Global Courant
The rapidly aging population is expected to be a boon for senior housing. After a difficult few years during the Covid-19 pandemic, assisted and independent living facilities are on their way to recovery. Occupancy rates, while not at pre-Covid levels, are improving. Demand is increasing while new construction is being delayed by the health crisis. “This is a very, very rare event in real estate in general where your demand trends are accelerating and your supply is stalling…for at least a few years,” said Wells Fargo analyst Connor Siversky. All of this, as well as pricing power and labor cost moderation, is likely to lead to a positive performance for those in senior housing, he said. Welltower and Ventas are the two big players in the space, and the real estate investment trusts are expected to benefit from the explosive demand, several analysts said. Ventas has an average overweight rating and Welltower has an average buy rating, according to FactSet. “Within senior housing, we remain confident in operators’ ability to sustain (net operating income) loss during the pandemic due to the strong interest rate and affordability outlook,” Raymond James analyst Jonathan Hughes wrote in a note Friday. “Longer term, increasing demand from the ‘Silver Tsunami’ of aging demographics and diminishing new supply impact could create a potential multi-year cycle of strong (skilled nursing facility) and senior housing.” All baby boomers will be over 65 years old by 2030. As baby boomers approaching retirement, they are looking for countless ways to live comfortably. This may mean that they have to live at home for as long as possible. It may also mean that you eventually need to look into independent living or even assisted living facilities depending on their health needs. The generation, born between 1946 and 1964, turned 65 in 2011, and by 2030, according to the US Census Bureau, they will all be over 65. By 2030, 39 million Americans will be between the ages of 75 and 84, 25 million will be between the ages of 75 and 84, and 9 million will be 85 and older. For example, according to the National Center for Assisted Living, about 50% of people in assisted living are 85 and older, while 31% are between the ages of 75 and 84. There will also be a decline in the number of adult children available to care for their parents, according to data from the National Investment Center for Seniors Housing and Care. “You have this growing need due to demographics, aging, higher acuity levels — people have more chronic conditions, more disabilities, what they need help with — and they have fewer caregivers,” said Caroline Clapp, senior director at the NIC. The NIC expects the ratio of 45- to 64-year-old adult children to adults age 80 and older to shrink to 4 to 1 in 2031 from 7 to 1 in 2015. Separately, data from the US Census Bureau shows by 2034, for the first time in history, older adults will outnumber children. Supply slowdown Link that growth in the older US cohort to the amount of supply in the market. Much of the available offerings on the market are old — nearly half were built before 1998, and two out of three were built before 2006, according to the NIC. Construction of senior housing has slowed but is still underway, the organization said. “We haven’t seen such a supply slowdown in a long time,” said Greg Kuhl, portfolio manager at Janus Henderson. “We always knew there was going to be demand because you could track these demographics, but the supply is slower because of a couple of things. The pandemic basically shut down construction and we’ve had some issues with funding ever since.” has yet to fully recover from the pandemic, but Well Fargo’s Siversky expects it to return to pre-pandemic levels sometime between 2024 and 2025. The occupancy rate was 83.2% in the first quarter of 2023, versus the pandemic low of 77.9. % in June 2021, according to the NIC. However, there could be 20% occupancy growth through 2030, based on pre-pandemic growth of 3% to 3.5% per year, Kuhl said. “Without a pick-up in supply growth, these buildings will effectively be full by the end of the decade,” he said. Room rates are also expected to rise, Siversky said. The average monthly rate at a residential care facility was $4,500 in 2021, an increase of 4.65% year over year. “Because of inflation, because of the lack of available supply and also because of the wealth accumulated by the older population, you also see an increase in interest rate growth,” he said. “Room rates could increase by 10% to 12% on an annual basis.” Bumpy road, but ‘attractive valuation’ ahead Senior housing is currently seeing favorable demographics, as well as improving fundamentals and margins, according to the NIC’s Clapp. Wage growth is slowing and assisted living jobs are back to pre-pandemic levels, she added. Some senior housing players may also find themselves increasingly in trouble if they have floating-rate debt or need to refinance a debt that is maturing, Clapp said. That could be an opportunity if stock prices reset, she noted. “If you’re a new investor, you can get an attractive valuation. If you’re a retail investor or a REIT buying these properties, or if you’re a developer, there’s an opportunity for new and evolving product types,” Klap said. Investors just need to sit tight and avoid any volatility.” It’s going to be bumpy in the near term. But longer term, this is a great industry to work in,” she said. Stocks to watch Both Ventas and Welltower are the two names most indexed on this trend, Siversky said. He started the coverage from both REITs in April with overweight ratings. Welltower, with a market cap of $39.6 billion, holds interests in senior housing, post-acute communities and outpatient housing. The shares are up more than 21% year-to-date in 2023, after a loss of almost 24% in 2022. Ventas’ portfolio includes senior housing communities, medical office buildings and other healthcare facilities, and the stock has gained 1.8% so far and lost about 12% last year.VTR 5Y mountain Ventas 5-year-old Performance Both names “have a stake in both the revenue and expense sides of the equation,” Siversky said. “This is where you’ll see the biggest increase in net operating income as we get back both occupancy and rate growth in senior housing. There’s a point where for every extra bed added in senior housing, you might not need another employee in the building, he explained. “Once you cross that margin, every extra bed you fill flows to the bottom line,” Siversky said. “That’s kind of where we’re getting to the point now, as we approach that pre-Covid occupancy rate, where your facilities are fully staffed, your expenses are mostly fixed at this point.” There are also many opportunities to find efficiencies in the current business model and streamline labor and material costs, he added. Janus Henderson’s Kuhl is optimistic about Welltower, which he owns in the company’s Global Real Estate Fund. The company has the most exposure to this business and is the most forward-looking in terms of its approach, he said. WELL 5Y mountain Welltower 5 year performance “For example, Welltower has brought in operational experts from the apartment industry to really professionalize and institutionalize things like revenue management, expense management, customer service and employee retention,” he said. “These are all things that the senior housing industry can get a lot better at, and I think they will and that will only increase profitability over time.” Meanwhile, last week Raymond James upgraded Ventas to strong buy from outperform and downgraded Welltower to outperform from strong buy. “We believe that VTR’s -2,000 basis point underperformance versus WELL YTD presents an attractive opportunity to increase exposure to senior housing at an attractive valuation, although we recognize that VTR (net operating income) growth is likely to lag that of WELL due to less upside in VTR’s fully stabilized Canadian Senior housing operating (SHOP) portfolio (>25% of SHOP NOI),” analyst Hughes wrote. Welltower has a 6% upside from analysts’ average price target, according to FactSet, while Ventas has an 18% upside. Other names associated with the trend include Ensign and Omega Healthcare Investors, both of which provide skilled nursing and senior life services, as well as Brookdale Senior Living, a senior community operator with a market cap of just $755 million. — CNBC’s Michael Bloom contributed reporting.
Demand for senior housing is exploding.
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