Given the financial pressures of COVID-19, should the industry prepare for an influx of distressed assets?
The buck will eventually stop
By Aron Will
Co-Head, National Senior Housing
CBRE Capital Markets
There could certainly be some distress in our sector come third- or fourth-quarter 2021, driven by borrowers that aren’t particularly well capitalized and don’t have the staying power to weather the storm.
The majority of banks have provided relief (lax covenants, maturity extensions, etc.), but the buck will stop at a certain point. Many forget that the sector had some issues pre-COVID, and that COVID simply exacerbated some of the underlying problems operators were facing.
Owners hang tough
By Alan Plush
Equity investors have largely learned from past downturns and, despite eroded fundamentals, are still hanging tough and are hesitant to sell at distressed valuations. Buyers are equally hesitant to “pay up” in most cases. Thus, instead of a large amount of distressed asset transactions, we simply have fewer transactions overall.
Should that change, then the larger market will suffer as both debt and equity become more cautious, and valuations decline as the better assets simply don’t trade.
Owners look downstream
By Richard Swartz
Vice Chairman, Equity, Debt & Structured Finance, National Senior Housing Capital Markets Group
Cushman & Wakefield
We are already seeing some distressed asset sales. These typically result from properties, both older and recently completed that are in lease-up, that prior to COVID were already experiencing weak occupancies. Most owners are evaluating their confidence in these properties and their current operators to navigate through this recovery. As part of this analysis these owners are evaluating their capacity and desire to fund operating deficits or the necessary capital improvements to compete effectively.
As lenders become more demanding on enforcing the terms of their loans, many will choose to sell on a distressed basis to get out from under these burdens.
There are silver linings
By John Powell Jr.
Executive Vice President, National Director Seniors Housing
An increase in distressed assets is quite likely. However, the timing partially depends upon the next round of stimulus and when sustained recovery begins.
The pandemic accelerated a likely correction in the industry. Already underperforming properties from a combination of weak management, poor physical condition/design or overbuilt markets have continued to experience declining operating margins.
With increased industry sophistication and greater emphasis on health and wellness, weak operators will exit the business. Introduction of stronger management and fresh equity to these properties will improve performance. Consolidation in a still relatively fragmented industry will also occur. Both are desirable outcomes.
Affordability may benefit
By Steve Thomes
Senior Managing Director & Head of Business Development
Blueprint Healthcare Real Estate Advisors
Pricing and transaction volume was very high pre-COVID, as was development, so the industry was already prepared for some fallout in the form of distressed acquisition opportunities in certain segments. I expect the influx of post-COVID distress will be most visible in markets with new competition and lower pre-COVID absorption rates.
As the industry emerges from the pandemic, any distress will be further exacerbated where struggling older and undercapitalized communities facing heavy competition will have no choice but to exit. The silver lining of reduced acquisition prices could be the opportunity to further the emergence of a more affordable model.
Distress presents opportunities
By Kassem Matt
Executive Managing Director
Near-term challenges facing the sector undoubtedly will result in financial distress for many. I will not use the word “influx,” but as demographics and long-view demand for seniors housing remains strong, I can see distress in the space as an opportunity to help to meet the much-anticipated need for the middle-market seniors housing product.
Valuation expectations of owners of these properties have not yet reset, but capital sources have already begun to target distress in the space. This may be an avenue to right-size the real estate cost for the middle-market product via acquisition of distressed assets.
Incentives can fill vacancies
By Paul Gordon
Occupancies across the full range of senior living properties are markedly down over the past year. While the industry has weathered the COVID crisis admirably and we appear to be on the road to a slow recovery, there surely will be an influx of distressed properties available in the marketplace.
When acquiring underperforming communities, our clients typically reposition their offerings, develop new contracts and addenda, and create incentives to fill vacancies. Examples include trial residence programs; waived or deferred fees; visitation privileges at co-owned properties at discounted rates; contracts with fewer included services and amenities; telemedicine arrangements; free smart pads; paid moving expenses; and caps on fee increases.
Find creative structures
By Mark Scully
Green Courte Partners
We are exclusively focused on independent living and active adult, which have generally outperformed the higher-acuity sectors through the pandemic.
There are certainly pockets of distress in seniors housing, but we haven’t yet seen an “influx” of distressed assets. Still, some developers aren’t getting the lease-up or rents they underwrote, which can create significant challenges with debt covenants and maturities.
However, since we have flexible, long-term, discretionary capital and an in-house management company, we are working through these challenging market conditions with our counterparties to creatively structure deals that align our interests and optimize their outcomes. It’s a win-win.
The benefits of scale
By Andrew Boland
Director of Healthcare Financing
Yes, inevitably, the seniors housing industry should expect an increase in distressed assets. This will vary greatly by location and ownership group. We see local visitation policies, vaccines and market demand as major influences for a community. Owners with scale may be in a better position to withstand more challenging circumstances.
We anticipate that distress will create acquisition opportunity, which will be buoyed by significant capital that is ready to deploy. Seniors housing is constantly adapting, and with time and access to financing any influx of distress should be minimized. Increased activity should continue into 2022.