The Covid-19 pandemic has sparked what one analyst is calling a “Great Reset” — and the result has been topsy-turvy for the senior living industry.
Investor sentiment may be shifting against senior housing in favor of the once-shunned skilled nursing sector. Related, the pandemic is helping some senior housing owners that have been working for years on turnarounds or reinventions, while Covid-19 is checking the momentum of others. And, the coronavirus crisis may be resetting the terms of an ongoing debate about senior housing capital structures.
Prior to the pandemic, senior living appeared an attractive real estate asset class in large part because of its private-pay revenue base and its large percentage of voluntary move-ins and move-outs, SMBC Nikko Securities America Analyst Richard Anderson wrote in a recent note to investors. Skilled nursing, by contrast, was seen as risky because of its exposure to stroke-of-the-pen Medicare and Medicaid reimbursement cuts.
Now, the “Great Reset” has changed the picture, Anderson wrote. The phrase Great Reset evokes “Great Recession” but applies more specifically to the effects Covid-19, he explained to SHN. Others have also noted that the pandemic is a chance to “reset” priorities and reevaluate conventional wisdom in order to launch new efforts — Prince Charles, for instance, is launching a “Great Reset” project to combat climate change.
In Anderson’s view, Covid-19 has reset some long-held perceptions related to health care real estate assets. Real estate investment trusts (REITs) are currently in the best position if they own life science, medical office buildings and skilled nursing facilities (SNFs), “in that order,” he believes.
Senior housing, on the other hand, appears a riskier proposition than it did a few months ago, when REIT portfolios were beginning to bounce back after a period of oversupply, and the influx of aging baby boomers was drawing ever closer. In the midst of Covid-19, senior housing portfolios are going through a steady occupancy decline that is “hard to watch,” Anderson wrote.
Furthermore, senior housing expenses are up, but financial assistance is all but nonexistent — despite massive government stimulus packages that have channeled funds to other sectors. Skilled nursing is among the beneficiaries of stimulus funds, with the federal government beginning to allocate $5 billion to nursing homes as of last week.
“Skilled nursing is suffering significant occupancy loss and terrible realities in spots, but financially has the most to gain from the various stimulus programs,” Anderson wrote. “It also has been hurt by the suspension of elective procedures, which are now turning back on as economies begin the perilous process of opening back up.”
If Covid-19 does lead to a resurgence in skilled nursing investment, the reversal of fortune will be dramatic indeed, considering the straits that SNFs were in just a few years ago. The industry was in the midst of “the most protracted and complex down cycle” in its history, George Hager, CEO of Genesis HealthCare (NYSE: GEN), said in 2017. Rising wages, lower reimbursements, managed care pressures and ongoing census erosion were among the challenges at the time, which caused some REITs to spin-off or sell large skilled nursing portfolios.
To be sure, skilled nursing still faces many of the same headwinds, as well as enormous challenges related to Covid-19. But while reliance on government payment systems is a risk in good times, being able to tap government support now is a boon. Despite a raft of bad headlines related to Covid-19 — and tragic situations at some facilities around the country — the needs-based nature of skilled nursing care should also help the sector bounce back quickly, particularly as Covid-19 testing and treatment protocols advance, or when a vaccine is developed.
Senior housing, by contrast, could experience a slower resurgence in demand until consumers are confident that Covid-19 is beaten, in Anderson’s view. Other analysts and senior housing executives have also raised concerns about how the pandemic might dampen demand.
The good news is that occupancy in independent living — which is more vulnerable to consumer confidence than assisted living or memory care — appears to have been resilient so far; the pure-play IL portfolio of New Senior Investment Group (NYSE: SNR) “largely outperformed the senior housing peer group,” BTIG Analysts Michael Gorman and James Sullivan wrote in an investor note. New Senior’s occupancy declined 130 basis points in March and 120 basis points in April, to settle at 86.2%. By contrast, the senior housing operating (SHO) portfolio of Toledo, Ohio-based Welltower (NYSE: WELL) declined 240 basis points in April alone, and executives at the REIT anticipate a 500 to 600 basis point decline in the second quarter.
Anderson does hold out the possibility that the health care real estate sector as a whole could “rip back up in dramatic fashion” if an effective Covid-19 treatment or vaccine is developed. In the meantime, though, the “reset” has altered the REIT outlook in some notable ways.
One winner may be Irvine, California-based Healthpeak (NYSE: PEAK), which has been in restructuring mode for several years. The REIT spun off a major skilled nursing portfolio, brought in new executive leadership, changed its name and rebalanced its portfolio with strong life science and MOB holdings in addition to senior housing. That portfolio mix appears well-suited to the demands of the moment, Anderson and other analysts have argued. Its 61% balance of life sciences and MOBs could offer “visible growth and a bridge to SHOP’s recovery phase,” BMO Capital Markets Analyst John Kim wrote in comment last week.
Another company that looks attractive today, in Anderson’s view, is Irvine, California-based Sabra Health Care REIT (Nasdaq: SBRA). Sabra faced some doubters after its $7.4 billion merger with skilled nursing-focused Care Capital Properties in 2017; on the senior housing side, its major operating partner Enlivant has been working steadily on improving a large turnaround portfolio. But Enlivant may be somewhat sheltered from the worst Covid-19 outbreaks due to its concentration in secondary and tertiary markets, and Sabra executives bring operational experience to its skilled nursing assets.
Perennial power players such as Welltower and Chicago-based Ventas (NYSE: VTR), on the other hand, may be hurt by their large senior housing exposure, particularly given their increasing focus on RIDEA operating partnerships.
In the near term, RIDEA translates to a “direct hit on earnings,” Anderson noted. In the midst of the pandemic, conservatively underwritten triple-net lease portfolios are showing their value.
Westlake Village, California-based LTC Properties (NYSE: LTC), for example, has “solid rent coverage” that helps offset the risks related to its senior housing exposure, Anderson wrote.
And though not addressed by Anderson’s note, executives with Murfreesboro, Tennessee-based NHI (NYSE: NHI) have touted that its senior living providers in triple-net leases — because they maintain full ownership of their businesses — have been in a better position to tap Payroll Protection Program (PPP) funds versus providers in RIDEA structures.
LTC and NHI were advocates for triple-net leases prior to the coronavirus pandemic, in an ongoing debate over the advantages and drawbacks of NNN versus RIDEA. The momentum toward RIDEA has been building for several years, as operators and owners alike said they prefer the alignment of interest and wanted to avoid lease escalators that could prove unsustainable in down markets. But others argued that triple-net leases are a proven capital structure that will endure, albeit with different approaches to escalators and more creative financial incentive programs for operators.
Whether Covid-19 will result in a triple-net lease renaissance is an open question — the potential downside for REITs is greater in RIDEA, but so is the potential upside once Covid-19 begins to wane, Capital One Analyst Daniel Bernstein recently told SHN. And sentiment around other issues, including how skilled nursing is viewed in relation to senior housing, and which REITs have the best portfolio composition given the future direction of health care and senior living, will no doubt continue to evolve.
Indeed, all types of health care real estate have “made a mark on the new environment,” Anderson wrote, but the pandemic “reset” is favoring some service lines and companies that may have a greater ability to “bridge that gap” between a pre-Covid and post-Covid world.