In some parts of the U.S., the rapid spread of COVID-19 has placed tremendous stress on health care systems. In other locales, some hospitals and physician practices have thus far sat mostly empty due to the postponement of elective surgeries and because COVID-19 cases have yet to escalate. While news flow about the pandemic is fluid and the repercussions remain uncertain, here S&P Global Ratings provides its current assessment of the implications for each facility type.

Health care delivery is predominantly needs-based.   Though we expect certain facility types to suffer more stress in 2020, we believe that demand will return relatively quickly once the pandemic eases. Moreover, we want to avoid overreacting and rating to the trough of the cycle. Instead, our ratings reflect our longer-term view of each company's cash flow profile and credit quality.

The CARES Act Provides Some Relief For Health Care Operators

The $2.2 trillion CARES Act, passed into law on March 27, aims to provide rapid relief to individuals and businesses hurt by the COVID-19 pandemic.

Within the bill are certain grants and loans that can benefit health care operators, such as:

• $100 billion in grants slated for direct support of hospitals and other health care providers.
• --The first tranche ($30 billion of the $100 billion total), distributed on April 10, was for hospitals and health care providers enrolled in Medicare. Facilities are to receive 6.2% of their total 2019 Medicare fee-for-service reimbursements in a lump-sum payment.
• --The second tranche ($40.4 billion) was disbursed starting on April 24, and included: $20 billion to Medicare providers based on net patient revenues from 2018 (which was ultimately netted against the first tranche); $10 billion to hospitals in areas hard hit by the pandemic (like New York); $10 billion to rural hospitals, many of which are under great financial distress; and $400 million to Indian Health Service facilities;
• --The remaining $29.6 billion is scheduled to go to skilled nursing facilities (SNFs) that rely primarily on Medicaid, provide additional COVID-19 "hot spot" funding, and cover uninsured claims at Medicare rates for any providers.
• Under the CARES Act, employers can defer their FICA payroll tax (social security) payments for 2020, with half of the 6.2% that's deferred due in 2021 and the other half due in 2022.
• The majority of health care operators are too large to qualify for the Paycheck Protection Program (PPP), which under the CARES Act, authorized up to $349 million in forgivable loans to small business that meet certain terms. That said, there are some operators that do qualify and could take advantage of the program.
• On April 24, an additional $484 billion in coronavirus relief for small businesses, hospitals, and health care providers was signed into law.
• --$75 billion has been allocated for aid for hospitals and health care providers.
• ---We don't yet know what the composition of this relief entails, but would expect it to be somewhat consistent with the package detailed under the CARES Act, with the vast majority of relief going to acute-care hospitals.

Health Care REITs Have A Mixed Prognosis

We expect REITs that own medical science research facilities to be hurt least by the pandemic fallout, followed by hospitals and medical office buildings (MOBs). Although perhaps surprising, we also expect SNF landlords to face only modest cash flow pressure, as long as expected government aid for Medicaid payors from the CARES Act isn't an insignificant amount. As we outline below, the pandemic will significantly affect senior-living facilities more than other health care facility types because of declining occupancy rates and less material government assistance.

Life Sciences

We expect life sciences real estate assets to be the least susceptible to COVID-19's ramifications. The pandemic has highlighted the importance of entities that perform research and develop vaccines and new drugs to combat viruses and other medical conditions. We expect ongoing government support to the National Institute of Health (the 2020 budget is up 7% from 2019 levels), increased philanthropic investment in medical research (currently at all-time highs), and streamlined FDA approvals to benefit demand fundamentals for biotechnology and pharmaceutical tenants over the next several years. We also note that the industry is highly supply-constrained in major life sciences markets (e.g., Cambridge, Mass. and San Francisco, Calif.), and believe companies with developable land in these areas will benefit.

Overall, we think cash flows from life sciences tenants will remain relatively stable without significant disruption, given its critical-asset-nature characteristics for research and development of life science and technology tenants, as well as largely triple-net leasing structures. However, we think capital markets volatility could result in higher borrowing costs, particularly for venture capital-backed firms, curtailing investment modestly. Moreover, we expect construction and leasing of projects under development will be more challenging, potentially delaying the EBITDA contribution from these projects.

Hospitals

The coronavirus is causing tremendous strain at many hospitals, as some have struggled to find sufficient ventilators and beds for COVID-19-infected patients. Moreover, cost pressures have risen significantly (labor and equipment), and higher-margin elective surgeries have been postponed. That said, hospitals will receive the largest share of government support from the CARES Act, and we don't think any major health systems will be under severe economic distress given the strength of that support. As a result, we expect hospital landlords to receive the rent due to them, even if there are occasional deferrals.

Medical Office Buildings (MOBs)

Like with hospitals, many physician practices have deferred nonessential procedures and have inquired about rent deferrals. On the positive front, demand should be robust once the nonessential procedures are re-scheduled, and eligible physician practices will receive government support under the CARES Act (about one-third of their payor mix is either Medicare or Medicaid, so they'll receive some grants). Moreover, a significant number of independent physician practices are small enough to quality for PPP assistance. Most of the facilities owned by REITs are either located on or adjacent to a hospital campus, or they're affiliated with a major health system, which also increases the likelihood of timely rental payments. While we do expect some modest disruption to cash flows over the next several quarters (with some rent deferrals), we think the risk of write-offs and asset impairments is somewhat low.

Skilled Nursing Facilities

Some consider SNFs to be at the apex of the pressure caused by the pandemic, given the high average age of patients (low-80s), the heightened risk of mortality within their census (patient health tends to be significantly poorer than at seniors housing facilities), and negative headlines in the news regarding affected communities. While we acknowledge the heightened risks facing many SNF operators, we think there are numerous factors that greatly mitigate the headwinds.

We think the primary risks to SNFs are:

• We estimate occupancy to be down around 500 basis points (bps) nationally, as hospitals have deferred elective Medicare surgeries. However, given the fact that SNFs are a high-acuity segment of health care, we don't expect occupancy to drift too much lower, barring an acceleration in deaths within the facilities, as new patients should continue to flow in at a relatively steady pace.
• Globally, an average of 10%-15% (of reported cases) of people aged 80 and older who have contracted the coronavirus have died. This could pressure occupancy rates further whenever a contagion infects a facility.
• Operating costs are up close to 15% nationally at the operator level, with significant pressure on labor costs and personal protective equipment (e.g., gowns, masks, and gloves).

Offsetting some of these factors are:

• Grants and FICA tax deferrals as part of the CARES Act and the subsequent coronavirus relief bill, although support for Medicaid payors has yet to be disbursed and the amount is still uncertain.
• On March 18, the Families First Coronavirus Act was passed, providing for a temporary 6.2% increase to all states for Medicaid reimbursement (approved retroactively to Jan. 1, 2020). While this isn't a significant per diem increase at the facility level ($10-$15), it provides additional aid.
• In early March, the Centers for Medicare & Medicaid Services waived the requirement that, to be eligible for Medicare reimbursement at a SNF, a patient must first spend three days at the hospital. This waiver should provide a healthy boost, as Medicare per diem reimbursement is around $800 for the first three days before dropping to an average of approximately $500 (compared to around $200 per day for Medicaid reimbursement). This waiver won't quite offset the pressure caused by declining occupancy (which is nearly all Medicare-related [high reimbursement rate] declines), but it's extremely beneficial for the SNFs.

In short, while we expect declining tenant-level rent coverage at the operator level, investors should keep in mind that the facilities are triple-net leased with modest cushion. While we expect rent deferrals to occur, and the timing of government relief is largely uncertain, we don't project a significant number of lease amendments (rent restructurings) at this time.

Seniors Housing Facilities

The bad news just keeps coming for seniors housing facilities and we expect this property type to withstand the worst of the coronavirus impact to health care real estate. After three straight years of supply outpacing demand, the sub-industry finally appeared to be approaching equilibrium in 2020 (see: Waiting Is The Hardest Part: Seniors-Housing Focused REITs Await The “Silver Tsunami," published Feb. 10, 2020). However, seniors housing assets will be tested like never before during this pandemic, with deteriorating occupancy well beyond anything the industry has ever seen. While seasonal influenza is a yearly occurrence, and results in significant mortalities (2017-2018 set the high mark with 61,000 deaths), seniors housing facilities generally saw occupancy levels perk up in the summer months with a steady flow of move-ins. We don't expect a similar boost to occur in 2020.

While there are significant near-term headwinds, we believe the below factors could help mitigate the pressure:

• Long-term tailwinds are extremely favorable, given the aging baby boomer population.
• Occupancy was only down modestly in March, although trends deteriorated in April.
• New construction should slow significantly in 2020, providing a much-needed benefit to the supply/demand equation when the pandemic abates.
• Many seniors housing operators have been able to qualify for loans under the PPP plan. While they usually exceed the number of employees under the prescribed guidelines (500 employees), many have qualified under the net income (less than $5 million for the last two combined fiscal years) or net worth (under $15 billion) eligibility requirements. This can benefit seniors housing triple-net leased assets in cases where operators receive loans, as they will have an increased ability to pay their contractual rental obligations during these challenging times.

Still, the following negative factors will impair performance:

• Increased mortalities from COVID-19 could accelerate the natural rate of attrition at these communities. That said, we are encouraged that contagion within our rated REITs' communities has been relatively well controlled thus far, with immediate isolation of residents and health care workers who test positive. Moreover, regular testing is conducted throughout the facility when a case is identified, to better ensure the continued health of residents.
• Move-ins, while still occurring in many communities, have slowed considerably, given shelter-in-place mandates as well as because most tours are only occurring virtually. Many facilities are also restricting move-ins completely to ensure the health and safety of existing residents.
• Operators generally aren't eligible for grants under the CARES Act, because they're predominantly private-pay (usually a good thing in our view, but not in this circumstance).
• Operator expenses are up significantly (high-single to low-double-digit area), with similar pressures that face SNFs.

It's difficult to quantify a run-rate of monthly occupancy attrition while the pandemic continues, and we acknowledge that assisted living facilities (ALFs) and memory care facilities are predominantly needs-based, which should set some floor in occupancy (albeit at a much lower level). Our best estimate is that occupancy will decline approximately 200–300 bps per month during the second quarter, with pressure likely to abate in the summer unless current shelter-in-place orders remain in place (as increased move-ins are critical to stabilizing occupancy).

Overall, we base these assumptions on:

• The average length of stay at seniors housing facilities is approximately 840 days. All things equal, this would imply a monthly attrition rate of around 3.75%.
• Nevertheless, that length of stay number includes voluntary move-outs prior to the patient passing away (38% of residents). In our estimation, we think the length of stay excluding move-outs is likely closer to three years (implying monthly attrition of about 3%). We think voluntary move-outs will be relatively minimal during this period.
• Move-ins are still occurring, albeit at a significantly reduced rate. We think the volume of move-ins could offset the attrition by around 1% per month, and could increase further as shelter-in-place orders are lifted and facilities are re-opened to visitors.
• Mortalities within the facilities are likely to increase from the ongoing spread of COVID-19, which could increase the rate of attrition modestly.

In our view, seniors housing operating portfolio (SHOP) assets are subject to significant near-term cash flow disruptions, because the landlord will be directly subject to the declining revenue from weakening occupancy as well as rapidly rising expenses. That's not to say that triple-net leased properties, which generally have poor coverage levels, won't be affected, and we anticipate numerous rent deferrals and rent restructurings to occur (particularly in cases where operators don't qualify for loans through the PPP). Welltower Inc. has the highest quality of seniors housing properties in the sector, in our opinion, but also generates the greatest portion of its property-level net operating income (NOI) from seniors housing facilities among the "Big 3" diversified health care REITs (62.3% of first-quarter annualized NOI, including 42.9% from SHOP assets). Ventas Inc. (56.7%, 33.9% from SHOP assets) and Diversified Healthcare Trust (47.5%, 38.2% from SHOP assets) also have significant exposure to SHOP assets, while National Health Investors, Inc. (69.0%, but no SHOP exposure) also has significant exposure to triple-net leases within seniors housing.

We Expect Increased Ratings Pressure On Some Health Care REITs.

After first quarter results were reported, we revised the outlook to negative on both Welltower and Ventas, largely driven by the outsized exposure each company has to SHOP assets, and the potential cash flow disruption that could result. In March, we lowered the rating on Diversified Healthcare Trust to 'BB' from 'BB+' on expectations that recent poor performance would continue for the next several quarters, even if the COVID-19 pandemic didn't lead to material occupancy deterioration . We also revised the outlook on CareTrust REIT Inc. to stable from positive in early April, not because of company-specific reasons but because we're unlikely to raise the ratings on any REITs in 2020. Additional rating actions within the subsector could be forthcoming, and the trajectory is negative.

Below is a table of our rated health care REITs, along with brief comments about how we think the companies might fare during this pandemic.