COVID-19’s effect on retail, hotel and office real estate comes as no surprise. But gathering actionable data from a sea of negative data is a perfect task for our NLP. We explore overall sentiment among REITs, and put together a ranking of the lowest performing REITs based on our Amenity Score. The data lead us to take a specific look at Healthcare REITs.
The Amenity Score measures the overall sentiment derived from all factors within Amenity’s Key Drivers dashboard. While all GICS registered negative Amenity Scores in the second quarter to date, the Real Estate sector has scored most poorly in the second quarter-to-date. We ranked all REITs beginning with the lowest:
The COVID-19 pandemic’s effect on retail, hotel and office real estate comes as no surprise. Weakness in sentiment surrounding the private prison company CoreCivic is also understandable. However, notable to us was the presence of health care REITs, which are facing challenges from every angle: revenue pressure is coinciding with increases in expenses. These companies face a high degree of business uncertainty and have registered negative sentiment with regard to earnings guidance.
Health care REIT stocks have had a rough year in the market, and in particular those focused on skilled nursing (also known as nursing homes) and assisted living facilities. However, the REITs focused on medical office buildings, hospitals, and outpatient/physician facilities have fared much better. These companies include Healthcare Realty Trust, Physicians Realty Trust, and Community Healthcare Trust. They also scored the best, meaning the least bad, of the Health care REITs in the chart above. As a group, these three names are down roughly 10% on the year, versus down 29% for the average of the remaining basket of six names.
Fear surrounding seniors’ susceptibility to COVID-19 is an obvious concern for the market. But it also appears that the longer the customer stays in a healthcare facility, the less enthusiastic the market will be about the stock.
Skilled nursing and assisted living facility owner Omega Healthcare Investors has doubled off its bottom but remains down over 30% on the year. As with its peers, guidance has been withdrawn and the lingering operational weakness and uncertainty was addressed on their last earnings conference call:
Based on discussions with our operators, overall occupancy has declined on average between 3% and 6%. While quality mix is down due to discontinuation of elective surgeries, offset slightly by the scaling up of residents that have tested positive for COVID-19 or potential cases amongst operators' patient populations.
In tandem with revenue pressure, and in addition to higher costs for personal protective equipment, Omega Healthcare Investors is experiencing increased personnel expenses:
In an industry that was already hampered by staffing shortages, operators are now faced with an additional strain on staffing, as any employees with symptoms was quarantined for two weeks at home, and others have needed to stay home to care for young children due to schools being closed. While we expect agency expense to increase, we believe the larger expense increase will be in the form of hazard pay, bonuses, and overtime to permanent staff.
Stephenson, put it more bluntly in response to an analyst question:
COVID-related OpEx, we're seeing dramatic cost increases.
The discomfort of the current environment was summed up by the CEO, C. Taylor Pickett:
We do not know how long census disruption and elevated COVID-19 costs will last and if the funding support from the federal government and the states will be sufficient to cover all of these incremental costs. We do not know the ultimate number of Omega facilities that will have widespread high cost outbreaks of COVID-19.
The impact of declines in elective surgeries and even emergency room traffic on skilled nursing facilities was addressed by another company with a focus on skilled nursing, CareTrust REIT:
... hospitals have been in a hurry up and wait mode, running incredibly low occupancies. They have largely stopped non-critical and elective procedures, and emergency department volumes have reportedly dropped significantly. Therefore, the skilled nursing facilities that depend most on short-term rehab patients coming from hospitals are being hardest hit. By contrast, the facilities that primarily care for the long-term Medicaid residents are less sensitive to the sharp decline in hospital census.
In contrast to skilled nursing and assisted living facilities, Physicians Realty Trust’s properties are leased to physicians, hospitals or healthcare delivery systems. The key differentiator is that over 90% of Physicians Realty’s space is either on campus or affiliated with a hospital or healthcare facility. The company’s EVP of Asset Management, Mark D. Theine, did have some positive points to make regarding their business:
Across the portfolios, the entire team worked tirelessly to implement these new procedures to ensure our buildings promote a healthy environment. Nearly all of our facilities remained open during the month of April and the vast majority expect to start increasing pacing volumes again in early to mid-May under enhanced guidelines for safe patient care.
Interestingly, utilization and profitability at the LifeCare LTACH, also improved considerably during March and April as the demand increased to the COVID-19 cases and CMS expanded the scope of care LTACH can provide an accelerated reimbursement payments.
Despite these rays of positivity, Physicians Realty Trust faces the same challenges as everyone else in the sector:
As you know, the US federal government has pumped trillions of dollars into the US economy, with hundreds of billions of those dollars directed to healthcare providers. While the overall financial impact of COVID-19 are still uncertain for our health system partners, it appears likely that the federal government subsidies in whatever form will not be enough to offset the direct and indirect cost of the pandemic.
To us, while there is a clear bifurcation in the health care REIT stocks, uncertainty and danger lurk.
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About Amenity
Amenity Analytics is the industry leader in providing insights from unstructured text by using Natural Language Processing (NLP) assisted by Artificial Intelligence (AI) and Machine Learning (ML). Amenity’s NLP system is a sector-agnostic, language-dependent tool for quantitative text analysis that is deployed across the financial services industry and beyond.
This communication does not represent investment advice. Transcript text provided by FACTSET and S&P Global Market Intelligence.
Copyright ©2020 Amenity Analytics.
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