The coronavirus is particularly dangerous for older adults and spreads easily in group settings. That's a double whammy for senior housing real estate investment trusts (REITs) like Omega Healthcare (OHI -0.03%) as well as more-diversified healthcare names like Ventas (VTR 0.11%) and Welltower (WELL 0.83%), which both have large senior housing portfolios. But there's 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 that the pandemic has had on senior housing REITs. One of the best examples is Omega Healthcare, which is one of the largest nursing home landlords, with over 900 properties. In early April, it was forced to announce that it had yet another tenant that was having difficulty paying its rent. At this point, operators representing roughly 18% of the REIT's rent roll are struggling to pay what they owe to Omega.
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There are contingencies in place to help offset the impact of such problems. That includes security deposits and other collateral that Omega can tap to mitigate the financial impact. Meanwhile, it is working with the tenants to help get them back on track, bringing in new tenants where appropriate, and selling weaker assets. So the REIT is muddling through this period as best it can. But it won't be pretty and 2022 will very likely be another difficult year. And yet there are glimmers of light at the end of the tunnel. Here are three things investors will want to watch closely.
1. Turning customers away
During Omega's fourth-quarter 2021 earnings conference call, CEO Taylor Pickett noted that "staffing shortages have limited many facilities' ability to admit new residents." Moreover, that has resulted in a building number of potential residents stuck in hospitals who would normally have been transferred to a nursing home. So, it appears that there is still material demand for senior housing.
Unfortunately, the key factor to watch is still staffing, since nursing homes and other senior housing assets are required to have certain staff-to-patient ratios. But, as staffing issues get ironed out, there appears to be a strong opportunity for increased occupancy growth.
2. More and more customers are on their way
The long-term story in the senior housing space has been the aging of the baby boomer generation. The pandemic didn't change that story. In fact, Welltower recently highlighted that 2022 will be the first year in a long time that the growth in the 80+ population will exceed 3%. That trend, meanwhile, is expected to continue for the foreseeable future, and perhaps even accelerate.
This is having a material impact on the senior housing market as well. Welltower also noted the industry has seen "UNPRECEDENTED senior housing absorption in recent quarters." The company emphasized the word unprecedented to highlight just how material the absorption has been of late. So, despite the headwinds, demand looks robust today and there are strong underpinnings for continued strength in the future.
3. Rents are going up, up, up
Inflation has been a growing concern across the globe, but that has some positive implications for senior housing REITs. For example, Ventas recently noted that it is projecting annual rent increases of 8% in 2022 for its senior housing operating portfolio (SHOP), which is a full three percentage points higher than average.
Like many other senior housing REITs, Ventas both owns and operates some assets, which gives it a very clear view of how things are going. While there are still headwinds to contend with, the ability to push through material rent increases bodes well for the future and, given Welltower's comments on demand, suggests senior housing will, eventually, start to see a double benefit from higher occupancy and historically large rent increases.
Not out of the woods just yet
Despite these positive signs, there are still troubles to deal with in the senior housing space. That's particularly true in the nursing home niche that Omega serves. But, for long-term investors, there are strong reasons to maintain a positive view of the future. And that could make owning these names, despite ongoing fundamental weakness, a worthwhile endeavor for risk-tolerant investors.
