The rapidly aging population is expected to be a boon for senior housing. After having a difficult few years during the Covid-19 pandemic, assisted and independent living facilities are on the road to recovery. Occupancy, while not at pre-Covid levels, is improving. Demand is increasing at the same time that new construction slows down due to the health crisis. “This is a very, very rare event in real estate in general, where demand trends are accelerating and supply is going to stagnate … for at least a couple of years,” said Connor Siversky, an analyst at Wells Fargo. . All of this, plus pricing power and moderating labor costs, is likely to lead to positive performance for those in the senior housing business, he said. Welltower and Ventas are the two big players in the space, and real estate investment funds are expected to benefit from the explosion in demand, several analysts said. Sales has an average rating of overweight and Welltower has an average rating of buy, according to FactSet. “Within senior housing, we remain confident in the ability of operators to recover [net operating income] lost during the pandemic due to the strong interest rate and affordability outlook,” Raymond James analyst Jonathan Hughes wrote in a note Friday. [skilled nursing facility] and housing performance for seniors.” All baby boomers will be over 65 by 2030 As baby boomers near retirement, they are looking for a variety of ways to live comfortably. That may mean aging out in their homes on as long as possible. It may also mean eventually seeking independent living facilities or even assisted living, depending on your health needs. According to the US Census Bureau. By 2030, 39 million Americans will be between the ages of 75 and 84, 25 million will be between the ages of 75 and 84 and 9 million will be 85 or older.Facilities, for example, are 85 and older, while 31% are between the ages of 75 and 84, according to the National Center for Assisted Living.There will also be a decline in the number of adult children available to care for their parents, according to data from the National Center for Investment in Housing and Senior Care.”You have this increasing level of need due to demographics, aging, higher acuity levels: people have more chronic conditions, more disabilities that they will need help with, and fewer caregivers,” said Caroline Clapp. , Senior Director of the NIC. The NIC anticipates the ratio of adult children ages 45 to 64 to adults age 80 and older to decline to 4 to 1 in 2031 from 7 to 1 in 2015. Separately, US Census Bureau data The US shows that by 2034, older adults will outnumber children for the first time in history. Declining Supply Combine that growth in the older American cohort with the amount of supply in the market. Much of the supply available on the market is old: almost half were built before 1998 and two out of three were built before 2006, according to the NIC. Construction starts on senior housing have slowed but are still underway, the organization said. “We haven’t seen a supply slowdown like this in a long time,” said Greg Kuhl, portfolio manager at Janus Henderson. “We always knew the demand would come because you could track these demographics, but the supply is slower because of a couple of things: The pandemic basically shut down construction, and since then we’ve had some difficulties in the financial environment.” has yet to fully recover from the pandemic, but Well Fargo’s Siversky expects it to return to pre-pandemic levels sometime between 2024 and 2025. Occupancy was 83.2% in the first quarter of 2023, vs. to the pandemic record low of 77.9% in June 2021, the NIC said. However, there could be 20% occupancy growth through 2030, based on pre-pandemic growth of 3% to 3.5% per year, Kuhl said. “Without a pick-up in supply growth, these buildings will be effectively full by the end of the decade,” he said. Room rates are also expected to rise, Siversky said. The median monthly fee in an assisted living facility was $4,500 in 2021, a year-over-year increase of 4.65%. “Due to inflation, the lack of available supply and also the wealth that the senior population has accumulated, you’re also seeing an increase in rate growth,” he said. “Room rates can increase 10-12% year-over-year.” Bumpy road but ‘attractive valuation’ ahead At the moment, senior housing is experiencing favorable demographics, as well as improving fundamentals and margins, said NIC’s Clapp. Wage growth is slowing and jobs are back to pre-pandemic levels for assisted living, he added. Some senior housing players may also see increased distress if they have floating-rate debt or have to refinance debt that is coming due, Clapp said. That could be an opportunity as stock prices recover, he said. “If you’re a new investor, you can get an attractive valuation. If you’re a private investor or a REIT buying these properties, or if you’re a developer, there’s an opportunity for new and evolving types of products,” Clapp said. Investors just need to sit tight and ride out any volatility. “In the short term, there are going to be bumps. But in the longer term, this is a great sector to be in,” he said. Stocks to Watch Both Ventas and Welltower are the top two names indexed to this trend, Siversky said. He started coverage of both REITs in April with overweight ratings. Welltower, with a market capitalization of $39.6 billion, owns interests in senior housing, post-acute communities, and outpatient properties. The shares are up more than 21% so far in 2023, after losing nearly 24% in 2022. The Sales portfolio includes senior living communities, doctor’s office buildings and other healthcare facilities. The stock has gained 1.8% so far this year and lost about 12% last year. VTR 5Y mountain Sales 5-year performance Both names “play a part on both the revenue and expense side of the equation,” Siversky said. “This is where you’ll see the biggest increase in net operating income, as we’ll get a return from both occupancy and senior housing room rate growth.” There’s a point where for every incremental bed added in senior housing, you may not need another worker in the building, he explained. “Once you cross that margin, every additional bed you fill flows into the bottom line,” Siversky said. “That’s where we’re getting to the point right now, as we approach pre-Covid occupancy levels, your facility is fully staffed, your expenses are largely fixed at this point.” There are also many opportunities to find efficiencies in the current business model and optimize labor and material costs, he added. Janus Henderson’s Kuhl is bullish on Welltower, which he owns in the company’s Global Real Estate Fund. The company has the most exposure to this business and is the most progressive in terms of its approach, he said. WELL 5Y Mountain Welltower 5 Year Performance “Welltower has brought in operational experts from the apartment business, for example, to try to really professionalize and institutionalize things like revenue management, expense management, customer service and customer retention. employees,” he said. “These are all things that the senior housing industry can do a lot better at, and I think they will and that will only drive incremental profitability over time.” Meanwhile, Raymond James upgraded Selling last week to a Strong Buy from Outperform and downgraded Welltower to Outperform from Strong Buy. “We believe that VTR’s underperformance of -2000bps against WELL YTD presents a compelling opportunity to increase exposure to senior housing at an attractive valuation, although we acknowledge that VTR [net operating income] Growth is likely to continue to underperform WELL due to lower upside in VTR’s fully stabilized Canadian Senior Housing Operating Portfolio (SHOP) (>25% SHOP NOI),” wrote analyst Hughes. Welltower has an edge of 6% over the average analyst price target, while Sales has an 18% advantage, according to FactSet.Other names linked to the trend include Ensign and Omega Healthcare Investors, which provide skilled nursing services and senior housing, as well as Brookdale Senior Living, an operator of senior communities with just a market capitalization of $755 million.- CNBC’s Michael Bloom contributed reporting.
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