Headwinds Batter Senior Housing REITs as 2018 Begins

It’s still early in what analysts had predicted would be an “eventful” earnings season for health care real estate investment trusts (REITs), but several telling themes have emerged in the reports released thus far, and they show a industry under duress.

Beyond a harsher-than-normal flu season and concerning levels of new supply, health care REITs—and senior housing REITs, specifically—are dealing with the effects of new federal legislation, pending asset sales and uncertainties in various health care sectors.

Additionally, it’s unlikely that senior housing fundamentals will improve at all in 2018—though that may change the following year.

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Headwinds galore

As a group, health care REITs have “taken it on the chin” this year, according to an analyst note dated Jan. 22 from Mizuho Securities USA LLC.

Turning to a different metaphor, these REITs are currently facing a “perfect storm” of headwinds, spurred by U.S. tax reform, unknowns with respect to the skilled nursing and hospital sectors, rising interest rates, and company-specific risks related to pending asset sales, the firm specified.

During recent earnings calls for HCP, Inc. (NYSE: HCP), National Health Investors (NYSE: NHI) and Ventas, Inc. (NYSE: VTR), several of the factors contributing to this tumultuous environment were addressed head-on.

On the tax question, though lower corporate rates and other provisions could be a boon to businesses, the recent comprehensive package of reforms also has some REIT downsides. Irvine, California-based HCP, for instance, incurred a $17 million non-cash charge resulting from the corporate tax rate changes enacted by the Tax Cuts and Jobs Act, which was signed into law in December 2017.

In the last several weeks, stock markets have been extremely volatile, with some pointing to recent changes in leadership at the Federal Reserve, and potentially more aggressive moves on interest rates coming from the central bank. NHI President and CEO Eric Mendelsohn, admitted during the the Murfreesboro, Tennessee-based REIT’s earnings call that it will be watching interest rates very closely this year and noted that the company is in a period of price discovery as buyers work to sort out pricing and cost of capital.

Then there are ongoing issues that REITs have been dealing with, such as how to handle their exposure to Brentwood, Tennessee-based Brookdale Senior Living (NYSE: BKD), the nation’s largest senior living operator, which has faced a slew of challenges in the last three years. At Chicago-based Ventas, questions continue to swirl around the REIT’s current Brookdale assets, especially given that many of Ventas’ Brookdale leases are set to expire in 2019.

So, for Ventas, 2018 could involve a “disposition plan…a ramp in early lease renewal activity, or perhaps a combination of the two,” according to Feb. 9 note from Mizhuo. Still, “much of it has to be addressed this year so that VTR isn’t left with its backs against the wall.”

Getting worse, then better

Senior housing fundamentals, meanwhile, will likely get worse before they get better—and they probably won’t get better until next year.

“Our view is that fundamentals in seniors housing worsen before they improve,” Chad Vanacore, analyst at Stifel, told Senior Housing News. “However, we believe we see a bottoming in 2018 and improvement in 2019.”

That timing is contingent in part on the delivery of new supply to certain markets around the country. Operators—including Brookdale—have come under occupancy and labor pressure in recent quarters as new competitors have opened their doors, and REIT landlords have felt the pain. But new supply coming online is expected to taper over the course of this year.

All the while, it’s fair to remain optimistic about the senior housing industry in general, given longer-term demographics.

“Longer term, we believe improving supply/demand coupled with growing demographics of senior population gives rise to multiyear period of growth,” Vanacore concluded.

Still, in the meantime, investors do not appear keen on the senior living REITs. As of market close on Tuesday, Ventas, NHI and HCP were all down between 1% and 2.17%.

Written by Mary Kate Nelson

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