The COVID-19 pandemic has turned many formerly safe investments into potentially risky ventures. These include senior housing real estate investment trusts, according to a Motley Fool analysis.
The report cited an August survey conducted by the American Health Care Association, which found that 55% of skilled nursing operators said they were generating operating losses, whereas another 34% reported profit margins below 3%. A similar survey released by AHCA’s sister organization, the National Center for Assisted Living, showed assisted living operators aren’t faring much better, with half saying they are operating at a loss and 64% indicating they won’t be able to sustain operations for another year.
Among REITs, Motley Fool cited Toledo, OH-based Welltower as an example of a stock that could be in trouble if senior living and care facilities struggle. The firm’s total revenue for the second quarter declined by 10%. The biggest drop-off was from its senior housing segment, where revenue declined by 15% from the prior-year period to $773.7 million. In addition, the segment incurred a $47.3 million loss during the period. A year prior, it generated a profit of $94.2 million. Welltower has blamed the downturn on higher expenses combined with lower senior housing occupancy rates, which fell from 85.8% in February to 78.9% in August.
Although the firm remains stable currently as tenants have largely continued to pay their rent, another wave of COVID-19 infections could “drag the performance of these businesses down even further, especially if facilities that are already struggling have to shut down for good,” according to the report.
Welltower already has trimmed its quarterly dividend by 30%, and a drop in rent payments could lead to additional cuts, the analysis noted. Shares of the REIT already are down 33% in 2020 — far underperforming the S&P 500, which is up 4% year to date. Its peers are likely to face similar challenges, the report added.
“If you’re looking to invest in healthcare, consider stocks that don’t have exposure to senior housing,” the report concluded. “Otherwise, you risk incurring significant losses, because the COVID-19 crisis isn’t going away anytime soon.”