Real estate investment trusts (REITs) with significant exposure to senior housing could be facing a “sharp, prolonged deterioration in credit metrics,” rating agency Moody’s stated in a report issued Wednesday.
In particular, these REITs run the risk of rent deferrals and other types of restructurings if shelter in place restrictions related to the coronavirus pandemic persist. Limitations are in place that could significantly slow the pace of new move-ins and accelerate occupancy rate declines, and REITs should expect increased leverage, as a result.
Most of the REITs are positioned well in terms of liquidity, however. And those with balanced and diversified portfolios — particularly in life sciences and medical office buildings — will feel less of an impact from the outbreak, according to the Moody’s analysis.
Among the 12 health care REITs rated by the New York-based financial services firm, six had their ratings affirmed while one was placed under review for a possible downgrade. Moody’s gave the “Big 3” REITs — Welltower (NYSE: WELL), Ventas (NYSE: VTR) and Healthpeak Properties (NYSE: PEAK) — negative outlooks because of their exposure to senior housing and the operational pressures brought about in response to the outbreak may result in a significant deterioration in credit metrics, Moody’s Vice President, Senior Credit Officer Lori Marks told Senior Housing News.
The risks are more acute with properties tied to operating contracts, due to higher expenses for staffing and critical supplies needed to continue services for residents. Margins, typically around 30%, will be squeezed; REITs that are in RIDEA structures will feel the sting, as they benefit directly from operating income. Assets with triple-net leases, conversely, may be in better positions due to rents being received, although coverage in some cases was thin going into Covid-19 This raises the potential of rent deferrals or other relief.
But that protection is limited and the short average length of stay for senior housing residents — around two years — means communities tend to turn over half of their censuses annually. This will put added pressure on operators to increase the pace of move-ins, while dealing with communities that are restricted to non-essential personnel.
Moody’s sees medical office buildings and life science properties as something of a safe haven if stay at home orders are protracted. REITs that own these assets in strategically important markets with long-term leases and a solid roster of investment-grade tenants will continue to generate revenues, even though these properties are not immune to the virus.
“In times like this, that type of cash flow predictability, longer lease terms and stronger tenants provide more cushion [compared to] other sectors that have more challenges,” Moody’s Associate Managing Director Philip Kibel told SHN.
Healthpeak, notably, has the most diversified portfolio mix of the Big 3 REITs: 34% of its assets are senior housing; 31% are in life sciences; 29% are medical office building and 6% are hospitals.
“[Healthpeak’s] life sciences portfolio is very strong and provides a lot of stability to its rental stream,” Kibel said.