Assisted Living Headwinds Could Make Investors Look Harder at REITs

Senior housing investors soon may become more concerned about the portfolio mix of the largest real estate investment trusts (REITs), as market forces have begun to favor independent living more than assisted living.

In particular, investors may become frustrated with the current practice of describing properties as “majority” assisted living or independent living, Green Street Analysts Michael Knott and Andrew Suh wrote in a recent report, “Senior Housing: AL vs. IL—Distinction with a Difference.”

For instance, a property that has 25 independent living units and 75 assisted living units might in REIT disclosures be described simply as a “majority AL facility.” But with the two different asset classes now experiencing very divergent trends, a more precise explanation of property unit mixes and performance “should be provided,” the analysts wrote.

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At the present moment, independent living occupancy is near seven-year highs, while assisted living has dipped to six-year lows, the report pointed out. At the same time, assisted living is staring down the barrel of oversupply issues. New independent living construction is 4% of stock versus 8% for assisted living.

This is not great news for “Big 3” REITs Welltower (NYSE: HCN), Ventas Inc. (NYSE: VTR), and HCP Inc. (NYSE: HCP), as they hold more assisted living than independent living. While the industry overall is pretty evenly divided between the two asset classes, the REIT senior housing portfolios are weighted more heavily toward assisted living than independent living: roughly 2/3 AL to 1/3 IL, according to Green Street.

Don’t expect the REITs to abandon assisted living and shift over to independent living, though. They’re long-term investors, and assisted living tends to be more stable over the long-term since it is more needs-based than independent living, which can see its performance dip and surge along with the broader economy.

“I believe they have a general preference for the needs-based AL product, and I don’t think they would attempt to make dramatic portfolio changes under the guise of a cycle-timing call,” Knott told Senior Housing News.

Still, investors are sure to be interested in knowing the extent to which REIT performance could be affected by the current assisted living environment—especially given that the REITs have increased their RIDEA exposure significantly in recent years. This means a slowdown in a property’s net operating income (NOI) will be felt by the REIT owner as well as the community’s operator.

Irvine, California-based HCP did provide some new data for the third quarter of 2016, separating out NOI growth for assisted living and independent living, Knott and Suh noted. This data showed that assisted living NOI had indeed declined slightly, while independent living NOI was “healthy.”

HCP has a much lower assisted living RIDEA concentration than its rivals, Chicago-based Ventas and Toledo, Ohio-based Welltower, the report stated. While standing by their argument that RIDEA likely is a good long-term bet for the REITs—which they laid out in a separate report recently—Knott and Suh emphasized that this exposure to assisted living is something for investors to be aware of and monitoring moving into 2017.

Written by Tim Mullaney

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