Morgan Stanley sees upside for senior housing stocks as the U.S. population ages

Americans are getting grayer — and that could be a windfall for senior housing. Two of the biggest beneficiaries of the trend are certain real estate investment trusts, which also return income to investors, according to Morgan Stanley. The firm likes Welltower , which has a 2.7% dividend yield, and American Healthcare REIT , which went public Feb. 7 and yields 7.1%. Both own senior housing properties. About 18% of the U.S. population is over 65 years old right now and by 2060, the share of senior citizens should rise to more than 23%, according to a Morgan Stanley analysis of Census data. As a result, the firm estimates there will be 2.1 million residents in independent living, assisted living, and skilled nursing housing in 2030, up from 1.7 million in 2022. That is based on the current penetration rate of 3% of older adults living in senior housing, yet that could possibly increase as changes are made in the industry, economist Sarah Wolfe and a team of analysts and strategists wrote in a note last week. “Improved affordability and demand for higher quality of life, services and care are key tailwinds,” they said. For one, active adult communities may change where seniors age by offering an affordable price point for those looking for a higher quality of life, but not necessarily medical care, the firm said. “Indeed WELL has been a leader in aggregating active adult communities with a recent $1.0 billion acquisition of 3,900 units ($249k / unit) increasing their in-place and under development ‘Wellness Housing’ portfolio to ~25k units,” the team said. WELL YTD mountain Welltower year to date The firm sees the addressable market growing to 185,000 units in 2030 from 150,000 in 2022. In addition, there is a rising need for senior care. Over the last four years, the percentage of senior citizens reporting their health status as “fair” or “poor” versus “excellent,” “very good” or “good” has averaged 24%, while those who who said they had difficulty with self care has averaged 9%, Morgan Stanley said, citing data from the National Center for Health Statistics. “This population of seniors that may need higher quality services and care is significantly greater than the ~3.0% of seniors that are currently living in senior housing facilities,” the firm’s analysts said. Welltower has the highest income and property density in its market, the team said. American Healthcare should see the greatest operating upside from senior housing facilities, they said. AHR mountain 2024-02-07 American Healthcare REIT since its Feb. 7 IPO “AHR is our preferred small cap play given that ~50% of portfolios are exposed to senior housing operating assets, where they can benefit from upside to property cash flow (vs. fixed 1-3% escalators),” they said. The analysts expect 10% growth in funds from operation in 2025/2026 for both names, which is significantly more than the REIT average of 2% to 4%.