Health-Care REITs Unfazed by Minimum Staffing Proposals

Christopher Wimmer

The federal government’s proposal earlier this month to increase staffing requirements in nursing homes is likely to result in higher operating costs and pressure margins for these facilities. Despite rising costs, Fitch expects U.S. health care REITs that own skilled nursing facilities assets to experience minimal impact.

According to the proposal from the Centers for Medicare and Medicaid Services, long-term care facilities that receive funding from Medicare and Medicaid would need to have a registered nurse on site at all times within two years of the rule’s implementation. Additionally, facilities would need to provide a minimum of 0.55 registered nurse hours per resident per day and a 2.45 certified nurse aide HPRD within three years of the rule’s implementation, or five in rural areas.

CMS estimates that approximately 75 percent of nursing homes currently do not meet the proposed requirements. Despite this, it’s unlikely that the rule will directly change any health care REIT credit ratings, though impacts will also depend on the trajectory of government reimbursement rates relative to expenses.

The pandemic pressured occupancies and labor costs for SNFs, which have yet to fully recover. However, ratings for health care REITs with SNF exposure were mostly unchanged through the pandemic despite the stresses they faced due to operational and balance sheet flexibility. The same is likely to be true even in the wake of minimum staffing requirements.

Health care REITs with SNF exposure are more insulated from individual operator stress given long-term master leases and their own ability to access flex spending and funding sources. In general, REITs tend to be diversified into other asset types, such as senior housing, and have the ability to re-tenant properties to replace stressed operators with stronger ones.

Pandemic-tested

Compared to the pandemic, the effects of nursing home minimum staffing standards will be slower to roll out, with significantly more visibility and management planning on the part of individual SNF operators. As a result, there is likely to be a less pronounced impact on REIT operations. Any rating changes would be the result both of operational stress and a change in the behavior of health care REITs to manage their leverage levels appropriately.

Despite these latest proposed measures, Fitch views the long-term rental risk profile of SNFs as unchanged. Though the pandemic may have accelerated trends of patients being cared for at home and new staffing minimums will increase pressure on operators, SNFs are likely to retain their place in the U.S. health care system as certain complex post-acute care and needs-driven care will continue to be best delivered in an SNF setting.

Christopher Wimmer, CFA, is senior director, Fitch Ratings.