Is recovery on the horizon for seniors housing in 2021?
NEW YORK: Battered by the coronavirus pandemic, 2020 has been one of the most challenging years for healthcare REITs. In fact, being ground-zero of the pandemic, price performance of REITs had been dismal before the recent vaccine-driven rally.
Admittedly, seniors housing woes have been the main reason behind healthcare REITs witnessing 36.8% decline in the first quarter. Nonetheless, recent positive news on vaccine have led to partial recovery of the losses, with year-to-date decline of 10.6%, per Nareit daily returns market data, against the S&P 500 Index’s increase of 16.8%.
In a recent business update, Welltower Inc. WELL noted that the distribution of COVID-19 vaccines in seniors housing communities across the United States is likely to commence during the week of Dec 21, 2020, which is encouraging.
While the pandemic has had transitory effects as well as long-term or permanent changes on different healthcare property types, the seniors housing real estate market has been most affected.
Seniors housing facilities reported record-low occupancy at the onset of the pandemic due to plunging move-in rates and increased move outs. This is because the risk of contracting COVID-19 is high for seniors and group settings increase the spread of the virus. Moreover, companies have been incurring elevated levels of expenses on account of rising labor costs and procurement cost of protective-equipment supplies.
With this double whammy, operating margins and profits have been squeezed and REITs that operate seniors housing properties under RIDEA structures have been badly hit.
In fact, the rough terrain for seniors housing market is likely to continue before a full recovery that is expected to be in 2022. Moreover, given that the average length of stay is two years for seniors housing operating properties, the turnover is expected to be high. Nonetheless, occupancy in the seniors housing market is likely to slowly improve in second-half 2021, backed by pent-up demand and vaccine distribution.
As for seniors housing triple-net assets, rent collections have so far been strong with Welltower reporting 98% rent receipts in October and November and National Health Investors NHI receiving 96.3% and 92.7% of rent for December and the fourth quarter, respectively. (Read more: National Health Notes Higher Rent Receipts, Occupancy Down)
However, occupancy continues to decline at triple-net properties as well, affecting operators’ financial strength. Amid this, LTC Properties, Inc. LTC slashed 2021 rent escalations by half in the form of a rent credit to offer financial support to operating partners. While government grants have aided operator performance, more such lease restructurings and cuts are expected in 2021, if such assistance fades before operations fully recover.
Lastly, with deteriorating property fundamentals in 2020, investment activity reduced significantly. Nonetheless, with the speed of vaccine deployment, demand for seniors housing has picked up lately and might improve in 2021. In fact, the silver tsunami or demographic-driven demand from the aging of baby boomers supports the encouraging outlook for both seniors housing market investment and performance.