Senior Housing Could Hit Its Trough By Midyear

The near-term outlook for senior housing is grim, but the worst could be over by the midyear. A new report from Mizuho is cautiously optimistic that the senior housing industry could hit a trough by the second half of 2021, thanks in large part to the vaccine rollout.

Senior housing investors will still have to get through the storm. In the first half of the year, the same report expects weak NOI growth among the healthcare REITs and ongoing rent deferrals and rent abatements for triple-net senior housing tenants. Occupancy losses in senior housing accelerated at the end of the year, and Mizuho expects they will continue to drop through at least the first quarter. In January, senior housing vacancy rates had dropped to the lowest level on record, according to National Investment Center for Seniors Housing and Care after a turbulent fourth quarter where occupancy rates dropped to 80.7%. Overall for the year, occupancy fell 6.8% in the sector.

Compounding the problem, operations expenses have continued to rise. The combination of falling occupancy and rising operations costs could present a rough road ahead for smaller operators if parent REITs don’t provide some form of rent relief. Some REITs are responding, like LTC Properties, which recently cut the annual rent increases in its leases by 50% for 2021.

As a result of the current market fundamentals, Mizuho is lowering earnings estimates for healthcare REITs Ventas, Welltower, Healthpeak Properties and Sabra to reflect a six-month inflection point this year, according to the report. However, the firm is increasing its earnings outlook for LTC, assuming the REIT will not have to cut rents and based on the fact that rent deferrals are lower than the baseline estimate.

Despite the lower earnings estimates, Mizuho is also increasing price targets for healthcare REITs, noting that investors are willing to pay higher multiples in anticipation of a recovery. Many investors are also already looking ahead to 2022. This presents a modest downside for healthcare REITs.

Although the possibility of a midyear trough is a light at the end of a long tunnel, Mizuho says that it is still too early to be bullish on the market. The report doesn’t expect occupancy to recover to pre-pandemic levels until 2023, and a lack of government aid could force REITs to provide rent relief in the interim. The pandemic itself also provides a layer of uncertainty in the recovery. New COVID strains could reignite the spread of the virus, elongating the pandemic and delaying recovery.