As seniors housing operators look back on the past 18 months, the effects of the COVID-19 pandemic have largely faded. Occupancy has been on an upward trend for many consecutive quarters, labor markets have become more stable and profit margins are getting larger. While the industry isn’t fully back to where it was in 2019, the outlook for operators is much sunnier than it was in mid-2020.
But new challenges have arrived in the form of capital markets disruption, which has impacted the ability to buy, sell, borrow, lend or refinance debt.
“We’re mostly past all the impacts of COVID, and life has kind of turned back to normal,” said JP LoMonaco of CBRE’s Senior Housing Valuation Group. “But life is definitely not the same as it was in the first quarter of 2020.”
LoMonaco was speaking as moderator of a Seniors Housing Business webinar panel titled “It’s the Dog Days of the Senior Living Investment Market — How to Find the Creativity Needed to Overcome Capital Markets Crunch” held Sept. 14. CBRE sponsored the event.
The panel included James Callister, CIO, CareTrust REIT; Cheri Doyle, managing director, J.G. Petrucci Co.; Brian Sunday, managing director, AEW Capital Management; Aron Will, co-lead, CBRE National Senior Housing; and Sevy Petras, CEO/co-founder, Priority Life Care.
“As I reflect back on the last 18 months, we very much were living in a COVID hangover era operationally,” said Will. “We started to see some really positive trends on the rental rate side to make up for lost time. It coincided with when the capital markets being turned on their heads.
“I describe the period we’re in now as a juxtaposition whereby people are cautiously or very optimistic about our operating fundamentals, as the balance of real estate outperforms, as we did coming out of the Global Financial Crisis [in 2008].”
“We’ve had month over month of record-setting occupancy growth across our portfolio, including in areas where they had pre-pandemic struggled in terms of meeting those expectations,” added Petras. While labor costs have stabilized, she noted that attracting labor is still a top priority.
Coming from the investment/ownership side of the seniors housing business, Sunday did not share the same sunny outlook.
“Whatever your business plan was going in 2022 with the recovery has been turned upside down,” he said. “Now we’re trying to reset. How do I get through this? How do I protect our assets? How do I stay aggressive on the buy side and continue to deal with the challenge in the capital markets?”
As a developer, Doyle said the capital markets disruption and high construction costs have made it extremely hard to build anything new.
“During COVID, the biggest challenge was finding projects to underwrite because of low occupancy. Now, it’s impossible to underwrite anything because interest rates are too high or in a negative leverage area, where your yield just isn’t going to make it.”
“Right now the big struggle is that debt’s not there, equity’s not there,” continued Doyle. “People are trying to cobble together equity by way of joint ventures that are kind of strange, that would never be done under normal circumstances, trying to build smaller communities. It’s a big struggle.”
As a REIT owner, Callister said CareTrust had to switch from helping tenants move through the pandemic. Now the company is ready to focus on acquisitions and dispositions once again, and has gained a new advantage. Where the company used to lose out on deals to highly leveraged buyers, those buyers have now been sidelined by high interest rates.
“That highly leveraged buyer, with the debt markets closing up, really had to retreat from a lot of the deals,” said Callister. “We found ourselves in an area of less competition than we’d seen typically.”
“This year we’re starting to see a lot more opportunities,” he continued. “If you have access to capital, a lot is coming onto the market for various reasons. We see it as a window of opportunity for the REITs. If you can strike a check, you can be a touch more competitive than in the years before this.”
Sunday agreed, noting that challenges for one part of the business were opportunities for another.
“If you do have money, this challenging environment is creating opportunities. If you’re a buyer right now, there could be some good deals out there for you.”
To view the full webinar, click here.
— Jeff Shaw
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