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COVID-19: Investors in Retirement Stocks to Face Delayed Loss Recoveries

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Investing in retirement residences and long term care stocks has long been regarded as a good long-term growth idea due to the evidence of a rapidly aging population.

However, the COVID-19 pandemic ravaged many long-term care (LTC) facilities and exposed retirement home operators to serious reputational damage. The scars could take longer to heal and there’s growing potential for long-term financial losses. Retirement stocks may take longer to recover from a 2020 market crash.

COVID-19 crashed retirement stocks

The coronavirus pandemic panic trades wiped billions off Canadian stock valuations. Shares in retirement residences were supposed to be immune to recessions and be defensive during market meltdowns.

However, they just couldn’t withstand a COVID-19 blow that disproportionately affected their clientele demographic.

Sienna Senior Living’s (TSX:SIA) stock is the most beaten-down stock after a 43% decline in share price on a year-to-date (YTD) basis. Chartwell Retirement Residences (TSX:CSH.UN) shares are down over 31% YTD.

Chartwell is the largest operator in the segment, with over 29,300 retirement suites, including 3,385 LTC beds spread across four provinces. Extendicare’s (TSX:EXE) stock price is also trading 27% lower so far this year.

Significant reputational damage

Reports say that the majority of COVID-19 deaths in Canada have happened in LTC facilities. Pandemic outbreaks have been very hard to contain in several seniors’ residences and the Ontario government had to seek military intervention to help contain the situation in five residences.

The province of Ontario actually took over management at eight LTC residencies struggling to contain an outbreak, which could be read as a significant sign of incapacitation on the part of management teams.

Even worse, potential customers (prospective residents) may feel uncomfortable to check into any of the affected facilities long after the pandemic is gone. The scary images of neglect and death in LTC facilities due to COVID-19 could compel them to take their business elsewhere.

There are several reports of lawsuits against a number of companies in the industry due to failure to satisfactorily manage the pandemic spread. These cast a very bad light on long-term care stocks.

Long term care stocks could take longer to recover

The Canadian Armed Forces’ report on its pandemic containment mission was quite damning. The military’s revelation of appalling conditions in affected LTC facilities raised the ire of regulatory entities, legislators, and the general population.

Most noteworthy, we could see new and tighter regulations after ongoing ombudsmen probes and government investigations are concluded. The industry was already an over-regulated space, complying with over 600 regulations and more than 1,000 requirements.

While the load could be heavier going forward, we need the best care and safest living conditions for our seniors.

However, increased regulation and monitoring usually means higher operating costs and more capital expenditures. Operators may be required to maintain higher staffing levels per facility forever.

Employees who got used to current danger allowances and retention incentives won’t want to lose them. Higher labour costs, cleaning, and sanitization expenses could linger for longer post the health crisis.

Given the negative publicity on the industry players right now, it may prove difficult to increase fees and charges to clients whose families already show increased levels of discontent.

Basically, operating margins could shrink very fast and stay that way for long. I can’t overemphasize what that could mean for profit margins and the high yielding dividends.

That said, the long-term care and retirement residences industry isn’t going away anytime soon. There could be potential opportunities after the health crisis too.

Potential opportunities in retirement stocks

Higher operating costs and lower margins could potentially bankrupt small industry players who had sprouted over the last decade. There’s an opportunity for large listed players with deep pockets to buy up competitors at better capitalization rates. Competition from small players could recede after regulatory tightening.

Larger operators like Chartwell would be the best-placed industry incumbents economically. They will be capable of working with lower margins but enjoying higher business volumes.

Further, I don’t see viable competition for the long-term care industry. Unless the government takes over facilities management, there will always be a need that private players must meet.

Happy investing.

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