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The rapidly aging population is expected to be a boon for senior housing. After having a rocky 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. What’s more, demand is increasing at the same time new construction slowed down due to the health crisis. “This is a very, very rare occurrence in real estate in general, where your demand trends are accelerating and your supply is going to be stuck … for at least a couple of years,” said Wells Fargo analyst Connor Siversky. All of this, as well as pricing power and moderating labor costs, are likely to drive positive performance for those in the senior housing business, he said. Welltower and Ventas are the two big players in the space, and the real estate investment trusts are expected to benefit from the explosion in demand, several analysts have said. Ventas has an average rating of overweight and Welltower has an average rating of buy, according to FactSet. “Within seniors housing, we remain confident in operators’ ability to recapture [net operating income] lost during the pandemic due to the strong rate and affordability outlook,” Raymond James analyst Jonathan Hughes wrote in a note Friday. “Longer-term, increasing demand from the ‘Silver Tsunami’ of aging demographics and declining new supply impact could create a potential multiyear cycle of strong [skilled nursing facility] and seniors housing performance.” All Baby Boomers will be over 65 by 2030 As baby boomers near retirement, they are looking for a myriad of ways to live comfortably. That may mean aging in their homes for as long as possible . It also may be eventually looking into independent living facilities or even assisted living, depending on their health needs. The generation, born from 1946 to 1964, began turning 65 years old in 2011, and by 2030, they will all be older than 65, according to the U.S. Census Bureau. That year, 39 million Americans will be between 75 and 84, 25 million will be between 75 and 84 and 9 million will be 85 and older. About 50% of those in assisted living facilities, for example, are aged 85 and older, while 31% are between 75 and 84 years old, 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 Investment Center for Seniors Housing and Care. “You’ve got this growing level of need from demographics, aging, higher acuity levels — people have more chronic conditions, more disabilities, that they’re going to need help with — and they’ve got fewer caregivers,” said Caroline Clapp, senior principal with NIC. The NIC is anticipating the ratio of 45 to 64 year old adult children to adults 80 and over to shrink to 4 in 1 in 2031 from 7 to 1 in 2015. Separately, data from the U.S. Census Bureau shows that by 2034, older adults will outnumber children for the first time in history. Supply slowdown Couple that growth in the older American cohort with the amount of supply in the market. Much of the available supply on the market is old — almost half was built before 1998 and two out of three were built before 2006, according to the NIC. Senior housing construction starts have slowed, but are still underway, the organization said. “We haven’t seen a supply slowdown like this in a really long time,” said Greg Kuhl, portfolio manager at Janus Henderson. “We’ve always known that demand was coming 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 financing environment.” Occupancy has yet to fully recover from Covid, but Well Fargo’s Siversky expects it to return to pre-Covid levels at some point between 2024 and 2025. Occupancy was at 83.2% in the first quarter of 2023, versus the pandemic record low of 77.9% in June 2021, NIC said. However, there could be 20% occupancy growth through 2030, based on pre-Covid growth of 3% to 3.5% annually, Kuhl said. “Without a pickup in supply growth, these buildings will effectively be full by the end of the decade,” he said. Room rates are also expected to increase, Siversky said. The median monthly rate in an assisted living facility was $4,500 in 2021, a 4.65% year-over-year increase. “Due to inflation, due to the lack of available supply, and also due to the wealth that has been aggregated by the senior population, you’re seeing a ramp up in rate growth as well,” he said. “Room rates can increase on a year over year basis by 10 to 12%.” Bumpy road but ‘attractive valuation’ ahead Right now, senior housing is seeing favorable demographics, as well as improving fundamentals and margins, said NIC’s Clapp. Wage growth is slowing and jobs are back at pre-pandemic levels for assisted living, she added. Some players in senior housing may also see increasing distress if they have any floating rate debt or have to refinance debt that is maturing, Clapp said. That could be an opportunity as the stock prices reset, she noted. “If you are a new investor, you can get an attractive valuation. If you’re a private investor or you’re a REIT buying these properties, or if you’re a developer, there’s an opportunity for new and evolving product types,” Clapp said. Investors just need to sit tight and ride out any volatility. “In the near term, it’s going to be bumpy. But longer term, this is a great sector to be in,” she said. Stocks to watch Both Ventas and Welltower are the two names most indexed to this trend, Siversky said. He initiated coverage of both REITs in April with overweight ratings. Welltower, with a market cap of $39.6 billion, owns interests in senior housing, post-acute communities and outpatient properties. Shares are up more than 21% so far in 2023, after losing almost 24% in 2022. Ventas’ portfolio includes senior housing communities, medical office buildings and other health-care facilities. The stock has gained 1.8% year to date and lost about 12% in last year. VTR 5Y mountain Ventas 5-year performance Both names “have a stake in both the revenue and the expense side of the equation,” Siversky said. “This is where you’re going to see the biggest net operating income boost, as we get a return of both occupancy and rate growth of senior housing rooms.” There’s a point where for each incremental bed added in senior housing, you might not need another worker in the building, he explained. “Once you cross that margin, every additional bed you fill flows to the bottom line,” Siversky said. “That’s kind of where we’re hitting the point right now, as we’re approaching those pre-Covid occupancy levels, that your facilities are fully staffed, your expenses are largely fixed at this point.” There is also a lot of opportunity to find efficiencies in the current business model and streamline labor and materials costs, he added. Janus Henderson’s Kuhl is bullish on Welltower, which he owns in the firm’s Global Real Estate Fund. The company has the most exposure to this business and is the most forward-looking in terms of their approach, he said. WELL 5Y mountain Welltower 5-year performance “Welltower has brought on operational experts from the apartment business, for instance, to really try and professionalize, institutionalize things like revenue management, expense management, customer service, employee retention,” he said. “These are all things that the senior housing industry can get a lot better at, and I think they will and that’s just going to drive incremental profitability over time.” Meanwhile, Raymond James upgraded Ventas last week to strong buy from outperform and downgraded Welltower to outperform from strong buy. “We believe VTR’s -2000 bp underperformance vs. WELL YTD presents a compelling opportunity to increase exposure to seniors housing at an attractive valuation, though we acknowledge VTR’s [net operating income] growth will likely continue to trail that of WELL due to less-upside in VTR’s fully-stabilized Canadian Senior housing operating (SHOP) portfolio ( > 25% of SHOP NOI),” wrote analyst Hughes. Welltower has 6% upside to the average analyst price target, while Ventas has 18% upside, according to FactSet. Other names tied to the trend include Ensign and Omega Healthcare Investors , which both provide skilled nursing and senior living services, as well as Brookdale Senior Living , an operator of senior living communities with just a $755 million market cap. — CNBC’s Michael Bloom contributed reporting.
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