Juan Sanabria

Although the COVID-19 vaccines are expected to become more widely available as the first quarter continues, investment banking firm BMO Capital Markets is predicting an elongated recovery for the senior living industry, with cash flows not recovering to pre-pandemic levels until about 2025. That’s according to an analysis released Thursday by the firm.

“Given COVID-19’s resurgence, we see weaker fourth-quarter 2020 and first-quarter 2021 operating and earnings results, along with potential for more triple-net rent cuts,” wrote Juan Sanabria, director at BMO Capital Markets. 

As a result of the firm’s cautious view, the analyst downgraded real estate investment trusts Welltower, Ventas and National Health Investors to “underperform” from “market perform,” pointing to too much optimism in the REITs’ estimated senior living growth and potential risks around their senior living triple-net exposure. Conversely, BMO Capital Markets upgraded CareTrust REIT to “outperform” from “market perform” and Sabra Health Care REIT to “market perform” from “underperfom.” Across the healthcare REIT sub-sector, the firm listed Healthpeak Properties as its top diversified healthcare REIT pick.

“Simply put, it will take time to recoup a 40 to 50% year-over-year decline in cash flows expected with the fourth-quarter earnings results,” Sanabria wrote. “We expect quarterly sequential increases in occupancy starting in the second quarter after declining about 12% to the mid-70% range from COVID through the first quarter of 2021.” 

Sanabria also noted that, although the firm is bullish on demographic-driven demand, it sees new supply as necessary, which will keep capital expenditures elevated. 

“We caution against false optimism around an initial surge in demand in early 2021 with a vaccine potentially stimulating pent-up demand, which we view as unsustainable and one-time in nature,” he wrote.