Investors brace for nursing home defaults amid pandemic

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The first major U.S. domestic coronavirus outbreak took place in a nursing home, and the pandemic continues to hit senior housing facilities and nursing homes hard, adding financial strain to a high-risk sector.

Most of the sector's $36 billion of outstanding bond debt is unrated or high-yield, based on significant risk factors in place before the pandemic.

Emergency medical technicians take a stretcher out of an ambulance at a nursing home in Teaneck, New Jersey, on Friday.

“Several borrowers report reduced occupancy and various other expected issues,” Matt Fabian, partner at Municipal Market Analytics, wrote in the firm's Weekly Outlook Monday. "An upswing in technical and payment defaults has already begun."

In addition to treating their own at-risk patients, skilled nursing facilities have had to take the overload from hospitals on the front lines of the COVID-19 fight.

As of Monday, COVID-19 had killed more than 3,600 U.S. nursing home residents, according to The Associated Press.

“Defaults are a concern as costs have risen out of line with revenue due to added needs of fighting COVID,” Chris Foster, chief executive of C Analytics, said in an email interview. “Litigation risk for some sites will also be a huge burden especially sites with higher than average mortality who can be seen as having not followed Center for Medicare and Medicaid Services, state or Centers for Disease Control guidelines and/or receive COVID-related inspection fines.”

Foster said that about 1,700 individual facilities that include independent living, assisted living and skilled nursing, back roughly 200 multi-site municipal bond obligors and another 400 sites back single site transactions.

The nursing homes were among recipients of a $30 billion relief grant to healthcare providers that began arriving on Friday. The Centers for Medicare and Medicaid Services said the grants need not be repaid if certain conditions are satisfied.

The terms require that the funds are to “reimburse the recipient only for health care related expenses or lost revenues that are attributable to coronavirus.” Documentation of all COVID-19-related expenses as well as lost revenue that is attributable to COVID-19 will be required for reports to be submitted to CMS, according to a report from the law firm Arnell, Golden, Gregory.

In Florida, nursing facilities are seeking indemnity from litigation, but Foster said he doubts they will get it. In several locations the National Guard is assisting in testing and cleaning.

The New York State Health Department on Sunday released its first report of deaths due to COVID-19 at city nursing homes. All together there were 1,064 virus related deaths.

In Maryland, Gov. Larry Hogan said that a major outbreak at Pleasant View Nursing Home in Carroll County had 99 confirmed cases among residents and staff, with 42 patients hospitalized and five deaths. The virus has surfaced in 60 nursing homes and long-term care facilities in Maryland, he said.

In Washington, state regulators and the Centers for Medicare and Medicaid Services reported serious infractions at the Life Care Center in Kirkland, site of the first known large U.S. outbreak, where 40 people died. CMS proposed a fine of $611,000, but said that could be adjusted based on the facility’s response.

Before the outbreak came to dominate the news, the National Investment Center for Senor Housing & Care reported senior housing occupancy for the first quarter was 87.7%, a slight dip from 88% in the previous quarter.

NIC reported 17,062 new construction starts in the last four quarters, the fewest new starts since 2014.

“Data from the first quarter will be an important benchmark moving forward in these unprecedented times, with occupancy and construction starts challenged by circumstances beyond anyone’s control,” said Chuck Harry, NIC’s chief operating officer. “The industry’s first priority is to ensure that frontline caregivers are in the best possible position to address the health and safety of residents, as well as their own wellbeing and that of their families.”

Medicaid, the joint state and federally run health insurance program for low-income Americans, pays for the care of more than 60% of nursing facility residents, according to a congressional Medicaid advisory commission. However, the program does not fully reimburse nursing homes for the cost of care, according to experts.

A nursing home that has a high Medicaid payer mix can have negative operating margins between 2% and 5% because of current reimbursement levels, according to congressional testimony.

The low reimbursement rates disproportionately affect rural communities that often serve high numbers of Medicaid patients. More than 400 rural nursing homes have closed in the last decade, according to a 2019 report from The New York Times.

The coronavirus pandemic struck just three months after Senior Care Centers, Texas’ largest nursing home operator, reorganized after a year in bankruptcy court.

"As the entire industry has seen, the leases associated with the communities have become cost-prohibitive," Michael Beal, the chief operating officer, said when the Chapter 11 petition was filed in December 2018. "This kind of action is absolutely necessary to address those costly leases while continuing to care for our patients and residents."

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