March 25, 2020
Jason Punzel

Senior Housing and Skilled Nursing is a Safe Asset Class

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Senior Housing and Skilled Nursing is a Safe Asset Class – by Jason Punzel

As I write this today, the stock market is up substantially for the second consecutive day.   The Fed’s actions coupled with the expected passing of the $2 trillion stimulus package has brought some calm to investors.   However, we all know that the market will be volatile for the foreseeable future.

There has been a lot of concern about how shelter in place policies will affect commercial real estate.  Most retail and office landlords have been inundated by tenants with requests for rent abatement and/or lease restructuring due to their businesses being closed or virtually closed.   Hotel and resort occupancy has been devastated, and even apartment owners are concerned about their tenants being able to pay rent due to possible job loss.  However, many believe senior housing and skilled nursing is a safe asset class.

Initially the REITs’ within this sector saw their stock prices drop between 40-70%, but have rebounded strongly over the past several days.   Why is that?  To begin with, the payor source for these communities is very strong.   Approximately 65% of all residents in Skilled Nursing, Assisted Living and Memory Care are on either Medicaid or Medicare, and the government is not going to stop paying.   The rest of the residents that are paying themselves “private pay”, have their assets mostly in cash and bonds, and not the stock market.   Very few people that are over 80 years old have a high percentage of their net worth in the stock market.  Thus, they will continue to have the ability to pay their monthly rent and service fees as their net worth has been affected very little over the past month.

As a whole, the senior living industry has been very proactive in combating COVID 19 with increased hygiene protocols, severely limited access to communities from outsiders and quarantining residents to their rooms, as necessary.  There have been outbreaks within communities, and there will continue to be more.  However, considering there are approximately 16,000 nursing homes and 30,000 assisted living communities in the US, the outbreaks have been small as a percentage of the whole.   Many owner/operators that we have spoken to have actually seen their occupancy rates increasing over the past several weeks as many feel their loved ones will be far safer in an assisted living community than anywhere else.

Conclusion:

While the Senior Living industry certainly is not immune to the COVID 19 pandemic, thus far, it has held up well in terms of occupancy and the payor source.   We believe many of the senior housing REITs have been unfairly punished along with retail, office and hotel REITs.   Watch for a continued strong rebound in this asset class.

Jason Punzel, Managing Director, punzel@slibinc.colm