Seniors Housing Goes Into Capital Preservation Mode

by Jeff Shaw

COVID-19 outbreak slows transactions, forces companies to take defensive posture.

By Matt Valley

The stabilization of the U.S. economy and its pace of recovery is inextricably linked to the speed at which the spread of the COVID-19 pandemic can be contained, say seniors housing experts. Until the health crisis is under control, they expect transaction activity to slow considerably or possibly even grind to a halt.

As of April 8, the respiratory illness had claimed the lives of 13,000 Americans, a clear majority of whom were senior citizens. Sadly, that running total included 4,000 coronavirus-related deaths in New York City alone. The confirmed infections nationally reached 400,000, according to data from Johns Hopkins University. The first death in the U.S. occurred in the state of Washington on Feb. 29.

“Whether it be monetary or fiscal policy, a short-term impact is practically impossible to gauge until we are finally able to roll out the necessary tests to understand who has the virus, we produce the necessary equipment such as ventilators and masks, and add the needed beds to alleviate the stress on the current healthcare system,” says Michael Gehl, chief investment officer for Housing & Healthcare Finance based in North Bethesda, Maryland. “Until we address the above, it’s tough to know how this plays out across the economy.”

Alan Plush, CEO and partner of appraisal firm HealthTrust based in Sarasota, Florida, says that refinancings and property sales that were already in the deal pipeline and too far down the path to walk away from are still getting across the finish line for the most part.

“But what fills the pipeline after that? We’ve talked to some of our competitors, and they are all kind of in the same boat. Everybody has about two weeks’ worth of work and then it looks to be really quiet,” Plush remarked in an interview with Seniors Housing Business on April 1.

Sensing that business will be sharply curtailed for at least three months and possibly as long as six months, Plush made the tough decision at the end of March to trim HealthTrust’s workforce through a round of layoffs. “We can obviously pull those former employees back in pretty quickly if we need to, but I think you are going to see a real slowdown across the space until people get their heads and arms around the potential depth of the issue,” says Plush, referring to the impact of the virus, which had claimed the lives of more than 87,600 people globally as of April 8.

A call to arms

Meanwhile, the National Investment Center for Seniors Housing & Care (NIC) notes that the workers in this industry such as doctors, nurses and certified nursing assistants are on the front lines of the battle against COVID-19 and need to be armed with the necessary tools.

“The workers are doing the best they can 24/7, and so we need to protect and help those workers with basic stuff like testing kits and personal protective equipment,” says Beth Burnham Mace, chief economist for NIC based in Annapolis, Maryland. “When I talk to operators, some are really successful at acquiring the equipment. Others are scrambling.”

Mace offers this advice to both investors and lenders: listen to the operators and provide them with what they need in this time of crisis. “If they need to provide overtime, allow that to happen in the business plan. If they need to provide extra equipment, allow that to happen.”

Plush echoes those sentiments. Despite the certainty that operational costs will rise in the short term, occupancies are likely to fall and liquidity may dry up for a time, Plush says it is imperative owners and operators remain laser-focused on the health, care and well-being of their residents.

“You may be faced with terrible, harsh financial decisions. But if, as an industry, we fail to care for the frail elderly, then the industry will take a decade to recover from this. So, we have an obligation to our residents more than anything else.”

Plush should know. In addition to heading up HealthTrust, he’s also the owner of Harbor Chase of Sarasota, a 108-unit assisted living and memory care community in the Sunshine State.

Monetary and fiscal policy moves

Nearly 10 million U.S. workers filed new claims for unemployment benefits during a two-week period in March, according to the Labor Department. The dramatic job losses were expected after most states issued stay-at-home orders to protect citizens from the spread of the virus. Businesses big and small began furloughing employees in waves because of lost revenues. Total nonfarm payroll employment fell by 701,000 in March, and the national unemployment rate rose 90 basis points to 4.4 percent.

In an emergency meeting in mid-March, the Federal Reserve lowered its benchmark fed funds rate a full percentage point to near zero to stabilize the financial markets as business closures and event cancellations mounted amid the spread of the virus. Simultaneously, the central bank declared its intent to buy at least $500 billion in Treasury securities and $200 billion in mortgage-backed securities to inject cash into the economy over the coming months, a move known as quantitative easing.

Gehl says the Fed is using every tool in its tool kit. “In fact, it has unveiled new programs that weren’t even used in the Great Recession in 2008, such as lending programs to investment-grade companies. I agree with everything the Fed is doing in times like these where the credit markets are seizing up and there is a flight to cash. This is what the ‘lender of last resort’ needs to be doing,” says Gehl.

In late March, President Trump signed into law a $2 trillion federal stimulus package in response to the severe economic disruption caused by the spread of COVID-19. The relief package, the largest in U.S. history, provides direct payments and expanded unemployment insurance to many struggling Americans. The package also provides loans and grants to businesses and directs additional resources to healthcare providers.

“Entire industries are shut down, and aggregate demand is plummeting,” says Gehl. “Responding to that drop in demand with fiscal stimulus is the right move, and I’m not sure even $2 trillion — roughly 9 percent of U.S. gross domestic product (GDP) — will be enough to get us through.”

Mark Zandi, chief economist for Moody’s Analytics, forecasts U.S. GDP to contract 18 percent in the second quarter on an annualized basis after an estimated contraction of 2.2 percent in the first quarter. Without the $2 trillion stimulus package, Zandi’s projection would have been a 33 percent contraction in GDP during the second quarter.

Mace doesn’t have her own economic model, but she closely follows the work of Moody’s Analytics and Capital Economics because they tend to be reliable. “The models are based on assumptions, and those assumptions may not be all right, but they give you a perspective,” she says.

A HUD lender’s perspective

Housing & Healthcare Finance, a lender in the HUD/FHA Section 232 mortgage insurance program used to finance nursing homes and assisted living facilities, closed $336.4 million in loans through the program in fiscal year 2019. The company ranked fifth in annual loan amount.

Although the company has experienced a steady flow of business in fiscal year 2020, which began Oct. 1 and runs through Sept. 30, Gehl emphasizes that it’s a fluid situation.

In recent weeks, Gehl has fielded some frequently asked questions. For starters, borrowers want to know if HUD is still writing loans. “The answer is yes,” he says, “and HUD is working with the lenders on ways to continue to work during this challenging time.”

Many borrowers also want to know if they can access reserves to pay operating costs. “At this point, it is on a case-by-case basis,” he says.

More broadly speaking, one burning question across the seniors housing industry is how COVID-19 will impact admissions.

Ultimately, the impact of coronavirus on an operator’s cash flow will dictate a lender’s ability to provide financing, according to Gehl.

“In addition, it’s hard to imagine the acquisition market doesn’t experience some level of a lull when a potential buyer can’t actually walk the facility, but just use virtual tours,” says Gehl.

Each lender will need to assess its own risk tolerance with deploying capital, says Aaron Becker, managing director with ORIX Real Estate Capital, the top HUD lender for seniors housing in fiscal year 2019 with $903.9 million in loans closed.

“I expect underwriting standards to tighten while the market adapts. This could reduce deal volume in the short term. “The HUD Lean 232 program remains open for business and will continue to insure loans during these uncertain times. The HUD 232 program was a bulwark for the lending community during the Great Recession, and I fully expect it will be again today.”

Proactive operators, owners

In an effort to preserve capital amid the COVID-19 pandemic, Sabra Health Care REIT announced on March 25 that the company will lower the quarterly dividend it expects to declare in May from 45 cents per share to 30 cents. The dividend cut is expected to generate about $30 million in cash savings per quarter.

Rick Matros, CEO and chairman of Irvine, California-based Sabra, stated in a press release that the company fully anticipates some disruption to its revenue stream as a result of the pandemic.

Sabra’s board of directors will re-evaluate the dividend once the pandemic has passed, according to Matros.

One of the biggest landlords in the seniors housing space, Chicago-based Ventas, launched a rent deferral program for operators in triple-net leases at Ventas-owned properties. These tenants account for approximately 20 percent of the REIT’s total portfolio by net operating income.

Under terms of the program, tenants can defer 25 percent of their April payment obligation until Oct. 1, or until receipt of governmental assistance, whichever comes first. All amounts deferred are required to be used for operating expenses. Ventas estimates that the amount of payments deferred for April could range from $3 million to $9 million.

NIC has launched a new weekly survey on move-ins and move-outs in the seniors housing industry to provide owners and operators with valuable data. “Transparency is essential for more informed decision-making,” says Mace.

Welltower, the largest healthcare REIT by market cap ($20.1 billion as of press time) provided a business update on April 1 that emphasized the Toledo, Ohio-based company has ample liquidity to weather any potential financial storm.

“With total near-term available liquidity of approximately $3.5 billion and no material unsecured debt maturities until 2023, the company is well-positioned to withstand further capital markets volatility,” wrote Welltower management in a press release.

Historical perspective

Gehl says the impact of the COVID-19 pandemic is unlike any other crisis he’s encountered before. “The only example with some parallels is the Great Recession, where the Fed had to step into the credit markets and the federal government provided fiscal stimulus. That being said, I’ve never seen complete cities and states shut down, with minimal economic activity at best. That is unprecedented in my career.”

Despite the daunting challenges currently facing the seniors housing community, Gehl takes solace in the fact that the industry is still open for business. “There are a lot of industries that can’t say that. And with our government programs, our industry has access to capital.”

The banking and financial institutions enter this new market environment on much stronger footing than in 2008, according to Becker of ORIX Real Estate Capital. “The government and its institutions have also learned from the events of  2008-2009 and are moving quickly to support the economy.”

Becker offers this advice for borrowers: “Don’t panic, stay the course, and understand that the business initiatives you were hoping to accomplish in the first half of the year could be delayed, but not necessarily canceled. We are going to get through this as a nation, and I have every confidence we will recover and move forward together.”

Plush believes that even after the coronavirus crisis is contained, many Americans for an unspecified period of time will remain cautious about the places they go and people they meet.

“People have to feel like they can go to a restaurant, get on a train, get on a plane, and not have to worry. You’re not going to see normalcy return until that happens.”

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