When will the Covid-19 pandemic end? Not anytime soon, according to the leaders behind Aegis Living, New Perspective and Sabra Healthcare REIT (Nasdaq: SBRA). All three companies are making preparations now to position their companies to weather the pandemic for the next 24 to 36 months.
For instance, Aegis has formed a “virus council” made up of physicians, virus trackers, psychologists, immunologists and gerontologists, and also hired an in-house researcher — all with the specific goal of informing the Bellevue, Washington-based company’s infection control strategy, according to CEO Dwayne Clark. Having that much expertise on hand is important when dealing with Covid-19, which Clark compared to a “three-headed monster” consisting of a trio of challenges: the virus itself, the economic effects of the virus and bad press.
“Unless you have a strategy for all three, you’re going to be in a world of hurt,” Clark said during a Marcus and Millichap senior housing outlook webinar Friday.
And he issued a word of advice for other senior living operators: get used to the new normal.
“If you think you’re going to go back and operate the way you did three months ago, you’re operating in an illusion,” he said.
Still, all three companies see opportunities to get ahead in the new post-pandemic world, even as the landscape for development enters a paradigm shift and acquisition opportunities become more scarce.
As Covid-19 rampages through the country, it will no doubt continue to affect the fundamentals of the senior housing industry. Specifically, Clark believes that, with regard to new construction, financing will be an issue. He compares the current period to the Great Recession, when loans tightened up at the outset before banks gradually inched back into the lending waters.
“If you don’t have a good balance sheet, if you don’t have a good history of being a good operator, I think it’s going to be next to impossible the next 24 months to get a loan,” Clark said.
Already, financing in general has tightened up and spreads from lenders have risen, curtailing the market, according to John Chang, senior vice president of research services with Marcus and Millichap.
Neither Aegis nor Minnetonka, Minnesota-based New Perspective have slowed down their development plans, however. Aegis has five communities under construction and five in pre-construction, while New Perspective has two projects ready to open in June and August, with five more in the pipeline.
On the whole, New Perspective Founder Todd Novaczyk believes that there is a “paradigm shift” underway with regard to acquisitions and new development. Before the pandemic, the cost per door of acquisitions or raw land “had just gone up and up and up,” Novaczyk said.
“I think now that we’re going to be in a new paradigm here,” he explained. “People who are trying to get X amount per door for their acquisition are going to be significantly less, and they’re probably going to have to sell … at a discount to replacement value.”
Private equity has been the driver of much of the industry’s past price increases, according to Sabra CEO Rick Matros. A 24- to 36-month recovery could affect valuations in the process, but pricing will be dependent on whether the private equity firms take a different point of view, he said.
“They lever up, which gives them an advantage. Debt is still cheap, so that gives them an advantage. And if they have a five- to seven-year horizon, that gives them an advantage,” Matros said. “So, they may not feel that they have to discount how they would normally value projects or acquisitions as they have as they have in the past.”
Matros added: “Skilled nursing valuations have always had more sanity to it than senior housing valuations have, so I would expect that to be the case going forward.”
On the acquisitions front, Matros said that while Sabra usually has a billion-dollar pipeline for acquisitions, “that’s pretty much dried up completely in this environment.” He blames the fact that many sellers are still seeking full value for their product despite the effects of Covid-19.
“There’s going to be some fallout here across all asset classes, particularly with smaller, undercapitalized operators,” Matros said. “For those of us that grow through acquisition, [this] will provide some opportunities going forward that didn’t exist before the pandemic.”
Grappling with the monster
One of the more challenging aspects of dealing with Covid-19 has been the unpredictable way it affects senior housing communities in any given market. For example, two communities in the same geographic area may follow the exact same infection control protocols but end up with two completely different infection rates, Matros said.
“One facility may have a relatively large outbreak, and another one may have one or two or three residents and that’s it,” Matros said during the webinar.
But senior housing communities which have a higher-acuity model will be among the first to rebound from the pandemic, he added.
“The less optionality, the better the chances your occupancy [will] come back more quickly, Matros said. “On the Independent Living side, it’s obviously a much more optional service. I think that takes longer to come back.”
Meanwhile, some media outlets have not given the issue the attention or nuance it deserves. Headlines and TV spots which focus on infection rates or deaths have grown common in the last few months. And some journalists still have not grasped the distinction between higher-acuity skilled nursing and senior living, instead lumping every kind of senior housing into the same category.
Though Clark acknowledged that there are indeed quality issues among some providers of senior services, the press rarely makes the difference between the different industries known, leading consumers to view every senior care setting, from nursing homes to independent living to small adult family homes, as one and the same.
“It’s a little bit unfair,” Clark said. “It’s kind of like you going to a bed-and-breakfast and having a poor experience and then blaming Marriott.”
To educate the public and get ahead of bad headlines, Clark has adopted a policy of transparency with his employees, Aegis residents and members of the press. He added that, while he used to hold a company-wide conference call once every three months, he now holds them once every two weeks.
“We have to internally enforce what kind of quality we have, and we have to have to educate people about the stratification of the industry,” Clark said.
On the financial side, Aegis has bumped up its spending on things like personal protective equipment (PPE) Covid-19 testing and labor. However, costs are not actually the biggest issue for Clark — revenue is.
“More than cost, it’s the impact you have on revenue when you have your buildings in isolation and you can’t tour people,” Clark said. “Our move-ins are down probably 65% to 70%. That’s the bigger issue.”
New Perspective is similarly seeing move-ins down and expenses up. But the company is also seeing far fewer move-outs than is typical, and has seen a decent amount of sales traffic and even deposits for two of its new communities due to open in June and August of this year.
“Will it be maybe as good as we would like? No,” Novaczyk said. “But being in a needs-driven business, and being able to handle a higher acuity … it’s going to make a big difference.”