Pent-Up Demand Remains Elusive But Senior Living Occupancy Begins to Recover

Coming into 2021, many senior living providers hoped that the pandemic had created substantial pent-up demand, which would lead to a rapid occupancy rebound once vaccinations reached critical mass.

Over the last two weeks, Q1 financial reports showed positive occupancy trends, but the census gains might not be due to pent-up demand — a topic that received a lot of attention on the earnings call for Ventas (NYSE: VTR).

Executives with the Chicago-based real estate investment trust (REIT) noted that April sales leads in the senior housing operating portfolio (SHOP) were at 104% of 2019 levels. That’s not reflective of massive pent-up demand, in the view of EVP of Senior Housing Justin Hutchens.

“When we think about pent-up demand, I think of 120%, 130%, some big number that’s lined up,” Hutchens said.

If substantial pent-up demand does not exist, hopes for a dramatically quick occupancy bounceback become dimmer.

But, there are reasons to remain optimistic that more pent-up demand will materialize and drive move-ins later this year. And — although a lumpy senior housing recovery is likely in the months ahead — the return of what Ventas execs termed “organic demand” is a very positive story, and reflects the strong performance of senior living companies during the pandemic.

The Ventas perspective

Many public owners and operators told a similar story about occupancy in their earnings calls, describing a tough start to 2021 but an inflection point late in Q1 and early Q2 as vaccination clinics wrapped up.

Ventas fit that pattern:

— March and April SHOP occupancy improved by 190 basis points from pandemic lows

— April move-ins totaled 1,880 residents, the highest number since June 2019

These statistics led BMO analyst Juan Sanabria to ask Ventas leadership this question during the earnings call: “Are you seeing pent-up demand, presumably some level, given you’re over 100% of what you saw in ‘19?”

The responses from Hutchens and Ventas CEO Debra Cafaro — that they are not observing much pent-up demand — surprised me, and seemed to surprise the analysts on the earnings call, several of whom asked follow-up questions related to this issue.

Cafaro and Hutchens offered several explanations for their perspective. First, they cited messages they are receiving from operating partners.

“We’ve spoken with operators; they’re not having leads come to the doorstep and say, I’ve been waiting for the vaccine, or I’ve been waiting to make this decision,” Hutchens said.

Cafaro put it this way: “Our bias is that this is organic demand that is based upon the need-based nature of the communities and the availability of the communities … We aren’t hearing from good sources that it’s anything other than move-ins that would have moved in now anyway.”

They attributed the uptick in leads and move-ins to the return of referrals that had dried up during the pandemic. For example, current residents were not referring their friends and family at the height of Covid-19, when some communities were not accepting new residents in any case. Now, this referral stream is starting to resume.

Also, professional referrals from health care providers slowed, as elective surgeries such as hip replacements were put on hold last year. Referrals from these professional sources are still only at about 50% of the pre-pandemic run-rate, Hutchens said this week, at the RBC Capital Markets Global Healthcare Conference.

Move-ins coming from these referral sources could be seen as “pent-up demand,” assuming that some of these new residents would have been referred last year in the normal course of business.

But on Ventas’ earnings call, Hutchens pointed out that the extent of this “pent-up” demand might not be that great, considering that referral activity did not fall off a cliff last year; from June 2020 through the end of the year, SHOP leads remained at about 80% of pre-pandemic levels.

“It really is sustained need-based demand from a growing demographic, and that is very positive,” Cafaro said, of what is behind the recent growth in occupancy.

Accentuating the positives

The return of organic demand should be a point of pride for the sector, not only reflective of a quick and effective vaccination effort, but also a sign that the industry’s handling of the Covid-19 pandemic was strong enough to maintain the trust of customers and referral partners — despite a flood of negative press that conflated private-pay providers with nursing homes, and survey data that showed an erosion of consumer confidence in assisted living and memory care.

Cafaro understandably did not want a debate over pent-up demand to overshadow these positives, telling analysts she did not want to “quibble over words” in how to characterize the resurgent activity.

But the analysts’ interest in pent-up demand is also understandable, as it will affect the pace and nature of occupancy recovery.

For now, executives with the publicly traded companies are not predicting the timeline for occupancy recovery, although they are turning more bullish on the near-term.

For instance, Ventas management guided to 120 basis point occupancy improvement in Q2 2021, which was above the 50 bps increase previously estimated by Baird Senior Research Analyst Amanda Sweitzer. She now sees a potential 10% to 20% boost to near-term move-ins, thanks to factors such as increased respite stays and the return of higher-conversion lead sources such as health care providers.

Source: Ventas

There are other reasons to hope that demand is still pent-up and will break through in the near future.

Last fall, Scotiabank surveyed 264 U.S. citizens considering moving a loved one into senior living, and found that among those delaying a move, 71% were holding out for at least six months. Analysts with the firm projected that 50% of the delayed move-ins would start to return during the 18-month period starting in July 2021.

And unlike Ventas, Invesque’s earnings did send a strong message on the existence of pent-up demand; the company reported that in March, its affiliated operator Commonwealth Senior Living had the biggest month for move-ins in its 20-year history. Here’s what Commonwealth CEO Earl Parker told SHN:

“Based on feedback from our sales community sales teams, I believe these numbers reflect a significant number of families who deferred the decision to move earlier when the restrictions were greater, and feel more comfortable now with high percentages of vaccination and our re-opening of visitation, programming, and communal dining.”

Complications ahead

As the somewhat mixed messages from different owners and operators suggest, the Covid-19 recovery will almost surely be lumpy in the months ahead.

One complicating factor could be the pace of move-outs. Lower occupancy means lower move-out rates than usual, Ventas CFO Bob Probst noted; as occupancy increases, the move-out rate will also normalize.

Also, financial recovery might lag occupancy recovery. Baird slightly tempered its margin expectations for Ventas, “as the partial rollback of Covid costs is offset by higher occupancy-related expenses,” Sweitzer wrote in a note.

The ability to maintain pricing power will be important to protecting margin, and driving rates could become increasingly difficult in an ultra-competitive lease-up environment — as Brookdale Senior Living CEO Cindy Baier noted, the company is seeing “everything you can imagine” from competitors.

And, occupancy recovery will occur faster for some operators than others; the pandemic has already bifurcated the industry into high- and low-census providers, and those that were able to maintain higher occupancy will obviously have an easier time returning to pre-pandemic levels.

Operators with newer portfolios — including buildings just coming online — appear to be in a strong position. The Springs Living opened three communities as Covid-19 hit, and these have seen a 30% occupancy increase, CEO Fee Stubblefield said during a recent SHN+ TALKS. Aegis Living CEO Dwayne Clark said that the provider’s newest developments are experiencing “unprecedented” pre-leasing, and new CCRCs from Mather and Kendal are also pre-leasing strongly.

The demand for new product is another reason to be bullish on the future of senior living, as it indicates that innovations in design and operations are resonating with older adults and their loved ones. And whether post-Covid occupancy recovery happens quickly or more slowly, the ability to win over the rising generation of consumers will dictate the future success of the sector.