BMO Analysis: 50% Decline a Worst-Case Scenario, But Historically Low Senior Housing Occupancy Could Be Coming

Senior housing occupancy could fall by as much as 50% this year due to Covid-19 — as Bloomberg reported — but this is a worst-case scenario, according to BMO Capital Markets Analyst John Kim. Less dramatic occupancy declines are more likely, yet even these relatively gentler drops could put occupancy at historically low levels.

BMO is modeling a base case of a 14% total occupancy decline over the next four quarters for the senior housing operating portfolios of the largest real estate investment trusts (REITs) in the sector, Kim told Senior Housing News. This assumes normal rates of attrition but a lower than usual volume of move-ins.

Occupancy on a nationwide basis stood at 88% as of Q4 2019, according to data from the National Investment Center for Seniors Housing & Care (NIC). So, applying a 14% decline from that level would put occupancy around 74%. By comparison, when occupancy hit 87.9% in Q2 2018, that represented an eight-year low.


These projects come against a relatively positive backdrop, given that senior living occupancy did not crater in the first weeks of the Covid-19 outbreak in the United States, with some providers even clocking increases. Last week, executives with Capital Senior Living (NYSE: CSU) said that current conditions do not lead them to foresee occupancy dropping into the 60% range. And other equity analysts in the space are also making a wide range of predictions in terms of how Covid-19 will affect occupancy, with scenarios ranging from mild to catastrophic. For instance, Green Street advisors projected an 8% hit to occupancy, if the U.S. Covid-19 infection rate is 50% and the mortality rate for seniors is 15%.

Several factors inform BMO’s base case occupancy projections. Move-ins that were scheduled prior to the coronavirus crisis will be completed, and meanwhile sales and marketing efforts have been disrupted by the pandemic. This will slow future occupancy growth, and REITs are already reporting occupancy declines in the second half of March.

For instance, New York City-based REIT New Senior (NYSE: SNR) reported that total move-ins were down 30% in March versus January and February averages. New Senior’s portfolio consists of independent living properties. Independent living may fare worse in Covid-19 than assisted living and memory care, given that move-ins are less dependent on need, Kim believes. He does not cover New Senior specifically.


Going forward, move-ins could slow even more dramatically, if communities with active Covid-19 cases stop taking new residents, while fear of infection dampens consumer demand, Kim noted. In the worst-case scenario, move-ins are suspended on a large scale.

Providers have been working furiously over the last weeks to boost infection control efforts and prevent Covid-19 cases, but the virus is infiltrating more senior housing and care settings across the country. More than 400 long-term care facilities had active cases as of April 2 — a 172% increase over the previous week, NBC News reported, citing CDC data. In New York state, the current epicenter of Covid-19 in the United States, 15% of deaths have been associated with nursing homes and 4% of deaths have been associated with assisted living facilities.

Even as the Covid-19 pandemic continues in the weeks and months ahead, senior housing construction projects that are underway could keep coming online, putting further pressure on occupancy. Given current development pipelines, supply could increase this year by 3% of existing inventory, Kim said. This doesn’t factor in delays related to Covid-19, but supply will still be delivered in this market, he added.

As senior housing occupancy takes a hit, so will operating margins. BMO’s base case analysis projects a 600 basis point decline in operating margins over the next year.

“It would be almost a linear drop to margins if there is a drop in occupancy,” Kim said.

Near-term expense pressures could be mitigated if operators can cut overhead and reduce staffing in response to lower occupancy, he noted. However, it’s also possible that expenses will rise as Covid-19 enters more senior housing communities, and providers will be squeezed as they provide high-cost care to these vulnerable older adults while seeing their census — and revenue — decline.

As with most aspects of the Covid-19 crisis around the globe, keeping in fear in check despite myriad uncertainties and potential dire outcomes is difficult but necessary.

“That’s what makes this environment so challenging,” Kim said. “I think that’s the reason why a lot of the health care REITs … are trading at historically low multiples, because [there are] so many unknowns at this time.”

Companies featured in this article:

, , ,