Senior housing-related stocks fell sharply on Thursday amid a dramatic market plunge tied to coronavirus fears.
The Dow Jones Industrial Average was down 10% at market close, in the worst drop for the index since “Black Monday” in 1987. The Nasdaq composite was down 9.4% at the close.
Several senior housing-related stocks fell even more precipitously, including the “Big 3” real estate investment trusts (REITs).
Chicago-based Ventas (NYSE: VTR) was down 27.88% at market close; Toledo, Ohio-based Welltower (NYSE: WELL) declined 18.73%; and Irvine, California-based Healthpeak (NYSE: PEAK) was down 13.59%.
Other REITs with significant senior housing portfolios were not spared. Notably, Irvine, California-based Sabra Health Care REIT (Nasdaq: SBRA) fell 27.74%. REIT selloffs already had started to occur on Wednesday, on news that the novel coronavirus known as Covid-19 had been diagnosed at a Sabra-owned skilled nursing facility in California. That situation has been “contained,” Sabra CEO Rick Matros told Senior Housing News.
Murfreesboro, Tennessee-based National Health Investors (NYSE: NHI) shares were down 21.97% at market close on Thursday. CEO Eric Mendelsohn believes there is some market “overreaction” to coronavirus fears, he told SHN. Leaders with Westlake Village, California-based LTC Properties (NYSE: LTC) agree that Covid-19 will not dampen the long-term prospects for senior housing and care, as they made clear in announcing a buyback program for up to 5 million shares of outstanding common stock on Thursday.
“As the world continues to work to find solutions to the current global pandemic, we have the highest confidence in our operating partners and their employees as they fight on the front lines to take care of those most at risk,” LTC CEO Wendy Simpson said in a press release.
LTC shares declined 20.12% on Thursday.
Publicly traded senior housing providers also experienced share price declines on Thursday. Dallas-based Capital Senior Living (NYSE: CSU) dropped most sharply, falling 38.20% to end the trading day at $0.63 a share. Brentwood, Tennessee-based Brookdale Senior Living (NYSE: BKD) was down 17.21% and Newton, Massachusetts-based Five Star Senior Living (Nasdaq: FVE) was down 10.03%.
Evaluating senior housing risk
The REITs and senior housing providers already were facing challenging market dynamics going into Thursday.
Covid-19 presents a stark threat to senior living residents, given that the infection most often proves fatal for older adults. The overall fatality rate for Covid-19 is 2.3% overall but 15% for those older than 80, according to a study of 72,000 Chinese patients that was published in JAMA in late February.
Although a skilled nursing facility in Washington state was hit early and hard by Covid-19, only a handful of U.S. senior living communities have reported diagnosed cases. However, the industry is widely exposed to the coronavirus, and infections are spreading rapidly. As of late Wednesday afternoon, 53% of all U.S. senior living communities were located in or adjacent to a county with a confirmed case, and that had risen to nearly 58% on Thursday morning, according to data that VisionLTC shared with SHN and sister site Skilled Nursing News.
This was the backdrop on Thursday, when the overall market plunge was precipitated by a confluence of factors, National Investment Center for Seniors Housing & Care (NIC) Chief Economist Beth Mace told SHN.
On Wednesday night, when the NBA suspended the professional basketball season and Tom Hanks announced he has the virus, the Covid-19 threat likely “became real to a lot of people,” in Mace’s view.
Also on Wednesday night, U.S. President Donald Trump delivered an address that may not have soothed investors.
“I would say that the markets were disappointed by the president’s speech last night, and that the markets are looking for more health care-related solutions, in addition to solutions to try to support the economy and the stock market,” Mace said.
She was not alone in this view that Trump’s message fell flat.
“President Trump in an extraordinary Oval Office address didn’t offer up major new ideas on stimulus and only said he’d propose a vague payroll tax holiday to Congress without strongly standing up for any firm size/magnitude,” wrote Ernie Tedeschi, policy economist for Evercore ISI, in a note quoted by CNBC. “This effectively kicks the issue to Congress which is still planning to go on recess next week.”
On Thursday, the Federal Reserve announced a number of additional actions intended to shore up markets, and the White House clarified policies around a ban on incoming travel from European countries. But the sell-off continued on Wall Street.
Although senior housing-related stocks fell across the board, some fared worse than others. Among the largest REITs, Welltower and Ventas may have been hurt by their larger exposure to operating risk via RIDEA, compared to Healthpeak.
This was already a trend taking shape this year, SMBC Analyst Richard Anderson observed in a note issued on Monday.
“The market appears to be voting along RIDEA exposure lines here, with investors favoring PEAK (down 2.2% YTD) and its relatively low senior housing RIDEA exposure, versus the significantly higher operating exposure at VTR (down 14.1%) and WELL (down 9.6%),” he wrote.
On the provider side, all three publicly traded companies have been going through portfolio restructuring and operational turnaround efforts in the last year, and so Covid-19 adds another challenge to existing ones. But like senior living providers across the country, all three companies have been putting sweeping prevention measures in place, leveraging their existing expertise in infection control. And, their efforts may be paying off, given how few confirmed cases of coronavirus have been reported in senior living communities thus far, Mace observed.
“Operators are taking [the virus] quite seriously to try to prevent the illness from coming into their properties, and this is what senior housing and skilled nursing does, they’re pros at trying to keep the flu out,” Mace said. “They’re well equipped, they know how to do it.”
However, just as the seasonal flu often is, coronavirus promises to be a drag on earnings in the near-term, given that infection control has entailed limiting non-essential visitors to buildings. This slows down or halts the sales process, meaning occupancy takes a hit — and if the Covid-19 situation makes consumers nervous about the risks of infection in congregate settings, a danger is that census will not bounce back quickly.
“It won’t affect the first quarter data, because we’re almost done, but might show up in Q2 data,” Mace said. “I think move-ins are going to be affected, certainly tours … it could affect the occupancy and the move-in rates and absorption.”
Absorption became “quite weak” in the periods following the Swine Flu in 2009-2010 and the severe influenza outbreak of 2017-2018, she said. However, with other issues like oversupply also playing a role, it’s difficult to say with certainty how large a part the flu played in those years.
At the moment, there is also uncertainty about how severe the problems will become in senior living communities, Mace noted. Staffing is one area of particular concern, as providers have already been struggling with high turnover rates, and if workers get sick or have to care for sick loved ones, replacing them or covering their shifts will be a severe test.
And, there is anxiety over the availability of necessary medical equipment and supplies such as gowns, masks and gloves. Earlier this week, the American Seniors Housing Association sent a letter to government officials, including Health and Human Services Secretary Alex Azar, pushing for them to make it clear that senior living communities should be among the top priority sites for distribution of supplies from the Strategic National Stockpile.
What happens next
Given that Covid-19 is a new virus, scientists are scrambling to learn more about how to combat it. In the meantime, uncertainty reigns.
“For now, no one can possibly know where this is headed, and at times, it is hard to separate the reality from the hype — and that is not to trivialize the unfortunate circumstances that have occurred thus far,” Anderson wrote.
Some lessons can perhaps be gleaned from countries where coronavirus struck earlier. In China, where the novel coronavirus originated and where it has infected and killed the most people, there are signs of containment. The city of Wuhan, which was hardest hit, recently closed its last temporary hospital for patients.
Should the United States follow a similar trajectory, there would be a three- to four-month “window of uncertainty” dating back to early or mid-February, Anderson wrote. And he conjectures that the greater sophistication of the U.S. health care system compared to China’s could speed up that timeline.
However, other observers have voiced the possibility that China, as a more autocratic government, was able to pursue an extremely aggressive testing regime and isolate patients in a way that will not be feasible in the United States. South Korea provides an example of a democracy that has rolled out an effective coronavirus response, which includes easily accessible testing at makeshift sites.
Anderson characterizes a Covid-19 turnaround as “inevitable” and describes a potential “sustained upward tear” in the stock market when that happens. And at that point, the same REITs that have been punished for their RIDEA exposures on the front end of coronavirus have the potential for more positive upside.
Coronavirus is also having huge consequences across the whole global economy, disrupting supply chains, battering the travel and tourism industry, and crushing small businesses that lose customers to illness or quarantines, to enumerate just a few effects of the pandemic. So, the economy as a whole appears to be heading for a recession, Mace said, which has mixed implications for senior housing.
In the Great Recession, occupancy declined and access to capital was constricted. However, the sector proved resilient — particularly assisted living, as a needs-based product. Already, other leaders in the sector, including Welltower CEO Tom DeRosa, have said that Covid-19 could in fact prove the value of senior living to consumers, who will see the benefits of high quality care and robust infection control.
In the longer term, Covid-19 does not change the demographics that are working in favor of senior housing and care.
“The senior housing sector is not going away,” Mace said.