Fitch: Heathcare REIT Tenant Support Shows Issues, Connectedness

NEW YORK--(BUSINESS WIRE)-- The willingness of healthcare REITs to step in as a lender to a struggling skilled nursing facility (SNF) operator illustrates the high degree of interconnectness of healthcare REITs and their tenants, Fitch Ratings says. New agreements and amendments to Genesis HealthCare's debt and leases reflect the materiality and persistence of skilled nursing operating challenges and demonstrate how REITs may respond.

On August 1, Genesis announced transactions wherein multiple healthcare REITs (Omega Healthcare Investors, Sabra Health Care REIT and Welltower) agreed to provide support and grant concessions to a sizable common tenant. The multi-faceted transactions include two REITs providing term debt to Genesis to refinance a loan that was at risk of a covenant breach, three REITs resetting operating performance covenants in the master leases to lower levels, and one REIT partnering with Genesis to sell assets and reduce the size of the lease obligation.

The REITs' collective willingness to support a key tenant instead of standing behind the structural protection of the master leases (which, notably, are still covered) reflects the higher degree of interconnectedness of healthcare REITs and their tenants relative to other commercial real estate sectors. While the REITs could have wagered that Genesis would continue to honor its lease obligations, the long-term prospect of having to re-tenant sizable portfolios was likely too costly in the face of generally immaterial net concessions to the REITs' earnings and balance sheets.

Fitch expects skilled nursing operators' margins to be pressured for the foreseeable future due to increasing coverage under Medicare Advantage (i.e. shorter stays and lower rates); Department of Justice investigations into billing practices; and Medicare bundled payment programs that may cause loss of SNF patient volumes to alternative post-acute settings. Rent concessions provided to tenants in REITs' skilled nursing portfolios could have a greater impact on REITs' cost of and access to capital and by extension their liquidity and growth prospects than on their leverage.

For more information on this topic, see Fitch's special reported titled "Re-examining Healthcare REITs and SNFs Amid Headwinds," available at www.fitchratings.com.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

Related Research

Re-Examining Healthcare REITs and SNFs Amid Headwinds (REIT Leverage and Tenant Rent Coverage Drive Ratings)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=878088

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160804005950/en/

Fitch Ratings
Britton Costa, CFA
Director, REITs
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Fitch Ratings
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Kellie Geressy-Nilsen
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Source: Fitch Ratings

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