REIT Risks Rise As COVID-19 Impacts Senior Housing Occupancy

The decrease in seniors moving into elderly homes because of the novel coronavirus could result in higher leverage expectations over the next 12 to 24 months and rating downgrades in the REIT sector, according to Fitch Ratings.

REITs with senior housing portfolios may experience monthly occupancy declines in the 200 basis point to 400 basis point range.  That number is higher than the 300 basis points that Fitch initially anticipated from declines.

“The development of a vaccine or a highly effective therapy may be the inflection point that sets the stage for a meaningful recovery, given an aging demographic and likelihood of slower growth in industry supply,” the ratings agency said in its report.

It noted that senior housing operators and REIT landlords are trying to minimize COVID-19 in those facilities by stopping in-person tours and limiting the number of people who can move in. However, those efforts are causing a decline in the number of occupancies. When states begin to ease social distancing restrictions, senior housing facilities may also begin to ease restrictions.

“We are still in the early innings of states easing social distancing guidelines so there’s less data as much as anecdotal evidence,” Britton Costa, senior director of Healthcare and REITS at Fitch Ratings in New York, tells GlobeSt.

Costa said he believes hospitals resuming elective and scheduled procedures will “be another catalyst for occupancy growth at skilled nursing facilities.”

“Hospitals, which discharge some patients to skilled nursing facilities, effectively stopped deferrable procedures to build bed and inventory capacity, to comply with government mandates, and in response to patient preference,” Costa said.

Before COVID-19, REITs that owned skilled-nursing facilities have seen more stability in cash flows and ratings because the skilled nursing facilities saw significant government support. That government support was not factored into Fitch’s March review.

The rating agency indicated that it expects a “W-shaped” recovery at the facility level because the timing that restrictions are lifted will vary in different markets from local COVID-19 infection trends.  A “U-shaped” recovery is expected at the portfolio level because “some markets will improve while others continue to decline” which will result in flat occupancy rates.

“We believe demand, particularly for higher acuity settings where it is less discretionary, is being deferred and therefore will rebound. Some REITs recently cited anecdotal evidence of new resident deposits and occupancy growth at re-opened facilities,” the report states.