Taking a Look at Our Senior Housing Play as Construction Loans Climb
Our shares of Welltower ($WELL) have traded off since their late July high near $250, but when we compare that move against the Vanguard Real Estate ETF ($VNQ), which invests primarily in all sorts of real estate investment trusts (REITs), it’s down around the same 7% or so as WELL shares.
Those declines, as well as those for other REIT vehicles, can be traced back to the climb in the 10-year Treasury yield that accelerated in late August and even more so in the first few weeks of September.
Two reasons that explain the fall in REITs alongside the increase in that Treasury yield are that higher risk-free yields tend to reduce the allure of real estate dividend payouts as they increase borrowing costs. We’ve seen the average 30-year fixed rate mortgage in the U.S. climb to 7.05% to 7.15% in recent days, up from 6.5% to 6.6% in late July, and the impact that’s had on the single family housing market. It stand to reason that rates for nonresidential construction projects have moved up as well and some digging suggests construction loans are in the neighborhood of 7.0% to 7.5% compared compared to 6.5% to 7.0% in late June.
What’s different about Welltower and others addressing senior housing is the current shortage. As the oldest members of the baby boomer generation turn 80, demand is rising faster than new communities — a gap that could take more than $1 trillion to address by 2050. That’s the figure found in a new report from NIC MAP.
NIC MAP’s estimates suggest the sector must add 578,000 units by 2030 and more than 1 million by 2035 to stay on track. That means roughly 140,000 extra units by 2027 and then about 100,000 new units each year afterward. Aging properties add another challenge. More than two-in-five existing units are over 25 years old, so a substantial portion of inventory needs renovations and upgrades.
We’re not primarily invested in WELL shares for the dividend or its current 1.5% yield, but we’ll be happy to see that land in the Portfolio’s cash. Our play with WELL shares is the growing senior housing capacity shortage pain point, what that means for pricing power and Welltower’s operational leverage. Looking more than down the road a piece, when the impact of current inflation tailwinds fade and interest rates move lower, that should rekindle some interest in REITs and WELL shares. Given the multi-year outlook from NIC Map’s above, that would suggest another tailwind for WELL shares.
In mid-September, subject to market conditions, we shared a potential $225 pick up point for WELL shares. While the upside to our $265 target isn’t quite enough to drive us to revisit our current Two rating, a pullback near $225 would offer sufficient upside to put that Two rating to work. We’ll be keeping a watchful eye on WELL shares as well as market conditions, but if the shares fall below their 100-day moving average on a sustained basis, the next layer of support clocks in near $212. Now that would offer us a reason to not only buy WELL shares more aggressively, but it would also give us a reason to rethink our rating on them.
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At the time of publication, TheStreet Pro Portfolio was long WELL.
