Prior to the pandemic last March, few industries seemed better prepared for surefire growth than healthcare real estate, from nursing homes and assisted living centers to medical office buildings.
After all, the demographic trends of aging baby boomers cannot be stopped. By 2040, the number of Americans aged 65 and over is expected to rise from 54 million to 80 million, with the number of Americans aged 85 and over increasing from 7 million to 15 million, according to the US Census Bureau.
And, as Invesque of Carmel, owner of 121 healthcare properties in the US and Canada, noted in a November PowerPoint presentation, healthcare spending per capital for 85 people is 2.4 times the US average.
“A massive wave of aging baby boomers will use more health services and spend more money on health care,” the presentation said. “We’re just getting started and real growth is ahead of us.”
Scott White, CEO of Invesque, says the investment offer remains intact. “As a real estate investment thesis, we always had a longer perspective in mind,” he said. “I still believe very much in what we do.”
However, it’s hard to overstate how terrible the past year was when COVID-19 impacted the full range of healthcare properties in its portfolio, from nursing homes and office buildings to memory and assisted living centers.
Invesque owns 30 of the senior citizen homes. But even if it is only a landlord, it is dependent on the operator’s underlying health to collect the rent.
“You are facing challenges that you have never dealt with before,” said White. “They are primarily trying to ensure the safety of residents and staff.”
In fact, the occupancy rate in senior housing communities in Invesque had fallen to 82.7% as of September 30, after 87.9% in the previous year.
And “given the stressful occupancy that has gone under for many senior housing facilities since the pandemic outbreak, Invesque’s current occupancy rate is likely to be significantly lower,” Canaccord Genuity analysts Mark Rothschild and Michael Pennington said in a report.
It’s easy to see why. Moving to a retirement home is usually an option that isn’t forced by a specific illness. As a result, it’s one that many families put off.
“If you could avoid it at all costs, you wouldn’t be putting a loved one into an institution where you might not be able to visit,” White said.
Many families have also stayed away, if at all possible, from nursing homes because they have been a hotbed of COVID-19 deaths. Nursing home residents and employees have caused 163,000, or 34%, of all deaths in the United States from the disease.
Given this reality, hospitals have directed more patients to home care than nursing homes.
Meanwhile, in efforts to fight the virus, operators have spent millions of dollars on personal protective equipment and other containment measures.
“You were hit both ways. Utilization has gone down and costs have increased, ”said White.
All of that took the steam off Invesque. Its shares, trading at $ 7.08 in February 2020, are down to about $ 2.25, a drop that reduced the company’s market value by $ 265 million.
Despite the decline, analysts say stocks aren’t necessarily a bargain.
“While the current share price seems compelling, we see significant risk to the company and leverage remains increased,” said analysts at Canaccord Genuity, Rothschild and Pennington, in a report.
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Investor enthusiasm waned in April when the company eliminated its dividend to save money. On an annual basis, 73.78 cents per share was paid. The dividend cut saved $ 40 million annually.
“We were one of the first companies to suspend dividends,” said White. “I wanted to be in a position of financial strength and power” when Invesque faced the uncertainty of the pandemic.
Eliminating the dividend and other cost savings came in handy as Invesque sought and received additional flexibility from its credit group. The fast-growing company still has significant debt – more than $ 1 billion – but it doesn’t have any major debt due before 2022.
However, analysts say the company faces numerous challenges – also due to the financial fragility of some of its operating partners.
In November, Invesque announced a memorandum of understanding aimed at scaling back business relationships with the Illinois-based nursing home operator Symphony Care Network.
Under the deal, Symphony would reduce the number of Invesque properties from 16 to eight. The other eight would switch to new operators or be sold to Symphony.
The pressure on the nursing home industry is unlikely to ease any soon. According to the American Health Care Association, U.S. nursing home revenues are expected to fall by $ 22.6 billion in 2021, after falling by $ 11.3 billion in 2020.
Already at record lows, occupancy will remain under pressure, according to analysts, especially as hospitals continue to transfer patients directly to home care and skip nursing homes. The risk of this move is that patients are more likely to end up in the hospital again.
“A key question for [nursing home landlords] will be the ability to reclaim lost occupancy when government incentives wear off and regain market share lost to home health, ”BMO Capital Markets analysts Juan Sanabria and John Kim wrote in a report.
White is not at liberty to disclose fourth quarter financial data before the company announces them on March 11th. But he took on an optimistic tone – albeit one with reservations.
“There’s a lot more for us to work our way through – the pandemic isn’t over yet,” he said. “I think the worst in terms of our industry is behind us. But there is still a long way to go. “•
