By Matt Valley
Time is running short for operators of underperforming properties trying to shake off the negative impact of COVID-19 on occupancy and revenue, said Chuck Hastings, vice president of finance and business development for Juniper Communities. “In 2022, lenders are going to want to see us all getting back to pre-pandemic levels [of performance]. So, as operators the pressure is on.”
Bloomfield, New Jersey-based Juniper operates 28 senior living communities in four states: New Jersey, Pennsylvania, Texas and Colorado. Hastings, who knows firsthand that lenders are growing increasingly impatient with financially troubled properties suffering under the weight of the pandemic, addressed the issue during a capital markets panel session at InterFace Seniors Housing Northeast in Philadelphia. The event, hosted Dec. 2 by Seniors Housing Business and France Media’s InterFace Conference Group at the Loews Philadelphia Hotel, drew over 225 industry professionals.
“When you have 28 buildings, you are always going to have one or two which are underwater to some extent,” emphasized Hastings. “We have one building that is still struggling. It’s in Western Pennsylvania. We just had a call with them yesterday. Their COVID positivity rate is 28 percent.” (The positivity rate is the percent of COVID-19 tests that come back as positive out of all the tests taken in a specific time period.)
“In 2020, the lender was very nice, very hands off” amid the property’s performance issues, said Hastings. “In 2021, we hadn’t really gotten all the way back — not nearly all the way back — and their tone changed. They were apologetic about it, but the sense we got after a while is that it was really coming from their regulator. They can’t have a whole lot of loans like that one on their books, so the rah-rah pats on the back kind of dissipated, and we had to find some solutions.”
Juniper offered cash collateral and other enhancements as a possible solution, but “that particular lender wanted the loan to go bye-bye off its books,” said Hastings. As of early December, Juniper was in the process of combining the troubled property in Western Pennsylvania with a larger, outperforming asset with plans to eventually “refinance that out.”
Joining Hastings on the capital markets panel at InterFace Seniors Housing Northeast were Ari Adlerstein, senior managing director, Meridian Capital Group; Mark Bultman, senior vice president, Capital One Healthcare; and Don Pelgrim, CEO and fund manager, Wilshire Finance Partners. The panel was moderated by Michael Coiley, managing director, CIT Healthcare Finance.
Coiley asked the lenders how underwriting has changed over the course of the pandemic. Bultman of Capital One Healthcare said the bank is factoring in the need for a bigger cushion for operating expenses in the first three years of any financing deals it underwrites. “Expense growth has obviously been a big topic of concern.”
When it does encounter troubled assets and performance deterioration, Capital One Healthcare will take the necessary and prudent steps to minimize the risks to the bank, said Bultman.“We’re trying to find non-cash ways to kind of buttress our risk position, whether it’s a little bit of recourse, additional collateral, stuff like that, and not hit people where it hurts right now, which is cash.”
With buildings filling up again, Bultman said Capital One is underwriting occupancy the same as it has in the past. Across the nation’s top 31 markets, the occupancy rate for private-pay seniors housing finished the year at 81 percent, up from 78.7 in the second quarter of 2021, according to Annapolis, Md.-based National Investment Center for Seniors Housing & Care. Still, that’s well below the occupancy rate of 87.8 percent recorded in March 2020, the first full month of the pandemic.
Pelgrim of Wilshire Finance Partners, which primarily provides bridge loans to regional owners and operators of independent living and assisted living facilities nationwide, said his firm is scrutinizing loan-to-value ratios and structure a lot more than in the past.
“We do a lot of distressed real estate, turnarounds and value-add. Oftentimes that involves a lot of structure. So, with respect to the holdbacks and some of the reserves we put in place, we’re being a little bit more conservative and just adding to those as well,” explained Pelgrim.
The upheaval surrounding COVID has made Bultman realize all the key players in a transaction have to be on the same page, otherwise the deal doesn’t get done. In the case of a property sale, that includes the buyer, seller, appraiser and lender.
“Since COVID, all these parts are kind of disparate now, and it’s harder to get deals done because maybe the appraiser is low, but I’m on board. But maybe I’m not on board with the underwriting. That’s an interesting dynamic that I’ve been following ever since we hit COVID and seen turmoil in the market,” says Bultman.
Adlerstein of Meridian Capital Group concurred and added that because he likes to sleep at night, he believes certainty of execution is important. “Perhaps Mike (of CIT Healthcare Finance) is priced 20 basis points higher than another lender bidding on the same deal. We’ll say, ‘Go with certainty of execution. Take the sure thing versus the maybe because there is enough other disruption in the market. We don’t want our lender to be disruptive too,’” emphasized Adler.
Seasoned lenders in the healthcare sector that have completed billions of dollars in transactions and that are committed to the space for the long term are routinely working with clients to get through the hard times, noted Adlerstein. “It’s the lenders that kind of dip their toes into healthcare and really are commercial real estate lenders — those are the guys we find to be troublesome. They just don’t get healthcare generally, and they have been reactionary.”
Time to raise rents?
Even though occupancy in the private-pay seniors housing space plummeted after COVID-19 hit, some operators now feel compelled to raise rents. Juniper, for example, recently announced that it would be raising rates 6 to 10 percent this year in all four states. But sales and marketing directors within the company argued that Juniper should discount rates to boost occupancy, Hastings acknowledged.
While competitors may focus on price, Hastings said Juniper will highlight the richness of its operating platforms, dining options and activity programs, which it calls Connections. “And when we get to January or February, we may find that we’re going to lose some residents because of that approach.” If that’s the case, Hastings said Juniper will pivot and try something else.
In his 26 years at Juniper, Hastings said this is the first time he’s encountered this tension between the decision to raise rental rates and the feeling that, because everybody in the industry is in “fill” mode, there is pressure to lower rates. “We haven’t found the secret sauce or the balance yet, but we’ll find out in the next couple of months. It’s going to be pretty telling.”