Remember back in March 2020 when the financial world was falling apart, rapidly? March 18 was the bottom for most of the healthcare REIT stocks, when investors thought the pandemic might wipe out a good portion of their investment value in senior care properties. At the time, they weren’t too far off, when top-quality REITs such as Ventas plunged to market values that had not been seen in years. But it was much more of a knee-jerk panic attack based on worst-case scenarios. Hindsight is always great, isn’t it?
Within two weeks, most REITs had recovered 30% to 80% of that initial loss, and then steadily rose for the rest of the year. The odd thing was that this nine-month rise in stock values was accompanied by a worsening pandemic environment with occupancy rates in nearly all their tenants continuing to plummet. It was as if the worst case was coming to fruition. So, why would investors push the values up when what caused the initial plunge was getting worse by the month? Was it the Fear Factor? (Remember that TV show?) Mostly yes, but also all the equity mutual funds had to rebalance their portfolios. We really do not believe they were thinking the end of seniors housing as we know was near.
What is even odder is that since the end of 2020, with the vaccine out, large swaths of the population getting jabbed, 80% and more of residents in senior living communities getting fully vaccinated, occupancy rates bottoming out in February and March of this year, and the light at the end of the dark tunnel getting a bit brighter by the month, most of the healthcare REIT stocks have stagnated in the past six months, with three slightly below their prices on December 31, 2020. What gives?
There are exceptions, of course, such as Welltower up 29% and Ventas up 16% this year. The big winner was New Senior Investment Group, which shot up by nearly 70% as a result of the acquisition announcement by Ventas. What is very difficult to reconcile is the plunge in March 2020, the doubling and tripling of values in the last nine months of the year, and then near-stagnation in 2021. It looks like investors were premature on both accounts, or perhaps too quickly making up for their initial error. The optimist would say that saner heads prevailed after March 2020, while the pessimist would say many of these investors really don’t have a clue about the senior living market. We would have to be in the latter group. The real problem is that many of them do not really care.
The problem, and the benefit, of the public equity markets, is their liquidity. Can you imagine if you could sell a senior care property with a phone call or an online transaction? The volatility in values would be immense and cap rates would be irrelevant. But property values, while they fell on average during the pandemic, held their own given what was happening inside their buildings. If the Ventas SHOP portfolio had been marketed to market based on the REIT’s value on March 18, 2020, then all those Sunrise Senior Living and Atria Senior Living communities would have been “worth” much, much less than replacement cost, and Shankh Mitra would have been ready to pounce. But that is not how it is done, and not how they are valued.
Healthcare REITs have often been considered to be the best proxy available for investing in seniors housing and care. But the short-term rollercoaster we witnessed would seem to pose a few questions to that theory. With their values up, occupancy levels on the rise, and improved liquidity, it would seem time for some of them, at least the ones that cut their dividends last year, to start getting back to their previous payouts. Now that is something investors count on.
