Healthcare real estate investment trust (REIT) giants Ventas (VTR 0.92%) and Welltower (WELL 0.40%) both cut their dividends in the face of the coronavirus pandemic. That's how bad it has been for owners of senior housing. But don't get too upset, the long-term outlook remains strong. And rebounding occupancy numbers prove out the story.
The baby boomers are coming!
It's no secret that the giant baby boomer generation is cresting into retirement in large numbers. Although still healthy and active today, the cohort will eventually need more help with daily living. That's just a part of life, with demand for additional health-related care increasing as a person ages. Which is why it is so notable that between 2020 and 2030, the number of people aged 80 and over in the United States is projected to expand by around 50%. And, at the same time, the construction of new senior housing projects has slowed after peaking in 2017.
Image source: Getty Images.
That long-term story is what backs the future for healthcare REITs, but they still have to deal with the here and now. Since early 2020 that's included the coronavirus pandemic and its many variants. This illness is particularly deadly for older people and spreads easily in group settings. Which helps explain why Ventas, Welltower, Omega Healthcare (OHI 1.37%), and LTC Properties (LTC 0.92%), among others, have seen their businesses suffer. While Omega and LTC Properties haven't cut their dividends, their funds from operations (FFO) payout ratios have risen to worrying levels, and they have been dealing with tenants that are struggling to pay rent.
None of this changes the long-term opportunity that these REITs are working to take advantage of, but it certainly makes the near-term a lot more stressful for investors.
What to watch
So what's an investor to do? The key here will be occupancy. It costs a lot of money to operate a senior housing facility, and the more residents there are, the more people over which costs can be spread. If occupancy dips too far, a property will be unprofitable. But once occupancy gets above a certain level, covering rent becomes much easier. During Omega's second- quarter 2021 earnings conference call, for example, CEO Taylor Pickett noted that, "...in general, we need occupancy to return over 80% in order to meaningfully mitigate the cash flow reductions from a pandemic."
At the end of the third quarter, however, Omega's occupancy remained below that figure, at 76%. LTC Properties' occupancy is a little more granular, with private pay facilities operating at 77% occupancy and nursing homes at 71%. These two REITs predominantly lease their assets to others, so the lessees owe rent no matter what happens. But if they don't earn enough to pay that rent, well, then there are problems. The current numbers here are generally improving but clearly still have a ways to go if 80% is the target. Both, as noted, have been dealing with struggling tenants.
VTR Dividend Per Share (Quarterly) data by YCharts
Ventas and Welltower each have assets they lease to others, however they both also have senior housing properties that they own and operate (known as SHOP assets in the industry). The performance of SHOP assets, good and, specifically in 2020, bad, flows through to the top and bottom lines, which helps explain why these two REITs cut their dividends in the face of the pandemic. Welltower's SHOP occupancy was at 76.7% at the end of September, so it is basically in the same range as Omega and LTC Properties. However, Ventas' SHOP occupancy rose to 82.2% in the third quarter, suggesting it is starting to see a meaningful business rebound. Clearly, all senior housing REITs are not created equal here.
So, as you monitor this industry, keep an eye on occupancy because it is the key yardstick to watch to assess the senior housing recovery. It has been slowly trending higher, but most in the industry still have more room for improvement, even Ventas, which is already over the 80% threshold in its SHOP portfolio.
The trend is your friend
The key here is not to get overly upset about the near-term problems, given the long-term outlook for demand in senior housing. However, you should still monitor occupancy levels, using that 80% figure from Omega as a general yardstick, to see how well the healthcare REITs you're looking at are managing in this difficult environment. But it's the occupancy trends that may be most important. As long as occupancy levels are heading higher, REITs like Omega, LTC Properties, and Welltower are moving in the right direction. If occupancy starts to sink, though, you need to dig in and figure out what's going on -- it could indicate that it's time to start looking at other, better-positioned options in the space.
