Health Care REITs Well Prepared to Withstand SNF Challenges
August 3, 2016 | by Lori Marks | Commercial Property Executive
By Lori Marks, Vice President & Senior Analyst, Moody’s Investors Service: The top reasons why health care REITs will be able to manage the challenges facing the skilled-nursing facility market.
Although certain sub-segments of health care real estate, including skilled-nursing facilities (SNFs), face operating challenges, health care REITs will be able to manage these challenges given the lease structures, portfolio diversification and balance sheet strength of the REITs.
Many health care REITs own SNFs, mostly in the form of triple-net-leased investments, whereby the REITs earn rental income from tenants that are responsible for property operations. SNF operators are facing challenges in a shifting reimbursement landscape resulting from payment models that increasingly reward those operators that can provide better-quality and more cost-efficient care. Many SNF operators are adapting their business models to accommodate these changes and will continue to thrive, while others will face increasing earning pressure in the coming years. These dynamics will drive more consolidation among SNF operators, providing REITs with profitable opportunities to participate in such transactions through sale-leaseback financings.
Even as the SNF industry continues to evolve and face associated challenges, we expect the rent payments due to REITs will remain secure, with only isolated instances of distress. First, reimbursement risk is a persistent challenge for the sector and one that REITs consider when they initiate sale-leaseback transactions. As such, lease payments are typically set so that the underlying property EBITDAR covers rent by at least 1.4x, which leaves a substantial cushion for potential income declines from reimbursement changes or other operational challenges. Furthermore, the REITs’ large operator relationships are often governed by leases that offer credit enhancements such as a master lease structure, cross-collateralization, security deposits and corporate guarantees.Go Back
“Always, but especially in this day of lawsuits and ever increasing regulations, the responsibility for a financial advisor t do their own due diligence on products they sell falls squarely on themselves. No one is going to take greater interest in protecting their practice than they are. We use the Blue Vault Partners Nontraded REIT Review to keep us informed of the performance of every single nontraded REIT. Finally, complete transparency is available for advisors using nontraded REITs. Every advisor using REITs in their practice should make the small annual investment of subscribing to Blue Vault’s reporting services.”