Seniors housing landlords and operators grappling with weak occupancy in the face of elevated supply have had to contend with another hurdle in recent months: a historically bad flu season.
Executives at seniors housing operators and real estate investment trusts said during recent year-end conference calls that they were forced to halt tours and move-ins at some facilities to stop the virus' spread. That has contributed to a more cautious outlook on the year for several companies.
Brookdale Senior Living Inc. President and CEO Lucinda Baier said her company would have to spend 2018 trying to "recapture" the occupancy the company lost to the worst flu season to hit the nation's seniors population in 20 years. She noted, according to a transcript, that Brookdale facilities were closed to new entrants for more days in the first 45 days of 2018 than in the entire first quarter of 2017. Ventas Inc. experienced a 250% year-over-year increase in the number of days its properties were closed to tours, Ventas CFO Robert Probst said, based on a transcript.
HCP Inc. CFO Peter Scott, in giving 2018 guidance, said the tough flu season has contributed to the company's cautious outlook for seniors housing in 2018. HCP has not seen a sizable uptick in move-outs, he said, according to a transcript, but it has had to put embargoes in place at some properties, reducing move-ins. Brookdale is a major tenant for HCP.
Welltower Inc. Senior Vice President of Investments Shankh Mitra said, according to a transcript, that the flu contributed to lower-than-expected same-store net operating income growth of 1.5% in the company's seniors housing operating portfolio in the 2017 fourth quarter. That has tempered the company's outlook for 2018, he said.
Stifel analyst Chad Vanacore said in an interview that in general, seniors housing occupancy rates are worse in the first half of any given year due to flu or weather-related issues and tend to recover in the second half of the year. He noted, though, that this year's flu season has the potential to be worse than the 2014-2015 flu season, which was the worst on record since the CDC implemented new protocols for tracking the disease in 2010.
According to broker CBRE, the seniors housing market has seen "moderate" overbuilding in recent years. However, the number of properties under construction peaked in 2016 and has declined in the subsequent years. "Seniors housing demand should remain relatively healthy next year, given continued expansion of the U.S. economy and a healthy housing market — both key variables in the demand equation," CBRE said.
Nonetheless, while seniors housing fundamentals are likely to improve over the long term given the rising number of seniors needing assisted living and decreased construction starts in the past few years, the bad flu season means that recovery may be delayed beyond the end of 2018, Mizuho Securities USA Inc. analyst Richard Anderson said in a note.
Given these headwinds, Robert W. Baird analyst Drew Babin said seniors housing operators will likely trade lower occupancy rates for "decent rent growth," avoiding granting rental concessions to tenants to boost occupancy rates as they look to maintain roughly 2.5% to 3% top-line rental growth until conditions improve. He said that given the pace of construction, occupancy rates could recover in 2019.
According to the Centers for Disease Control and Prevention, people were still seeking care for influenza-like illnesses at an elevated rate in the week ending Feb. 24, but there was a decline in the proportion week over week.