Nursing Home REITs: Is the Recovery Real or Just Accounting?

The first thing to check when a business is supposed to be recovering is the parking lot. For nursing home REITs, occupancy rates are indeed climbing back to pre-pandemic levels, which is a solid sign that underlying demand is returning. Recent data shows senior housing and assisted living occupancy at 86.5% in the fourth quarter of 2024, with projections for a full return to normal this year. That's the good news: people are moving in, and the beds are filling up.

But the real test is whether the financial foundation can support that demand. The pandemic left deep scars. A longitudinal study analyzing thousands of nursing home records found the crisis significantly reduced operating margins and revenue per resident day. In other words, even when the beds are full, the money coming in per patient didn't keep pace with the costs, squeezing the bottom line. That's a fragile setup, especially when you consider the ongoing cost pressures.

The biggest, most persistent pressure is staffing. The industry is still grappling with a major shortage, with predictions of an 80,000 RN deficit this year. This isn't just a quality-of-care issue; it's a direct hit to the financials. More staff means higher payroll costs, which are already rising. It's a constant headwind that eats into the profits that should be flowing from recovering occupancy. The sector is getting more business, but it's paying more to deliver it.

So the recovery looks real on the surface, but the financials tell a more cautious story. The parking lots are fulling up, but the cost of keeping them full remains high and is likely to stay that way. For investors, the question isn't just about occupancy numbers anymore-it's about whether the improved demand can finally outpace these stubborn cost pressures. The answer to that will determine if this recovery is sustainable or just accounting.

The REIT Playbook: Shifting Toward Senior Housing

The playbook for surviving in this sector is clear: get out of the old, high-cost skilled nursing centers and into newer, stabilized senior housing. That's exactly what LTC Properties is doing. The company is actively transforming its portfolio, increasing its 2025 investment target to $460 million and focusing that capital on newer, stabilized senior housing (SHOP) assets. This isn't just a tweak; it's a full strategic pivot.

The shift is driven by a simple math problem. LTC is selling older skilled nursing centers and redeploying the proceeds to acquire higher-quality properties with better occupancy. The numbers show the change: the company sold seven older skilled nursing centers earlier this year, and its investment pipeline now includes more than $290 million added to SHOP through November. The goal is a fundamental rebalancing, aiming for a portfolio that is 65% to 35% in favor of SHOP-the lowest skilled nursing concentration in its history. In other words, they are shedding the burden of aging assets to build a more stable, higher-margin foundation.

This move is supported by a strong market backdrop. Health care REITs have seen solid gains so far in 2025, posting returns of 8.5% as of May. Analysts point to favorable supply/demand dynamics and powerful demographic tailwinds as key reasons. The supply of new senior housing is finally cooling due to high construction costs and financing hurdles, while demand from the aging population is accelerating. This creates a favorable environment where newer, well-located SHOP properties can command better rents and occupancy.

The bottom line is that the smart money is betting on quality over quantity. By shifting capital from older, costlier skilled nursing facilities into newer, stabilized senior housing, REITs like LTC are trying to build a portfolio that can weather the staffing and margin pressures of the past. It's a practical, boots-on-the-ground strategy: upgrade the product, improve the financials, and ride the demographic wave.

The Smell Test: What a Common-Sense Investor Should Look For

For a common-sense investor, the real story is in the details on the ground. The numbers in a press release are just the starting point. The real test is whether the recovery is translating into better financials and stronger operations. Let's kick the tires.

First, look past the pipeline announcements. It's easy to talk about a $290 million SHOP pipeline, but the real proof is in the performance of the actual properties. The key metrics to watch are consistent occupancy growth and, more importantly, rising revenue per resident day. The industry is recovering occupancy, but the pandemic showed that filling beds doesn't guarantee profitability. The study found operating margins and revenue per resident day were hit hard. A genuine recovery means those per-unit revenues are finally climbing again, not just holding steady. That's the sign that demand is strong enough to command better rates.

Second, watch the staffing and margin numbers. These are the true indicators of cost control and quality. The sector is still facing a major RN shortage, which directly pressures payroll costs. If a REIT can show improvements in staffing levels and, more critically, in operating margins, that's a red flag being addressed. It means they are managing costs better or passing them on, which is essential for a sustainable recovery. Without this, the improved occupancy is just paying for higher expenses.

Finally, understand the trade-off of the triple-net lease structure. This setup provides predictable rental income, which is a major advantage. But it concentrates the risk in the health of the operator tenants. If the nursing home operators themselves are struggling with staffing or margins, their ability to pay rent could be in question. The REIT's income stream is only as strong as the businesses leasing its buildings. This is a fundamental vulnerability that the simple math of a full parking lot can't hide.

The bottom line is that a real recovery isn't just about more people moving in. It's about making more money per person, controlling the costs of keeping them, and doing so in a way that the financial model can support. Until we see those numbers improve, the recovery remains fragile.

Catalysts and Clouds: What Could Make or Break This Recovery

The path forward for nursing home REITs is being shaped by a mix of concrete deals and looming policy clouds. The near-term catalyst is clear: momentum is building. LTC Properties, for instance, expects to close $110 million in SHOP acquisitions in January, signaling continued execution on its strategic pivot. This isn't just talk; it's capital deploying into the newer, stabilized assets that form the core of the recovery story. It's the kind of tangible progress that can keep investor confidence high and the portfolio transformation on track.

But the biggest cloud on the horizon is a piece of legislation. The 2025 reconciliation law has the potential to significantly disrupt the sector's financial engine. While it doesn't directly cut services, changes to the Medicaid program could result in reduced payments from Medicaid for nursing facility care and fewer people having coverage. Given that Medicaid pays for nearly half of long-term institutional care, this is a direct threat to a core revenue stream for many operators and, by extension, the REITs that lease to them. The risk is real and material.

On the flip side, there is a critical piece of support that helps offset rising costs. The 4.2% increase in Medicare Part A payments to SNFs for FY 2025 provides essential financial relief. This adjustment is a direct counterweight to the persistent pressure from staffing and other operational expenses. For REITs with a mix of tenants, this payment boost helps stabilize the income stream, making the sector's financial foundation a bit more solid against the backdrop of the Medicaid uncertainty.

The bottom line is a sector caught between a powerful growth catalyst and a significant regulatory risk. The January SHOP deals are a vote of confidence in the new strategy, while the Medicare increase offers a financial buffer. Yet the Medicaid threat looms large, capable of undermining the very occupancy gains that are driving the recovery. For investors, the setup is one of cautious optimism: the momentum is real, but the policy tailwind could quickly turn into a headwind.