOI coverage of lease expense and fixed-charge coverage ratios was less than 1.0x without CARES Act grants during Q2, but was well above 1.0x for others. Public operators with coverage ratios less than 1.0x saw occupancy decline by as much as 10% during Q2.
Fitch estimates that about $144 billion of the $175 billion of grant funding under the CARES Act was already distributed or earmarked. “This results in a high level of uncertainty regarding the extent of rent relief necessary in 2021 if government funding is exhausted and SNF cash flows remain strained due to the uncertain duration of the pandemic and depressed occupancy levels,” says Fitch.
That being the case, Fitch says its assessment of healthcare REITs’ long-term rental income risk profiles for SNF portfolios hasn’t changed. We do not view occupancy rate declines as permanent and expect an eventual restoration of operating fundamentals to pre-coronavirus levels,” the ratings agency says.
For comments, questions or concerns, please contact Paul Bubny
- ◦Financing
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