Publicly traded senior housing owners and operators have started reporting their first-quarter 2020 earnings, but because of Covid-19, these financial results will be mostly irrelevant. Analysts, investors, and senior professionals hope that the earnings reports and comments of the executive team will make people more aware of the impact of Covid-19 on the industry and what the next pandemic will bring.
The US Covid-19 epidemic began in mid-March, at the end of the first quarter. Richard Anderson, an American analyst at SMBC Nikko Securities, told Advanced Housing News that from a financial reporting perspective, the timing is “somewhat convenient.”
Therefore, Lukas Hartwich, a Green Street analyst, told Shanghai News that investors are not only focusing on first-quarter results but are “eager” to obtain real-time indicators and on-site information. Rent collection in April is one of the subjects of particular interest because it is expected that payments will get delayed due to the coronavirus crisis.
However, although real-time information is valuable, the market may look more than it is today. That is because even the current April figures “may not be able to explain the problem,” Capital One analyst Daniel Bernstein told SHN. Although some metropolitan areas and states gotten struck in April, Covid-19 peaked at different times in different places.
Therefore, analysts expect to put pressure on REITs and operator executives to develop long-term strategies and prospects. For example, Bernstein is interested in understanding the expectations and plans for when the states will reopen, and the ongoing preparations to prevent Covid-19 from surging again in the fall.
He and other analysts also want to know what measures the operators are taking to control the increasing costs.
And, despite admitting that Covid-19 needs to strengthen daily management, the status of coronavirus may continue for a year or more until an effective vaccine is developed, which means that long-term planning is essential.
Rent reductions become a priority
Several REITs have issued regular updates in the past few weeks, reporting indicators such as occupancy rates, Covid-19 infection rates, and increased spending by operators. Analysts agree that these updates provide useful information. Regarding the other information they are looking for, some people say they want to know about the rent collection and rent relief of the three network leasing portfolio.
According to a survey by NAREIT, compared with other types of REITs, the healthcare industry’s rents in April generally showed a “moderate drop.” Although medical real estate investment trusts generally charge 86% of typical rents, payments for senior housing and skilled care seem to be “relatively stable.”
However, some operators, including the Chelsea Senior Living (Welltower tenant Chelsea Senior Living), have reported that they need to reduce rents because their expenditures have skyrocketed and the slowdown in relocation has squeezed their income.
Chicago-based Ventas is one of the “big three” medical real estate investment trusts and has launched a rent deferral plan. Venta’s tenants can choose to postpone 25% of the April rent until October 1, 2020, or receive government assistance. The real estate investment trust fund is expected to postpone a total of $3 million to $9 million in April.
Anderson believes that other real estate investment trust funds may be more “surgical” in rent reductions, but will help operators when needed.
Raymond James analyst, Jonathan Hughes focused on senior housing and skilled nursing investment portfolios of real estate investment trusts and conducted a sensitivity analysis based on several assumptions. He expects that to double EBITDAR coverage, rent deferral or reduction in 2020 will require approximately 25%. He said a few weeks ago that he assumed that rents need to be postponed or reduced by 50%, but he lowered this figure mainly because skilled care providers received financial support from the government.
Several analysts, including Anderson, pointed out that before Covid-19, some triple play portfolios had low rental coverage. That puts more pressure on the real estate investment trust fund, making it necessary to be proactive.
Entering Covid-19, some real estate investment trust funds have begun to reconsider their triple play structure. For example, Murfreesboro of National Health Investor Corporation in Tennessee began reducing escalators and linking them to the consumer price index. Anderson believes that Covid-19 may further accelerate the speed of these adjustments.
Hartwich also pointed out that before Covid-19, rental coverage was low and consistent with the theme of analysts seeking long-term visibility. He hopes to have some insight into how investors will consider rent reductions in the coming years.
Specifically, he is seeking a clear relationship between rent extension and emission reduction, and whether the real estate investment trust fund will speed up the resolution of the three network leasing schedule because even before the Covid-19 strike, the rental coverage rate is still below market.
Despite the risk of postponement or rent reduction and the need to reconsider the risk of escalators, the three network leases are still considered a basic security structure because of how they keep REITs isolated from NOI fluctuations in operations. Analysts generally believe that Covid-19 will not significantly change the benefits of real estate investment trusts or investors for Sanwang compared to RIDEA.
In recent years, it has moved to RIDEA. Bernstein pointed out that as Covid-19, REITs such as Welltower and Ventas have increased exposure to RIDEA, they will immediately suffer more pain but will enjoy more upside in the recovery. Anderson has similar expressions in terms of RIDEA and leasing.
Covid-19 has caused several listed high-end housing companies to cancel the 2020 guidelines, and analysts and investors have been trying their best to predict this year’s performance based on available information. They hope to improve their predictions based on the knowledge learned in the upcoming earnings.
A significant challenge is that the Covid-19 crisis is evolving rapidly, and the federal government and states respond in different ways. Therefore, the prediction of how the life of the elderly will develop covers a range of possible situations. For example, BMO’s Kim suggested that the occupancy rate might drop by 50% in the worst case, although he believes that the occupancy rate might drop by 14% in the next four quarters.
Hughes expects that the occupancy rate of senior housing and skilled nursing staff will decline by 10% in 2020 due to a decrease in admissions.
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