Dealmakers in seniors housing feel the effects of the industry’s pandemic-related challenges, but they see brighter days on the horizon.
Roundtable participants
- Brooks Minford, Director, Berkadia
- Charles Bissell, Managing Director, JLL Capital Markets
- Cindy Hazzard, Broker, JCH Senior Housing Brokerage
- Richard Swartz, Vice Chairman, Cushman & Wakefield
- Jason Stroiman, Founder and President, Evans Senior Investments
- Brooks Blackmon, Senior Director, Blueprint Healthcare Real Estate Advisors
- Vince Viverito, Senior Vice President, Senior Living Investment Brokerage
By Jeff Shaw
The brokers in seniors housing may have the deepest knowledge of the industry. In order to link sellers with buyers, they have to understand every aspect of the industry from the C-Suite to the residents’ rooms.
During particularly tumultuous times, as we find ourselves in today, who better to ask about the state of the industry than these dealmakers who need to know the sector inside and out?
Seniors Housing Business spoke with seven brokers who specialize in the seniors housing industry about where we are and where we’re going, particularly in the light of the ongoing COVID-19 pandemic.
Seniors Housing Business: What do you consider to be your company’s specialty within seniors housing? This can include size, type of care or any other factor that makes something a perfect brokerage opportunity for you.
Blackmon: Blueprint transacts on deals of all sizes and across the entire acuity spectrum, with the current allocation between private-pay seniors housing and skilled nursing transactions an even 50/50 split. We don’t necessarily have a “perfect brokerage opportunity” as we’re equipped to handle all types of transactions.
Bissell: JLL’s National Seniors Housing team provides investment sales, debt and equity solutions nationally. We sell and finance all types and sizes of seniors housing and long-term care assets, but our unique competency is serving larger institutional and corporate clients with more complex capital needs.
Stroiman: We work on all sorts of deals from a size standpoint. We have several deals in our pipeline over $100 million in size all the way down to $5 million. We tend to excel in seniors housing assignments that are complex in the sense that there isn’t an obvious buyer for the community or portfolio.
Swartz: Cushman & Wakefield’s Senior Housing Capital Markets team is one of the only groups in the market with true multi-dimensional capital markets expertise, encompassing over $9 billion of transactions not just in investment sales but also debt placement and equity joint ventures. The team’s client base represents nearly every major owner or institutional investor that actively pursues domestic seniors housing opportunities as well as several off-shore investors.
Hazzard: JCH is unique in that each of our team members started off in the industry as operators. Our operating backgrounds range from marketing and administration to finance.
This gives us the unique advantage when vetting opportunities and helping sellers to identify ways to position their assets when bringing them to market. We take pride in our reputation for getting the difficult deals done.
Minford: At Berkadia, we have a full-service seniors housing platform, encompassing investment sales, mortgage banking and servicing. As the largest non-bank servicer industry, our platform supports all products and property types across all market sectors. We have a dedicated seniors housing mortgage banking arm which focuses on HUD, Fannie Mae and Freddie Mac financing, along with other capital markets services.
Viverito: Historically, SLIB has specialized in skilled nursing transactions. Although we still do excel and understand the intricacies of skilled nursing deals, our specialty over the past few years has moved to the full acuity spectrum.
Recently, we have had a lot of success selling non-stabilized, new-construction, private-pay assets.
SHB: How has transaction volume changed over the last 12 months — throughout the pandemic, recovery and resurgence due to the Delta variant?
Blackmon: While Blueprint had a respectable 2020, closing north of $1 billion in transaction volume, new originations slowed as our clients’ sole focus was taking care of residents and keeping COVID out of their communities. The result was fewer deals getting done in the first two quarters of 2021. And while the first two quarters were light, we’ve seen an onslaught of new inquiries over the last three to four months.
Regardless of any perceived risk the Delta variant presents, we are underwriting and bringing to market a large number of new opportunities.
It’s safe to say that we’re as busy as we’ve been in the firm’s history in evaluating and bringing deals to market. I expect industry transaction volume in fourth-quarter 2021 and the first half of 2022 to be very high.
Bissell: When the COVID pandemic hit, our team had approximately $2 billion of sales and financings actively moving through the pipeline. Some of those closed in the spring of 2020. Others closed, but with altered deal terms to adjust for the new environment. But a meaningful portion of transactions were put on pause while investors and lenders figured out their strategies.
Then the vaccine came,
property-level performance began improving and the landscape changed. In early second-quarter 2021, we began to see a resurgence in activity, with many sellers now looking to relist their properties, and buyers increasingly coming off the sidelines to bid on deals.
Thus far, the Delta variant has not had a significant impact on deal flow. Resident vaccination rates at seniors housing assets are very high, and staff vaccination rates are increasing. The resurgent economy and strong housing market are also having positive influences.
Stroiman: Transaction volume has picked up considerably as compared to 2020 as many independent owners want to get out of the industry due to potential future changes in tax laws and the difficulty of operating in the current environment. We have not seen any slowdowns due to the Delta variant in any meaningful way.
Swartz: With the exception of a handful of large transactions, volume has remained considerably off the pre-pandemic pace. The first quarter of 2021 was extremely slow with very little in broadly marketed opportunities. Since the start of the second quarter, we have seen a significant uptick in these opportunities coming to market, a trend that we see continuing for the rest of the year.
COVID muted both new supply coming to market as well as capital demand, and with COVID concerns slowing, these pent-up forces are being loosened, resulting in much more capital markets activity. So far, the Delta variant does not seem to have had a significant impact on the volume of deals hitting the market.
Hazzard: We’re busier than ever right now. The first six months of the pandemic found lenders and investors uncertain. We’ve seen many smaller operators bring distressed assets to market while bigger operators, better able to weather the storm, were able to hang on. Transactions are also taking longer to close.
However, as most operators have found their footing in this new environment and vaccine rates have increased, asset managers have started to review which properties can be trimmed from their portfolios. We’ve not seen any decline related to the Delta variant, but as we enter into the colder months and the question of booster shots come to light, that may change.
Minford: In 2020, as across the industry, many of the transactions we were working on came to a grinding halt. The size and nature of those transactions, the downward occupancy and revenue trends across the industry, and the scarcity of financing meant most of our clients were forced to the sidelines until more stability returned to the market.
Today, we are seeing a sense of confidence, and in some cases an aggressiveness, which resembles that of 2019 — particularly as the debt markets open back up and provide buyers more options on the financing side. Similarly, we are seeing a lot of new capital to our industry, which is looking for both stabilized and value-add deals throughout the country. Rebounds in occupancy seem to vary by geographic region.
Viverito: 2020 was a lost year for most. Regarding transactions, we were down about 35 percent as a company. However, 2021 has seen an explosion of activity. We have already surpassed our 2020 total of closed deals in July of 2021.
It’s certainly been a challenging environment given the nuances of COVID-19 and the Delta variant. However, the greater senior living industry has adapted well and appears to have an appetite for acquisitions again. With that said, staffing challenges are creating some of the largest issues for operators these days.
Going through changes
SHB: What are some of the hidden factors affecting deals?
Blackmon: Arguably the biggest factor in getting deals done in 2020 was the debt market.
While there were still a handful of lenders willing to issue loans, a large portion of the debt market was sidelined or only made loans in special cases with established relationships. Debt pricing isn’t quite back to pre-COVID levels, but rates remain very low and we’ve seen a lot of banks and debt funds eager to get back in the middle of things.
In today’s market, there aren’t many “hidden” factors affecting deals, though one thing we continue to run across is increasing insurance costs.
Bissell: Staffing challenges are resulting in spikes in expenses due to overtime and use of agency staffing. Investor and lender underwriting also focuses on concessions, rent growth, occupancy rebuild and insurance, but none of that is hidden.
Swartz: Throughout 2020 we saw investors underwriting extremely conservative leasing velocity and rate growth.
The vaccination push has allowed most properties to press forward with aggressive sales efforts. Trailing three-month performance ending in June has on average shown a steady uptick in occupancy industrywide.
Anecdotally, we believe the upward trend has continued throughout the summer, but the pacing may have slowed due to Delta variant concerns. For most deals involving some element of lease-up, the largest factor affecting pricing is how aggressively or conservatively investors underwrite the pace of re-leasing.
Hazzard: When working with sellers, it’s imperative that the operators separate out the various stimulus monies, Payment Protection Program (PPP) loans and government grants in their financial statements as to not overstate their bottom line. Facilities continue to encounter staffing shortages and find themselves having to increase starting wages, while being hesitant to pass the increased costs along to the consumer.
Minford: We are seeing a backlog in delays from third-party providers and state licensing agencies. Pre-COVID, we could typically count on appraisals being turned around within three to four weeks and state licensing agencies to respond within five to seven weeks.
Work-from-home challenges, coupled with sporadic access to buildings, has us advising clients that there could be a delay on closing of up to 30 days. While not the case in every transaction, we are certainly making sellers aware as we move closer to Dec. 31 and year-end closings become more significant.
Other variables that are impacting the underwriting of transactions continues to be staffing, insurance and construction costs. Combined, these three items have resulted in the biggest shift in underwriting over the last year or so, as PPE costs have slowed.
Viverito: Staffing is the most common challenge we are hearing from owners/operators today — so much so that some owners are unable to take on new residents because they do not have the proper staffing coverage ratios. Hopefully as unemployment benefits decrease more people will return to the workforce alleviating some of these challenges.
SHB: What changes are we seeing as related to valuations and capitalization rates during this time?
Blackmon: We’ve seen valuations on the seniors housing side, for asset and acuity types, increase over the last six months. The increase in values can largely be attributed to the following:
• For about 12 months the number of new investment opportunities was significantly decreased as a result of asset owners focusing on operations and the lack of appetite from buyers to bid at a level that sellers were comfortable transacting at.
• It’s no secret that institutional private equity firms raised a staggering amount of capital over the last three years. The number seen in industry publications is usually around $11 billion to $12 billion, though I think that number is on the conservative side. For different reasons, this capital needs to be deployed and, because of the pandemic, this capital was largely unspent. Given the inability to place capital and the scarcity of quality assets on the market, we’ve seen a significant increase in participation from these groups in bidding processes over the last couple of months.
• On top of the core and opportunistic capital raised by institutional investors, there were a number of “distressed” funds raised by middle-market private equity and regional seniors housing investment firms. This capital was raised with the idea that coming out of the pandemic there would be a number of lender-directed sales and smaller owner-operators that didn’t feel they could hold on operationally. While private-pay seniors housing [operators] didn’t get near the stimulus that the skilled nursing sector did, the stimulus they did get in conjunction with PPP loans helped most stay afloat. As a result, we haven’t seen the wave of distressed sales that so many were anticipating.
• Construction costs are as high as they’ve ever been. Those costs pushed many who sought to build toward buying existing properties. This has only added to the number of other buyers that are participating in sales processes and has created a competitive and efficient market.
Bissell: Given that most assets are not fully stabilized currently, valuations are very much an art as opposed to a science. Cap rates on current net operating income are of limited use. Ultimately, the buyers are seeking a return on their capital, and that return has not really changed. For value-add deals, as an example, that return is mid- to high teens levered IRR (internal rate of return). How you get to that number is the art. However, upward trending performance again has helped substantiate more aggressive assumptions.
Buyers also are looking hard at replacement cost, and view the ability to purchase a quality asset at less than replacement cost as an important factor in underwriting. The increased construction cost has made the discount to replacement cost thesis more compelling.
Stroiman: There are relatively few deals today that are stabilized (over 90 percent occupancy), and the ones that are tend to trade at a premium on a cap rate basis. Most deals have a value-add component due to the state of their occupancy, so defining the valuation really needs to be looked at on a case-by-case basis. Our approach is to define what a pro-forma stabilized value of the community would look like and then work backward from that number if the building is in distress. Understanding the potential debt leverage in a deal today is also key to understanding valuations.
Swartz: We haven’t seen evidence yet that would lead us to believe that there has been a fundamental revision to stabilized cap rates and IRR. However, as per the previous answer, near-term (year-one) underwriting remains more conservative, particularly for properties that require significant lease-up to achieve stabilization. We have also observed a heightened emphasis on replacement-cost evaluation, particularly with respect to pre-stabilized assets.
Hazzard: Many of the facilities coming to market do not have the bottom line that they had several years ago and are now being valued more heavily on the real estate and improvements than relying on cap rates and other traditional methodology.
We’re also finding newer assets coming into the market that opened their doors during COVID and are finding difficulty in meeting their projected lease-up timelines. Missed projections and pressures from investors are causing development groups to sell these assets, albeit not at a discount.
Rates on performing properties have not moved much. The bottom line is, at the end of the day, the lenders are “The Great Mediator” on pricing.
Minford: We are seeing the most significant impact on pricing as it relates to older (built before 2006) properties. Generally, the concerns here are related to design (flow of the building, average unit square footage, amenities) along with the increasing likelihood of larger capital expenditure projects needing to be done in the near future.
We are also seeing a change in use for some of these older communities, which is impacting the way buyers value them. Alternatively, we are seeing very aggressive pricing for deals that were built in the last five to seven years and performing well (over 80 percent occupancy with healthy
private-pay rates). We’ve seen many offers reminiscent of 2019 pricing on these types of deals and expect that to continue as firms work to deploy investor capital into the seniors housing space before the end of 2021.
Viverito: Over the past 12 months, we have seen the market make a complete 180 degree turn. Valuations, in general, are back to pre-COVID levels, and in some cases even higher. Additionally, inventory is still relatively low compared to previous years. Most deals are receiving multiple offers, even for the distressed assets, which is continuing to drive up prices.
There’s a lot of bullish capital out there looking for a place to invest and make up for a lost year in 2020.
Buy/sell dynamics
SHB: Who are the biggest buyers and sellers right now, and why? How has that changed over the last year?
Blackmon: We’ve seen a large number of developers that have completed projects prior to or during the pandemic and historically seek to “build, fill and sell” reach out to Blueprint to advise on a transaction.
This is largely a result of higher construction costs, and many developers feel that their completed communities are a good value proposition for buyers looking to purchase assets whose replacement value today may be 15 to 20 percent higher. Whether in lease-up or near stabilization, in a lot of cases buyers are able to purchase high-quality assets in lease-up at a small premium to today’s replacement costs.
We’ve also seen a number of local and regional owner-operators that weathered the COVID storm but are tired and are seeking to exit the industry. And while we haven’t seen it quite yet, I believe a number of the larger private equity firms will soon begin to execute on disposition mandates that were slated for 2020 or early 2021.
Bissell: In 2020, the biggest sellers were REITs and public companies seeking to pare their portfolios and willing to sell at prevailing market pricing in order to accomplish broader strategic objectives. With the resurgence in occupancy we have started to see a more traditional mix of sellers, including private equity, institutional funds and merchant builders.
On the buy side, a huge amount of money was raised to target distressed seniors housing. But the combination of funding from public subsidies, and patient existing lenders resulted in there being minimal distress in seniors housing. Some of that money is now pivoting and being deployed into value-add deals.
Stroiman: On the buy side, the most active buyers in our purview continue to be regional owner-operators that are looking at value-add deals to round out their regional markets. As most deals on the market are not stabilized and have some turnaround aspect to them, each deal is unique in vetting a strong buyer pool.
Most sellers we deal with today are independent owner-operators looking to leave the industry or larger institutional funds looking to shed non-core assets. These categories don’t remain vastly different than a year ago, with the only caveat being the return of more institutional buyers that have come back to the market.
Swartz: Most buyers continue to be private equity in nature, although the public REITs have made big splashes this year with large portfolio acquisitions and dispositions. With the lack of opportunities over the past year and the continued inflow of new institutional commitments to the seniors housing space, there is a significant amount of dry powder on the sidelines that is increasingly eager to be deployed.
As more value-add and distressed acquisition opportunities present themselves, we have seen a number of opportunity funds that were not previously in the space now aggressively pursuing value-add portfolios of older properties — and/or those with lower occupancies. For high-quality, Class A and/or stabilized properties, the buyers have remained consistent to before the pandemic.
Recently, most of the sellers that have come to market have been publicly traded groups that seek to realign their portfolios and operator relationships and private sellers that are evaluating strategic exits where ownership has capitulated.
Hazzard: We’re seeing buyers from all over the spectrum, ranging from people new to the seniors housing space to those with over 100 facilities. Many are using this opportunity to fill out their map geographically.
During the beginning of the pandemic, we found ourselves with value-add inventory from independent owner-operators. Currently, more of the major players in the industry are pruning their non-core assets and “mom and pop” operators that are wanting to exit the space are bringing their facilities to market, distressed or not.
Minford: To date, the biggest sellers have been large REITs or private equity groups that have made the determination to exit the senior living space to focus on other asset classes. We are also seeing some smaller, regional operators — typically smaller, family operations or regional operators with one primary equity group backing them — exit the space. The last year has taken a toll and these operators are looking to take some money off the table and invest in other asset classes.
Other buyer groups are eager to step in and take advantage of growing their portfolios in a meaningful way to obtain more scale in certain geographic areas. I think COVID has sent some investors that were not fully committed to the space back to other product types, which is ultimately good for the industry.
Viverito: There are a lot of smaller “mom and pop” type sellers right now. They are either ready to retire or COVID has pushed them to exit the space. Some REITs are rightsizing their portfolios and private equity groups are doing the same. From a buying perspective, the REITs are active, but regional operators partnering with private equity groups seem to be the most aggressive buyers right now.
SHB: Which segments of seniors housing are you most bullish and bearish on right now and why? Has your opinion changed at all in recent years?
Blackmon: We saw active adult and independent living as the most resilient asset types during the pandemic. I think a lot of others outside the industry saw that same trend and investors who have yet to dip their toes in seniors housing will find the most comfort in a lower acuity product as their jumping-off point.
Bissell: I remain bullish on communities offering a continuum of care because this provides the best long-term housing solution for the majority of seniors and their families. But I also believe there is a place in the market for one-level facilities such as freestanding memory care and active adult communities.
It’s really a matter of the supply matching the demand, and not seeing supply get way out in front of demand as it did for freestanding memory care a few years ago.
Stroiman: Independent living seems to continue to pick up steam, as the long length of stay of the average resident seemed to provide a buffer against the industry-wide downturn in occupancy from COVID. Standalone memory care seems to continue to be a tough segment of care to lease up and maintain at a high occupancy.
Swartz: We continue to be bullish on full-continuum product, particularly if fully stabilized. We have seen appetite softening for smaller, older buildings as well as standalone memory care. The biggest change is how bullish we are on the active adult space, which we view as finally emerging as a standalone asset class.
Hazzard: The core ingredients of the seniors housing industry really haven’t changed. There is no shortage of seniors who will need the services that our industry will provide. Each sector provides necessary services. I believe there is demand for all.
Minford: Private-pay assisted living continues to see healthy interest from the market on the acquisition front. However, we are starting to see more interest in active adult, independent living and middle-market assisted living. Operators are realizing just how in demand an affordable, yet quality option is for both acuity levels.
Viverito: Active adult communities are a hot topic right now. The “silver tsunami” is still five to 10 years away, so the natural first wave of boomers starting to enter the market is looking at active adult communities. This timing is sensible because home prices in most markets have increased dramatically in the past two years. Thus, downsizing from their empty-nester homes and making a nice profit makes a lot of sense.
A glimpse into the future
SHB: Looking into your crystal ball, what do the next 12 months hold for seniors housing?
Blackmon: I believe we’ll start to see quite a bit of consolidation. Regional owner-operators will continue to purchase communities owned by smaller “mom and pop” owners that are seeking to exit the industry. Similarly, I think you’ll see institutional capital start to recapitalize some of the aforementioned regional owner-
operators that have spent the last five to seven years growing from five to 25 communities.
Bissell: I believe the next 12 months will see continued improvement in seniors housing performance, with move-ins remaining strong. Transaction volume will continue to increase as investors seek to deploy the capital they have raised. We will also continue to see capital coming to seniors housing from other sectors where returns have been compressed to historically low levels.
Stroiman: It will take time for the industry to get back to a healthy occupancy from a macro standpoint. If you have equity ready to deploy, there are still deals to be had in this market for a significant discount. Operators and their equity partners that have a defined strategy of what they are looking for and can move quickly may find that they have a strategic advantage in this market and will come out ahead.
Swartz: We expect an extremely active transaction market with a significant volume of product being offered. Strong product will have accelerated occupancy recovery. We’ll see more entrants for development and investment for active adult and more distressed transactions, some due to lender concerns.
Hazzard: Things will continue to be bumpy probably through the end of 2021. That being said, we believe that mask mandates, booster shots and a general awareness of the consequences in our industry if infection control protocols are not taken seriously will help mitigate many of the concerns with the Delta or future variants.
It seems to be a consensus that when the additional unemployment monies dry up that some staff will return to work, hopefully reducing staffing shortages and wage competitions in local markets.
Minford: If all holds, we should see a lot of volume over the next 12 months both on the financing and investment sales side. There’s plenty of investor capital to put to work, and lenders are back in the market and looking to provide acquisition debt or to refinance assets already in a portfolio.
Viverito: We see continued deal flow. Interest rates are still historically low and there is plenty of capital looking for cash flow. When government support stops, we may see more distressed assets coming to the market, specifically in the skilled nursing world. Hopefully, the staffing situation and vaccination rates will continue to improve, leading to an increase in occupancy across the industry. I’m bullish on continued improvements with the new norm of COVID and the industry taking control.
SHB: What issues in our industry keep you up at night?
Blackmon: The shortage of quality labor and the increasing cost of finding it. This has long been a concern for operators in our industry, but there isn’t a quick resolution and the pandemic has made it that much tougher. I don’t see labor issues getting much better for the foreseeable future.
Bissell: Having been through numerous cycles in the seniors housing space, I don’t lose sleep over the current issues. The seniors housing market has many complexities and is constantly evolving. There are always challenges to overcome, but our sector is fortunate to have attracted many highly intelligent and caring leaders, and I am confident that solutions will be found as the sector continues to grow and evolve.
Stroiman: Staffing continues to be the primary issue our industry is going to face for the foreseeable future. We know the demographics are going to be there from a resident basis, but will we have enough staff to care for them? Pay is certainly a factor, and how it impacts industry profit margins remains to be seen.
The one strategic advantage our industry has over retail and other industries in some ways is that our staffs have a great purpose in their daily jobs caring for seniors, as compared to just stocking shelves or delivering packages. Hopefully, operators can continue to articulate that to their staff and inspire a new generation of workers.
Swartz: Our biggest concern right now relates to the potential of COVID variants that otherwise disrupt the normal operations and/or slow the industry’s rebound.
Minford: Aside from COVID, financing is a concern. As we saw in 2020, when the availability of financing contracts, it becomes very difficult for most groups to transact.
Technology continues to play a role in how and where seniors are treated. We anticipate more at-home or out-of-
community solutions in the future of seniors receiving care, which will largely be tied to technology.
We’re interested to see the impact of the newly built independent living communities which were constructed with the idea of being licensed for assisted living in the future, as the idea of aging in place becomes a renewed possibility for those living in those newer communities.
Viverito: I’m concerned about mutations of the virus and vaccination rates. If people are unwilling to get vaccinated, many of those being seniors housing staff, the infection rate will persist and staffing will remain challenging.
Winter will be tough as new variants could continue the spread. All of this leads to less available staff, safety concerns for loved ones and challenges for senior living owners and operators. All of this leads to lower occupancy.
However, I’m bullish that America will continue to innovate, change and stay ahead of COVID and keep our industry strong.