However, the report asks the question, “REITs are selling, who's buying?” Although the selloff is expected to continue, “it remains to be seen who the incremental buyers will be, given tepid responses from smaller REITs to increase their exposure and notable sellers of Genesis Healthcare Inc. (GEN) real estate, e.g. Welltower Inc. and Sabra Health Care Inc.”

The coming months, Fitch says, should provide investors with “meaningful data points on private market values for skilled nursing assets given REITs' disposition guidance.” That being said, “the depth of the market's demand for Genesis Healthcare's real estate specifically” will be tested with both Welltower and Sabra Health Care announcing disposition plans, and with HCP and Ventas Inc., “both of which Fitch presumes to be on the sidelines when it comes to skilled nursing acquisitions.”

Fitch's report notes that the willingness of multiple healthcare REITs to provide support and concessions to GEN “illustrates their interconnectedness.” Transactions announced in Q3 2016 include two REITs providing term debt to GEN, three resetting operating performance covenants in the master leases and others partnering with GEN to sell assets and reduce lease obligations, Fitch says. “While REITs could have wagered that GEN would honor its obligations, having to re-tenant large portfolios would be too costly, and likely too disruptive, in the face of small concessions,” the report states.

Genesis Healthcare

NEW YORK CITY—Repositioning their models to a value-based care reimbursement environment has meant turbulence for many post-acute providers despite bundled payments initiatives only being in early stages, according to Fitch Ratings—as well as healthcare operators and REITs on their second-quarter earnings calls. The ratings agency says healthcare REITs have taken decisive action in response to the growing presence of bundled payments, i.e. federal programs intended to incentivize coordination across providers and tie payments to value for episodes of care.

“Payors focusing on cost containment to offset demographic-driven volume growth will continue to pressure skilled nursing operators' operating fundamentals,” according to a Fitch special report released Wednesday. It notes that the Center for Medicare and Medicaid Services has led this charge, announcing that various cardiac procedures would be added to the existing bundled payments for care improvements program. For their part, skilled nursing operators—which is to say those that work with healthcare REITs rated by Fitch—have said that “conversations with Medicare Advantage continue to focus on length of stay and rates.”

However, they remain “somewhat optimistic about the effect of joint and cardiac bundles on earnings given that these patients account for only low-single digit percentages of revenues,” according to Fitch. “Nonetheless, high operating leverage increases the effects of even modest top-line declines on EBITDA and rent coverage ratios.”

Most healthcare REITS intend to be net sellers of skilled nursing facilities, says Fitch, noting that some have already amended lease terms on their SNF properties and provided debt to a key common tenant. “These actions likely reflect REITs' expectation that a short- or medium-term reversal in operators' prospects is not forthcoming and tenants may need additional financial flexibility as they manage through the transition,” according to Fitch.

However, the report asks the question, “REITs are selling, who's buying?” Although the selloff is expected to continue, “it remains to be seen who the incremental buyers will be, given tepid responses from smaller REITs to increase their exposure and notable sellers of Genesis Healthcare Inc. (GEN) real estate, e.g. Welltower Inc. and Sabra Health Care Inc.”

The coming months, Fitch says, should provide investors with “meaningful data points on private market values for skilled nursing assets given REITs' disposition guidance.” That being said, “the depth of the market's demand for Genesis Healthcare's real estate specifically” will be tested with both Welltower and Sabra Health Care announcing disposition plans, and with HCP and Ventas Inc., “both of which Fitch presumes to be on the sidelines when it comes to skilled nursing acquisitions.”

Fitch's report notes that the willingness of multiple healthcare REITs to provide support and concessions to GEN “illustrates their interconnectedness.” Transactions announced in Q3 2016 include two REITs providing term debt to GEN, three resetting operating performance covenants in the master leases and others partnering with GEN to sell assets and reduce lease obligations, Fitch says. “While REITs could have wagered that GEN would honor its obligations, having to re-tenant large portfolios would be too costly, and likely too disruptive, in the face of small concessions,” the report states.