Irrational Valuations for REIT Shares

What a week it has been. At the market’s close on Wednesday, Ventas was yielding 18.7%, Omega Healthcare Investors 18.0% and Sabra Health Care REIT 30.4%. This assumes they all maintain their current dividend rates. Ventas just announced the payment date for its dividend at the same rate as last year. 

Of course, Ventas plunged by 19% on Wednesday, Omega by 17% and Sabra by 20%. These drops, on top of the previous weeks’ plunge, caused yields to skyrocket. Obviously, this is irrational, even in these days of the coronavirus/Covid-19 pandemic (CV-19). All of the other healthcare REITs fared poorly as well. But does this represent a buying opportunity? Well, it did. 

To show how fickle the market is, acknowledging that most of the buying and selling is computer generated and not as a result of thoughtful analysis, one only has to look at the next day’s performance. CareTrust REIT shot up 54%, Omega up 50%, Sabra up 35%, Welltower up 23%, Ventas up 18%, National Health Investors up 14% and LTC Properties up 13%. This is just in one day. It should be noted that after Wednesday’s plunge, LTC had one of the lowest yields of the group, at 9.0%. Healthpeak Properties was the lowest at 7.1%. 

If we didn’t have a self-imposed policy against buying shares of companies we write about, this would have been a great investment opportunity. It appears as if it was for some investors. Maybe in times of crisis, we should lift the ban. There couldn’t be a better time.  

The irrational valuations this past week (and before) were based on fear and the fact that the elderly are more susceptible to CV-19 than others, and with a much higher death rate. The fact that the first major site of death in this country was a skilled nursing facility in Washington helped spread that fear. But since then, we have heard of only a few “outbreaks” in senior care communities, such as in Fort Lauderdale, Florida and Willowbrook, Illinois. The latter is a nursing facility where the reported cases doubled in one day to 46, according to local reports. Of the total, 33 are residents and 13 are staff. But remember, this is the exception and not the norm, as most companies and REITs are reporting few or no communities with CV-19 cases.  

Ventas

On worrisome Wednesday this week, the market cap of Ventas closed at just $6.32 billion. That is a level it has not seen in years and maybe 70% below its peak. To put that in perspective, the investment value of this REIT’s medical office buildings at year end was $7.68 billion, and this asset class is not going to devalue with the CV-19. Ventas had $12.475 billion of seniors housing operating (SHOP) assets, and $7.7 billion of triple net senior care (and others) assets.  

The implication, of course, is that the market was valuing the SHOP assets at close to nothing. We say “implication” because the way the markets work, especially in a panic, we doubt any analysis was done on valuation. Yes, one of their Atria Senior Living communities had a few deaths from CV-19, but that is one of several hundred communities. Atria and other Ventas partners have had their share of problems over the past few years, but they are still in some of the best markets in the country.  And they are not worth zero. And they will come back when the pandemic winds die down and development continues to slow. 

Healthpeak

On the other hand, looking at Healthpeak Properties tells a different story. Its seniors housing portfolio makes up just 17% of NOI today, with MOBs 44% and Life Science assets 31%. It has not been punished nearly as much as Ventas in this market panic, and its yield is the lowest of the group. Usually, the lower the yield the less risky the market believes it shares are. So, maybe investors are doing some analysis after all. Just not enough.  

Look, we know this pandemic is not leaving us anytime soon, we know that the death toll will rise, and we know the economy is going to take a significant hit in the short term. Therefore, the labor shortages should ease, at least in the short term. Our guess is that if there is not a major concentration of CV-19 deaths in senior living communities and skilled nursing facilities in the next few weeks, the protocols put in place in the vast majority of properties in the past week or two will have proven to work. At least we hope so.   

Not to demean the seriousness of this CV-19 pandemic, but we wonder how the public would react if every death as a result of the flu each year, in every senior living community and skilled nursing facility, was publicized like it is today with CV-19. You know the answer. This is the time for the entire senior living and post-acute care sector to really take some leadership in our healthcare system. Doing anything and everything to keep occupancy levels from falling by the 600 to 1,000 basis points that some have either been predicting or think is already baked into current market values is crucial. But keeping the existing residents safe and healthy will be the priority. Isn’t it always? But this time, we have to keep the staff safe and healthy as well. 

 

Leave a Reply

Your email address will not be published. Required fields are marked *