Question of the Month: Time to Invest?

How do you know whether to keep your powder dry or jump back into the investment/development markets?

Buying, but not building

Rick Shamberg

Managing Director

Scarp Ridge Capital Partners

Our firm has taken a bullish approach to the acquisition market in senior living and a more conservative approach to development opportunities.

Given the dislocation and interruption stemming from the pandemic, including pressure on sponsors (which in some cases has translated to more reasonable valuations), pent-up demand from consumers, high construction costs for new development, and a general lack of new supply in some markets, we see an opportunity to buy newer properties at or below replacement cost.

We expect the volatility in financing markets and inflationary pressures to continue in the near term, but the long-term outlook for senior living product that is well located and well managed is extremely bright.

 

Always be investing

Laurie Schultz

Principal & Co-Founder

Avenue Development

I’ve never subscribed to the belief of keeping dry powder, nor “build it and they will come.” There is always opportunity for smart investments and new development in the right geographic market, no matter the economic environment.

We maintain a consistent set of development criteria to add value and differentiate our product to residents, and put a strong emphasis on understanding the competitive landscape. If you are not investing, you are not growing and pushing the limits to improve.

 

Don’t overextend yourself

Michelle Kelly

Senior Vice President, Investments

NHI

I tend to believe in the “bird in the hand” approach, particularly in the acquisition world since it can be somewhat unpredictable when the next good deal is going to be in front of you.

The key is to stick to your investment and underwriting criteria and potentially even be a bit more conservative in a more challenging economic environment. You also need to make sure that, post-acquisition, your company is still on solid financial footing. In other words, don’t overextend yourself just for the sake of getting the deal done.

 

Experience breeds confidence

Kelly Sheehy

Senior Managing Director, Healthcare Business

Artemis

With the tailwind of demographic demand at its back, seniors housing remains very attractive. Our experience investing in healthcare through multiple cycles over the last 20 years reinforces our conviction to stay disciplined, partner with strong operators and be nimble in this time of volatility.

Our capital enables us to pivot to investment opportunities and structures that are priced appropriately and can withstand unpredictability in interest rates and labor. This includes development opportunities, where we can structure protection against cost increases and debt opportunities and provide attractive financing at a basis and pro forma we can underwrite with appropriate cushion.

 

Tailwinds are strong

Adam Heavenrich

Managing Director

Heavenrich & Company

Despite rising interest rates, an inflationary environment and a pending recession, this is a remarkable time to invest in seniors housing. The recent jump in home values will expand demand, as more seniors will be able to afford needed services. The lull in new senior housing construction due to COVID will contribute to an under-supply of seniors housing units in the coming years, just as we are coming into the Silver Tsunami.

Moreover, the occupancy dip caused by COVID has created some distressed acquisition opportunities. With a reasonable cost basis, investment in existing seniors housing is well protected, as new competition will have to charge substantially higher rents to support the much higher cost of construction. A combination of surging demand, limited supply and distressed pricing has produced a unique window of opportunity for investors.

In select markets, rents have increased substantially enough to justify new construction.

That said, all seniors housing investments are market- and operator-specific, requiring solid due diligence and alignment between investor and operator.

 

Maintain sound underwriting

Zach Bowyer

Senior Managing Director, Valuation & Advisory

Cushman & Wakefield

There is a capital tsunami coursing through the market and affecting all in its pass: debt, equity, volumes, valuations, asset mix, geography, you name it. The global money supply is $20 trillion (24 percent) higher than it was at the end of 2019 with dry powder estimated at roughly $28 billion over pre-pandemic levels.

There is opportunity in all market cycles; knowing when to deploy capital depends on your investment strategy. While we are seeing a slight pause from investors, the weight of capital coupled with the exponential demand growth from our aging population — the other tsunami — should help offset rising interest rates and other inflationary factors, with sound underwriting being more important than ever.