REITs Take Differing Paths

by Jeff Shaw

Strategies of the industry’s biggest publicly traded owners range from billion-dollar purchases to exiting seniors housing altogether.

By Jeff Shaw

Publicly traded seniors housing REITs have experienced a roller coaster ride over the past 18 months. Stock prices soared in early 2020, then crashed in March 2020 as the pandemic began. Occupancy rates hit record lows and are just now showing signs of recovery. It has been a volatile period of highs and lows.

As an example, Welltower (NYSE: WELL), the largest owner of seniors housing in the United States, was near a record-high stock pricing of about $90 per share in February of 2020 before plummeting to less than $40 per share. The stock price as of July 12, 2021, had nearly completely rebounded, though, closing at $89.43 per share.

Although occupancy rates have started to show some signs of recovery, they are still at historic lows — below 80 percent for private-pay seniors housing as of the end of the second quarter, according to the National Investment Center for Seniors Housing and Care.

This unpredictability may be why so many REITs are taking different paths from one another.

Healthpeak Properties (NYSE: PEAK) was the fourth-largest owner of seniors housing as of June 1, 2020, according to an annual ranking compiled by the American Seniors Housing Association (ASHA), boasting 218 properties and 30,401 units. (As of press time, ASHA had not yet released the rankings for 2021.)

However, Healthpeak has made it clear that it intends to completely exit the rental part of the industry. The Denver-based REIT has been in the process of selling its entire triple-net and seniors housing operating portfolio (SHOP) properties for an estimated $4 billion, with plans to only hold onto a handful of continuing care retirement communities. Healthpeak is instead moving its money largely into the life sciences and medical office sectors.

“We closed on an additional $1 billion [of dispositions] since our last earnings call,” stated Scott Brinker, Healthpeak’s chief investment officer, during the company’s first-quarter earnings call in May. “With the vast majority of the asset sales now behind us, we’re able to shift nearly 100 percent of our transaction focus to strategic investments in our core business segments, and advance our densification opportunities.”

New Senior Investment Group (NYSE: SNR) was one of the first REITs to divest its seniors housing. The company announced in late 2019, when it was still the ninth-largest owner of seniors housing in the country, that it had agreed to sell its entire assisted living portfolio for $385 million to focus instead on independent living. And then the company made even more headlines in June of this year.

Big spenders

While Healthpeak and New Senior seek to exit the bulk of their seniors housing investments, the two largest owners in the country — Welltower and Ventas (NYSE: VTR) — have been making big purchases in the sector.

In June, Ventas agreed to buy New Senior in a deal valued at $2.3 billion, including assumption of $1.5 billion of the company’s debt. In making the announcement, Debra Cafaro, chairman and CEO of Ventas, said that the New Senior acquisition comes at a time when the seniors housing industry is on the upswing during its recovery from the COVID-19 pandemic. She added that the acquisition positions the Chicago-based firm to “win the recovery.”

“Building on the strong momentum we are experiencing in our business, we are delighted to announce this strategic and accretive acquisition with New Senior that expands Ventas’ position in seniors housing at an important inflection point in the cycle as the senior housing industry rebounds,” Cafaro said at the time of the agreement.

Also in June, Welltower announced it would buy 86 Holiday Retirement independent living communities for $1.6 billion. The three-company deal also included Holiday selling its entire operations business, totaling 240 communities, to Atria Senior Living.

“The Atria team shares our vision for the significant, multi-year growth opportunity in the seniors housing sector, and we are excited to embark on this journey together,” Shankh Mitra, Welltower CEO and chief investment officer, said at the time of the announcement. “Through a highly incentivized and aligned management contract, we have created tremendous upside opportunity for stakeholders of both Welltower and Atria.”

That wasn’t Welltower’s only big move in 2021, either. The company invested in developer and operator Monarch Communities, terminated 51 Genesis Healthcare leases and switched to a team of regional operators, and acquired 22 properties in Illinois and Ohio alongside operator Pathway to Living.

Why buy now?

There may be a silver lining to low occupancy rates that savvy buyers can take advantage of, according to Rick Matros, CEO of Sabra Health Care REIT (NASDAQ: SBRA). If an acquisition is made while occupancy is depressed — particularly due to a temporary situation like the pandemic — there is more room to grow numbers post-acquisition.

“Prior to the pandemic, it was really hard to find good SHOP deals because occupancy had been doing really well, or had been impacted by oversupply,” says Matros. “The pandemic sort of reset SHOP. There’s a long recovery ahead of us, and there’s a nice opportunity to have some upside. If occupancy is too high, you have a lot more downside than upside to an acquisition.”

In yet another high-profile deal entered into during the pandemic, Omega Healthcare Investors (NYSE: OHI) acquired 24 Brookdale-
operated communities from Healthpeak, taking advantage of the latter REIT’s exit from most types of seniors housing.

“We’re opportunistic buyers, even during the pandemic,” says Vikas Gupta, senior vice president of acquisitions and development for OHI. “We want to make sure our operators have good cash sustainability and can continue to pay us rent. If we see deals that fit our criteria, we’ll do those.”

Eric Mendelsohn, president and CEO of National Health Investors (NYSE: NHI) says the REIT is generally a net buyer. However, he quotes Winston Churchill, the late prime minister of the United Kingdom, saying “never let a good crisis go to waste.” 

“We are motivated to use this crisis to transform into a stronger healthcare REIT, and we can accomplish this through lease restructurings, finding operators better aligned with our goals and selling underperforming assets,” says Mendelsohn. “We’re in the process of identifying assets to sell and have targeted a range of $200 million to $400 million in sales.

“But we also want to show that we can walk and chew gum at the same time. So we are actively looking for opportunities to redeploy proceeds from asset sales, as well as internally and externally generated funds, into accretive acquisitions so that we can return to our more normal growth profile.”

A wild ride in stock market

NHI’s stock price changes at the outset of the pandemic were nearly identical to Welltower’s — hitting a record high over $90 per share in February 2020 before dropping nearly 65 percent to under $40 per share in just a few weeks’ time. “It was quite the ride,” recalls Mendelsohn. By March 2021, NHI’s stock had rebounded to over $70 per share again, and as of mid-July the REIT’s share price was hovering around $67 per share.

“In funding our growth pipeline, we target a 60/40 mix of equity and debt, so the precipitous decline in our stock [price] made us more cautious in deploying capital at the outset of the pandemic,” says Mendelsohn. “But we have always maintained a strong balance sheet and were prepared to use it for acquisitions if the right ones became available. That’s a long way of saying that the fluctuation in our stock price hasn’t meaningfully impacted our ability to complete attractive acquisitions.”

NHI made $227 million in investments in 2020, and has announced $125 million so far in 2021, adds Mendelsohn.

Gupta agrees that, despite a similar swing in stock prices (OHI’s pre-pandemic high was $44.65 per share, fell to $22.43 as the pandemic hit, and as of July 12 of this year had not yet fully recovered at $37.28 per share), REITs continued to view the acquisitions market with a steady hand.

“We don’t always price deals according to just our stock. We look at what we think a property is worth. We haven’t changed our underwriting. We may have been a bit more timid as our stock price was low, but we stayed within our range. It goes back to what we believe is the true underlying value of this type of real estate.”

Sabra’s stock price also hasn’t returned to its pre-pandemic level — it stood at $22.29 per share on Feb. 9, 2020, fell to below $10 per share as the pandemic hit, and had rebounded to $18.32 on July 12, 2021. Matros admits that “in terms of the larger market, it was hard to get things done” during the pandemic. However, he echoes Mendelsohn’s and Gupta’s point that the REITs were able to close deals during times of low stock prices.

“We still got some things done last year, and we’re currently in a position where we can do deals. It may just be a little less accretive until the stock fully recovers. As the industry recovers, we expect the stock to recover as well.”

When asked about the recent large transactions by the Big Three REITs — Welltower, Ventas and Healthpeak — Matros says he “appreciated the doubling-down with Ventas and Welltower in seniors housing,” regarding their large-scale acquisitions.

“When Healthpeak decided to exit seniors housing, it raised a lot of questions, especially with the pandemic not over yet. We think seniors housing is a great space. Nothing’s really changed as far as opportunities and where the demographics are going. REITs are long-term investors. The pandemic was problematic on a whole host of levels, but it didn’t change our approach to the sector.”

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