BMO Capital Markets: Senior Housing Faces ‘Elongated Recovery’ Through 2025

Senior housing’s post-coronavirus recovery may take longer than some expect, with cash flows and occupancy not returning to pre-pandemic levels until 2025.

That is according to a new report on the sector from BMO Capital Markets (NYSE: BMO). The Toronto-based investment bank and financial services firm, using proprietary modeling, studied historic market net absorption trends and considered factors such as a slowdown in new development to come to that conclusion and is taking a more bearish outlook on the industry, as a result.

The estimate on cash flows rebounding to pre-pandemic levels is more conservative than the industry consensus of two years, Analysts John Kim and Juan Sanabria wrote in the report.

The BMO analysts are also taking a pragmatic view toward an occupancy rebound in senior housing, and are cautioning against optimism around a surge in demand in the year’s early months, as coronavirus vaccines become accessible to senior housing and long-term care facilities.

“We expect sequential increases in occupancy starting [the second quarter of 2021] after declining about 12% to the mid-70% range through [Q1],” they wrote.

BMO’s analysis led the firm to downgrade health care real estate investment trusts Welltower (NYSE: WELL), Ventas (NYSE: VTR) and National Health Investors (NYSE: NHI) to underperform in 2021.

In the cases of Toledo, Ohio-based Welltower and Chicago-based Ventas, Kim and Sanabria cited implied growth in the REITs’ respective senior housing operating portfolios (SHOP) at valuations that are currently unrealistic. Murfreesboro, Tennessee-based NHI, meanwhile, was downgraded in part due to risks associated with its exposure to triple-net leases with its operators.

NHI and other REITs have offered rent relief to operators through the pandemic, and the BMO analysts anticipate that further cuts or deferrals could come, given that Covid-19 currently is surging in various parts of the country.

“In periods of distress, NNN leases tend to behave like operating leases with SH rent coverage already at ~1x EBITDAR before factoring in the full Covid-19 impact or CapEx requirements,” they wrote.

In a statement to Senior Housing News, Ventas stressed that it remains focused on the health and safety of its residents and frontline workers in its communities, and the rollout of coronavirus vaccines will facilitate a turnaround as it accelerates.

“We remain confident in the resiliency of demand for senior living and the value senior living provides for residents and their families,” Ventas Executive Vice President, Senior Housing, North America Justin Hutchens said.

BMO was more optimistic about two other REITS. Sabra Health Care REIT (Nasdaq: SBRA) was upgraded to market perform, while CareTrust REIT (Nasdaq: CTRE) was upgraded to outperform.

These REITS have a higher exposure to skilled nursing, which has received more substantial and consistent government support during the pandemic. Kim and Sanabria noted that Sabra worked to improve its balance sheet during the pandemic, which now stands at 5.5x net debt/EBITDA, including joint ventures, while keeping an eye on maintaining its BBB- credit rating.

“Although we are cautious on SH (25% of NOI), we do not see the same level of upside priced into the stock as with Welltower or Ventas,” they wrote.

Overall, BMO remains bullish on senior housing in the long-term. New supply, which was beginning to moderate pre-pandemic, is expected to slow down further as developers and owners continue to face constrained lending environments. But Kim and Sanabria also warn that higher levels of price competition and growing concessions as operators begin to rebuild occupancy. Concessions, notably, are already increasing.

“Post pandemic, we expect period-end occupancy in our base case scenario to increase by 150-200 basis points per annum with outer year supply a key wild card,” they wrote.

This is the second time in as many months that a financial services firm sounded a warning about a sluggish recovery.

Last month, Scotiabank (NYSE: BNS) released a survey on senior housing sentiment suggesting that senior housing occupancy would not begin to bounce back until mid-2021 as seniors postpone moves until the pandemic is under control, and occupancy for real estate investment trusts would not return to pre-pandemic levels until 2023.

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