The coronavirus is particularly dangerous for the elderly and spreads easily in groups. It’s a double whammy for senior housing real estate investment trusts (REITs) like Omega Health (IHO -0.73% ) as well as more diverse health names like Sales (VCR -2.55% ) and well tower ( GOOD -2.42% ), both of which have large senior housing portfolios. But there is a light at the end of the tunnel. Here are three signs that 2022 could be a key inflection point for the senior housing industry.
No easy solutions
It is important to recognize the very real impact the pandemic has had on senior housing REITs. One of the best examples is Omega Healthcare, which is one of the largest nursing home owners, with over 900 properties. At the beginning of April, she was forced to announce that she had yet another tenant who was struggling to pay her rent. At this point, operators representing about 18% of the REIT’s rents are struggling to pay what they owe Omega.
Contingencies are in place to help offset the impact of such issues. This includes security deposits and other guarantees that Omega may leverage to mitigate the financial impact. During this time, he works with tenants to help them get back on track, bringing in new tenants when needed and selling weaker assets. The REIT is therefore getting through this period as best it can. But it won’t be pretty and 2022 will most likely be another tough year. And yet, there are lights at the end of the tunnel. Here are three things investors will want to watch closely.
1. Refuse customers
During Omega’s fourth quarter 2021 earnings conference call, CEO Taylor Pickett noted that “staffing shortages have limited the ability of many properties to admit new residents.” Additionally, it has resulted in a number of potential residents being stuck in hospitals who would normally have been moved to a nursing home. It therefore seems that there is still a material demand for housing for the elderly.
Unfortunately, the key factor to watch out for remains staffing, as nursing homes and other senior residences must have certain staff-to-patient ratios. But, as staffing issues are resolved, there appears to be a strong opportunity for further occupancy growth.
2. More and more customers are on the way
The long term story in senior housing has been the aging of the baby boomer generation. The pandemic has not changed this story. In fact, Welltower recently pointed out that 2022 will be the first year in a long time that the population growth of the over 80s will exceed 3%. This trend, meanwhile, is expected to continue for the foreseeable future, if not accelerate.
This also has a significant impact on the senior housing market. Welltower also noted that the industry has seen “UNPRECEDENTED absorption of senior housing in recent quarters”. The company emphasized the word unprecedented to highlight how big uptake has been lately. So, despite the headwinds, demand looks robust today and there is a solid foundation for continued strength in the future.
3. Rents go up, up, up
Inflation is a growing concern around the world, but it has positive implications for senior housing REITs. For example, Ventas recently noted that it expects annual rent increases of 8% in 2022 for its senior housing operation (SHOP) portfolio, which is three percentage points higher than average.
Like many other senior housing REITs, Ventas both owns and operates certain assets, giving it a very clear view of how things are going. While there are still headwinds to contend with, the ability to push through significant rent increases bodes well for the future and, given Welltower’s comments on demand, suggests that senior housing will eventually begin to reap the dual benefits of higher occupancy and historically high rent. increased.
Not out of the woods yet
Despite these positive signs, there are still issues to manage in the senior living space. This is especially true in the nursing home niche that Omega serves. But, for long-term investors, there are good reasons to keep a positive view of the future. And that could make owning these names, despite lingering fundamental weakness, a worthwhile venture for risk-tolerant investors.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.