Reg's Blog

Friday Feature: REIT Update

Like all healthcare/senior housing investments during the pandemic, REITs experienced turbulence and stagnant growth. Coming out of the pandemic, the outlook has started to brighten but, challenges remain in adjusting REIT portfolios. The adjustments are fundamentally, selling under-performing assets within their portfolios.

Rebounds in occupancy are providing some bright spots though assets within, remain a bit murky for most senior housing dominant REITs. Nursing home concentrations continue to lag in terms of recovery as average plant age remains “old”, occupancies are depressed (80% ish), operating costs have increased faster than revenues, and liability headwinds are increasing. Yet, some of the larger REITs are seeing their Senior Housing Operating Portfolios more favorably these days post Covid, primarily as product demand remains strong (demographics) and supply in relation, is rather flat to somewhat down (no real building going on). The strongest performance elements remain housing vs. health care or Independent, Assisted and Memory Care versus skilled nursing.

Dissecting where REITs are at, I took and in-depth look at two of the largest with extensive senior housing portfolios – Welltower and Ventas. Each has a different operating approach with Ventas, strictly providing investment and business guidance and infrastructure services and Welltower, actually providing direct management (though not for every asset). In late 2022, Welltower received permission from the IRS to direct manage 45,000 Independent Living units within its portfolio. Below is a summary of where each REIT is at and what they see as an outlook for the remainder of 2023 and early 2024.

Welltower:  First quarter results were better than expected with year-over-year same shop net income growth of 11% advanced by net operating income growth within the senior living portfolio of 23.4%.  The drivers were year-over-year occupancy and revenue growth per occupied room of 6.8%

From an investment perspective, Welltower did $785 million gross of investment activity comprised of $529 million in acquisitions and funded loans alongside $287 million in development funding.  Within this development number were four projects at $57 million.  There was $92 million of property dispositions and loan payoffs.

Welltower continues to rebalance its senior housing property portfolio, reducing SNF holdings and concomitant risk concentration.  As part of this plan, Welltower continued to transition and sell its Pro Medica operated facilities (147 SNFs) to Integra Health Properties. In January, Welltower sold to Promedica, a 15% interest in 31 SNFs for $74 million.  This represents the second piece of a Welltower/Integra 85/15 joint venture.  The remaining components will finalize in 2023.

Going forward, Welltower is expecting continued occupancy improvement to drive same shop operating revenue gains of 9.5%.  Improving labor outlook in terms of hiring and retention is also adding positivity to improved performance outlooks.  Year-over-year occupancy gains are projected at 230 basis points. From their investment presentation: Positive revenue and expense trends are expected to drive YoY SS SHO Portfolio NOI growth of 17% – 24%. 

As the senior housing industry has headwinds, Welltower will no doubt experience some.  The question is, how much and when.  Higher interest rates and a stronger dollar will affect dividends.  The same, could create a recession and thus, drag some occupancy rate projections downward.  A recessionary job market, however, could add incremental labor gains at softer prices (wages).

Ventas: Ventas first quarter earnings report is set for release on Monday, close of market.  We can, however, see a similar recovery trend for Ventas as with Welltower, improving occupancy, more stable expenses, and increasing same shop revenues via improved pricing and occupancy. Fourth quarter 2022 saw an overall portfolio occupancy improvement to 82.5% and a Net Operating Income for the portfolio of 19.1%. 

Like Welltower, Ventas is bullish on demographic trends noting the growth percentage of the 80 plus segment/cohort of the population.  In the next five years, the growth rate for this group is forecasted at 23%.  Couple this demographic shift with a historically low new unit pipeline (COVID and interest rate impacted), unit absorption of existing product begets a favorable occupancy trend, at least in the near term. For Ventas, 99% of their portfolio is in locations with no new construction starts within 5 miles.  A primary market for a senior housing location is 5 to 7 miles.

For occupancy growth, Ventas is projecting year-over-year improvement of between 130 and 170 basis points – a bit less bullish than Omega. Overall portfolio revenue growth of 8% is the forecast with NOI growth at 5%.  They are expecting improved hiring and moderating inflation, along with improved topline revenues, to generate the NOI improvement.

Rent increases and care rate increases are forecasted at 10% and 11% respectively.  What is interesting to me is the forecast on expense improvements.  Labor is pegged at 43% of revenue (61% of expenses) with only 2% equating to contract labor.  That is exceptionally low in today’s market and certainly, not indicative of a trend I have seen among most operators.  In all other expense categories, Ventas if forecasting decreases (-5% taxes, -4% in food, utilities, and maintenance, and -2% in insurance).  This pegs year-over-year expense growth at 5% vs. 2022, at 8%.

To me, the risks of achieving these results are similar to Welltower.  First, moderating labor cost may or may not materialize though, a recession could help.  Interest rate increases could push the economy into a recession, cramping occupancy gains.  Energy is a wild card for me from an inflationary perspective as during a recession, gas/fuel oil will fall via weaker demand and as stronger dollar yet worldwide turbulence, may throw a wrench into this outcome. Insurance costs are rising so it’s odd to me that a savings of 2% is attainable across any senior housing portfolio.

After Monday, I’ll take a peek at Ventas first quarter results and then, add it to my files.  Later summer, I’ll take an overall look at the REIT sector and maybe, drop a quick update to this post.

TGIF!

May 5, 2023 Posted by Reg Hislop III | Health Policy and Economics, Senior Housing | Economics, Industry Outlook, Market Trends, Money, Performance, REITs, Strategy, Trends | Leave a comment