Some types of real estate investment trusts (REITs) held up quite well during the COVID-19 pandemic while others took investors on quite a roller-coaster ride. And many of the largest healthcare REITs are certainly in the latter category. Now that we've had a chance to look at third-quarter results from all major healthcare REITs, there are some clear trends investors should be aware of.
Trend 1: Medical offices are doing as well as ever
Medical offices are one of the most resilient types of commercial real estate, and that's true even in the midst of a global pandemic. Healthcare is considered to be an essential service, and medical offices even got a bit of a tailwind from the suspension of nonessential procedures in many U.S. hospitals.
In fact, if you look at the performance of medical office assets owned by REITs, you wouldn't even know anything was out of the ordinary. Pure-play medical office REIT Physicians Realty Trust (NYSE: DOC) collected virtually all of its third-quarter rent (98.4% collected plus 0.8% on deferral agreements), and its same-store NOI actually increased year over year.
While medical offices only make up 31% of major healthcare REIT Ventas' (NYSE: VTR) portfolio, it has been the best-performing part. Rent collection was at 99% in the third quarter, and like Physicians Realty Trust, same-store cash NOI increased from a year ago. And diversified healthcare REIT Healthpeak Properties (NYSE: PEAK) was a particular standout with same-store medical office NOI growth of 3.3% in the third quarter.
Trend 2: Senior housing still has a long way to go
While medical offices have proven to be quite resilient during the pandemic, that isn't the case for senior housing. While the long-term trends still point toward a growing need for senior housing, the pandemic has caused move-outs to rise and move-ins to plummet, a bad combination for senior housing operators.
Just to run down some of the highlights from a few major healthcare REITs:
- Welltower (NYSE: WELL), which is not only the largest healthcare REIT but is mainly focused on senior housing, reported that occupancy in its senior housing operating portfolio (SHOP) has steadily declined from 85.6% in February to 78.4% in September. And the company expects a further decline of 75 to 125 basis points in the fourth quarter.
- Healthpeak reported year-over-year NOI growth of negative 6.3% in the third quarter in its SHOP portfolio, although occupancy hasn't declined quite as sharply as Welltower's.
- Ventas reported senior housing occupancy of 79.6% at the end of the third quarter, down significantly from 80.9% at midyear. Move-in rates have improved but remain down from the same time last year. On a positive note, Ventas reported collecting substantially all of its rent from its triple-net-leased senior housing portfolio.
Trend 3: Healthcare REITs are ready to get back into growth mode
As a final trend, while most healthcare REITs understandably pumped the brakes on growth as the pandemic started, it appears that most are ready to get back into growth mode.
For example, Healthpeak just made one major acquisition in October and entered into agreements for two more, with a total investment value of nearly $1 billion. And in September, Healthpeak started construction on a major life science office property. In October, Welltower agreed to acquire a portfolio of 25 assisted living and memory care facilities. And finally, Ventas spent $1 billion in October to acquire a San Francisco life science portfolio.
The Millionacres bottom line
For obvious reasons, senior housing properties are a long way from anything resembling a normal level of business. So, it's fair to assume that healthcare REITs with a senior housing focus or even a diversified approach could be rather volatile until the pandemic is behind us. On the other hand, medical office properties have barely been affected by the pandemic, and any weakness in the stock prices of medical office REITs could be a buying opportunity.