As of May 22, there have been more than 1.6 million confirmed cases of COVID-19 in America, with almost 95,000 deaths. One of the hardest-hit groups in this pandemic has been seniors living in nursing homes -- by one estimate, they account for nearly 40% of all COVID-19-related deaths nationwide.
As a result, stocks of healthcare mortgage REITs, such as Healthpeak Properties (NYSE:PEAK), are trading for cheap valuations. Will the company be able to rescue its business amid this devastating outbreak? Let's find out together.
Business is not well
In total, senior homes account for more than one-third of Healthpeak's assets, and that business has been hit hard. In April, the number of new move-ins for the company's senior home operating portfolio declined by 73%. Occupancy was down 3% month over month, to 82.2%, and there was a 22% increase in the number of new move-outs.
For the continuing care segment (which offers different levels of care through the end of life), the drop in new move-ins was even worse -- 89%. The company has also seen new sales leads decline by about half within the course of the quarter. While management is optimistic about a rebound in key performance metrics, there are ample risks up ahead which may indicate otherwise.
Multiple sector headwinds
The first risk facing Healthpeak and other healthcare mortgage REITs in general is (perhaps ironically) the issue of trust. With so many COVID-19-related deaths occurring in senior care homes and nursing facilities, I think it's naive to assume key metrics like number of new move-ins and occupancy rates will just rebound once the first round of the pandemic subsides, which brings me to my next point.
There has never been a pandemic without a second wave in recorded history. In my opinion, the issue of a second global epidemic of COVID-19 is a question of when, not if. For nursing homes, there are a lot of questions left unanswered.
Will we continue to see a massive spike in deaths of seniors at these facilities as we did during the first wave? Is it wise or ethical to accept new move-ins between waves, or before the pandemic is fully contained? Do nursing home operators have the appropriate manpower and capital to contain outbreaks?
Unfortunately, the uncertainty will no doubt bring up the problem of liability and potential lawsuits against nursing facilities, which has received little media coverage. Once the dust settles, families of residents who died could accuse nursing homes of negligence in lawsuits; indeed, some already are. Even if nursing homes prove they have taken every single precaution they can to contain the spread of COVID-19, the sheer number of potential lawsuits will no doubt be a drain on their capital just when it comes to preparing a defense.
Takeaways for investors
It may take years for seniors and their families to regain their trust in nursing homes after this crisis. At the beginning of May, 54 out of 222 senior housing properties owned by Healthpeak had confirmed cases of COVID-19 among their residents. Of those 54, 31 have reported COVID-19-related deaths. At least half of the company's senior housing communities are not accepting new move-ins.
I predict the company's share price may suffer yet another material decline at the beginning of the second wave of a COVID-19 pandemic, and the erosion of trust in the safety of senior housing homes will put Healthpeak and the industry as a whole at risk on a longer-term basis.
With a price-to-earnings ratio of 11 and a dividend yield north of 6%, Healthpeak may seem like a great dividend stock to own at a bargain price. However, as I outlined above, the sector as a whole has significant issues to overcome to reassure investors (and seniors, and their families) that senior care homes can operate safely amid the pandemic. Right now, this doesn't seem like the case. While Healthpeak's other segments -- medical buildings and life sciences -- are expanding their net operating income, I think the dangers of the senior care segment are more relevant. Investors can and should look for other dividend stocks in healthcare that are much safer.