While occupancy gains remain steady for senior living as a whole, leaders with American Healthcare REIT and National Health Investors (NYSE: NHI) observe that in many ways — from occupancy recovery to dealmaking trends — the market is disjointed.
The pace at which operators recover appears to be largely market-specific, with some senior living providers having success rebounding to pre-pandemic occupancy and margins while others have seen a slower pace. But the challenges faced by the industry remain largely the same, from high agency labor costs to margin pressures due to inflation and increased costs of wages.
But these challenges have not deterred a large influx of deal activity in senior living as acquisitions are made and new communities are planned, with NHI Senior Vice President of Investments Michelle Kelly noting that capital has come off the sidelines after two years of limited deal-making.
However, that tailwind could be dampened as interest rates rise.
“The equity side of the equation is pretty strong,” Kelly said during a webinar hosted by Argentum on Wednesday. “It’s the debt costs that are going to start to play into exactly how aggressive they can get.”
That puts pressure on investors to execute deals with hopes of seeing returns in one to three years, while Kelly added it is a “funky, disjointed acquisition environment” as property values remain high regardless of whether a community’s cash flow is healthy or not.
“It’s still a little all over the place,” Kelly said.
American Healthcare REIT reports a “mixed bag” for restoring pre-pandemic occupancies and return on investment (ROI). Executive Vice President of Asset Management Ray Oborn said the REIT averaged around 70% of occupancy recovered from the pandemic, while ROI margin challenges still weighed heavily tied to high inflation and increased wages.
Agency costs remain a strong headwind for operators of both American Healthcare REIT and National Health Investors, with Oborn reporting in the first six months of this year, agency labor costs were up 260% compared to the same time last year.
Kelly said pressures felt due to labor were “market-specific,” while other challenges caused by supply chain disruption and gaps in staffing were “still very prevalent.”
“There are some that have rebounded well and there are others that haven’t,” Kelly said.
In some markets, Legend Senior Living has raised wages between 10% and 20% to remain competitive, according to CFO Chris Wettig.Legend operates 42 communities in six states based in Wichita, Kansas.
Kelly said pace at which communities owned by NHI are recovering occupancy remains market-specific, regardless of condition or age of a community, while Oborn said he felt there was a slight correlation between community age and its recovery since 2020.
“It’s less about the age of the asset as it’s much more about the strategy for the operator and then how that specific micro-market performs,” Kelly added.
American Healthcare REIT — which is on track from an IPO later in 2022 or early next year — is the majority owner of Louisville-based Trilogy Health Services.
Oborn noted that non-Trilogy senior living community assets average an age of 22 years, and the age of a building seems to have a bearing on its occupancy resiliency.
“I think that the recovery, if you look across the broad spectrum, I believe that the Covid recovery has been a little bit more pronounced in the newer inventory,” Oborn said.
While occupancy numbers continue to rise for communities, Oborn said without corresponding revenue growth, that’s where margin compression comes in.
“Our key right now for our operators is how do they grow revenue and in a somewhat competitive environment,” Oborn said.
Now may be the time for operators to pass rate increases onto consumers because of the macro economic challenges spurred by the current inflationary environment.
“Now would be the time to be a little bit aggressive with those annual rate increases to try to get back a little margin erosion we felt,” Oborn said.
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