Vaccine will help long-term care homes

Long-term care homes have been hit hard by the pandemic. But there could be some “interesting” announcements in 2021’s first half, however.

Long-term care homes have been hit hard by the pandemic. But balance sheets are solid, liquidity is high and dividends should be maintained.

CIBC analysts hosted a panel of leaders and advisors in the Canadian seniors housing sector to discuss business trends and current industry themes. Featured speakers were from Chartwell Retirement Residences (TSX—CSH.UN), Extendicare Inc. (TSX—EXE), Sienna Senior Living Inc. (TSX—SIA), Groupe Sélection (private), and Cushman & Wakefield PLC (NYSE—CWK).

Long-term care homes (LTC) have in particular been hit hard by the pandemic. While the near-term battle with a second wave of COVID-19 remains front and centre, seeds are being sewn for a post-pandemic recovery. Broad vaccine distribution should eventually lead to a return of constructive long-term fundamentals. Front-line workers are set to be among the first recipients.

It is hoped that by the end of first-quarter 2021, immunization could be largely achieved across LTC and retirement home employees, with residents immunized by the end of the following quarter. With recent positive vaccine announcements, there is a clear path to properties fully reopening and, with residents feeling more secure regarding their health and safety, there would be broad support for a recovery in move-ins and occupancy.

Demand will be strong over the long term

Panelists generally had a favourable long-term outlook reflecting strong demand for seniors housing from demographic tailwinds, while supply pressures have alleviated as development projects were postponed or cancelled during the pandemic. We view LTC homes as providing essential needs-based services, and believe COVID-19-induced occupancy declines and higher expenses will eventually be reversed owing to demographic trends and a reduction in extraordinary measures.

The wait-list for Ontario LTC currently stands at over 38,000 individuals, as the demographic continues to age and occupancy restrictions in four-bed properties add further pressure to demand. There has been no noticeable decline in the number of individuals on the wait-list across the sample pool; instead, quite the opposite has occurred with an average increase of about 15 per cent for total beds. We think this underscores the fact that LTC is a needs-based service and that demand continues to be strong.

Feds and provinces both committed to sector

The Canadian government remains committed to the long-term viability of the LTC sector as evidenced by increased funding to meet elevated pandemic costs, occupancy protection funding, and legislation to limit litigation against “good faith” operators.

In early November, the Ontario government committed to increasing the amount of care per day to four hours from 2.75 hours (direct hands-on care provided by care staff), with a target to achieve this standard by 2024-2025. This should result in overall costs increasing, however, as the expense is related to care, it will be a flow through to the government and the operator will make no margin. The result should be a higher level of care available to all residents, but with no extra profit (or loss) to the operator.

Short-term expenses will remain high

Gross operating expenses are expected to remain elevated in the near term, as the second wave runs its course and more homes are in outbreak. Given most of these costs are associated with infection control and care provision, there is an expectation that many of these costs will ultimately be reimbursed by the government, however, timing of the recoveries is not always predictable. Development and redevelopment activity is expected to gather steam in Ontario as the new construction funding program economics are better understood.

While opportunities may emerge to grow through acquisitions, it is not a near-term priority for management teams. Nevertheless, balance sheets appear solid with Canadian Mortgage and Housing Corp. financing available for retirement home properties. Liquidity is high, and companies look positioned to maintain their dividends (and make acquisitions) as visibility emerges for an end to the pandemic.

Owing to COVID, 2020 has been quiet in terms of commercial real estate transaction volumes in general. The investment market had been robust before the pandemic, with participation from the Canadian public players and pension funds, US and Chinese groups and private equity. Seniors housing volumes have declined sharply, mostly on the lapping of the 2019 Groupe Maurice deal (sold an 85 per cent stake to US-based Ventas Inc. for $2.4 billion), but are down irrespective of this transaction. Cushman & Wakefield though said that there could be some “interesting” announcements in 2021’s first half, however.

Chris Couprie, Dean Wilkinson, Zan Zhang, Ioan Ilea and Seth Rubin were the CIBC World Markets equity analysts who hosted the event.

This is an edited version of an article that was originally published for subscribers in the January 1, 2021, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.

Investor’s Digest of Canada, MPL Communications Inc.
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