REIT Skilled Nursing Concern Is "Overblown"

Earlier this month, skilled nursing facility operators Genesis and Signature received qualified audits, sending a ripple of concern through the industry and causing some investors to pullback from REIT investing. While qualified audits can cause concern over tenant risk, Mizuho Securities says that the concern is largely “overblown.” With government support behind the market, Mizuho Securities expects skilled nursing tenants to continue to fulfill rent obligations, making them a stable tenant. In fact, not only is Mizuho maintaining the rating for healthcare REITs in the skilled nursing market segment, but it is raising its earnings estimates and price targets for SBRA, OHI and CTRE.

Government support for skilled nursing facilities is critical to Mizuho’s ongoing support for the market. Already, the government has pumped $14.6 billion into the industry. This equated to $1 million per skilled nursing facility in the US. In addition, skilled nursing facilities are receiving additional Medicaid payments through FMAP, a temporary suspension of the 2% Medicare sequestration period and a 2.2% increase in skilled nursing Medicare reimbursement in October among other things, according to Mizuho. This additional support for the industry should ultimately provide $30 billion in government relief funding to the industry, which will result in less rent deferral and rent concessions.

The government support isn’t the only driver for the skilled nursing sector. Mizuho expects REITs to report strong third quarter earnings. Combined with government support, it expects rent coverage to be at pre-pandemic levels. Occupancy trends have also stabilized as more states are starting the reopening process and re-launched elective surgeries. In addition, the skilled nursing facility sector benefits from new vaccine news, and once a vaccine is available, it will see a rebound. However, a prolonged pandemic environment is a danger to the sector.

It should be noted that while the market overall has staved off disaster with government support, there has been $213 million in lost revenue this year at Genesis. In addition, coming maturities in 2021 are a concern for Mizuho. If the market returns to some kind of state of normal next year, the operator will need to recover from this public health event.

The pandemic is the true test for skilled nursing. The upcoming election should have a limited impact, if any, on the market. There is currently bipartisan support for skilled nursing, and regardless of the election results, the market should continue to receive support. Mizuho actually says the strong support for the market might be a silver lining for the industry, which now has the spotlight in front of Congress.