The details of what a post-coronavirus senior living landscape resembles remain cloudy, but the pandemic laid bare the need for the space to evolve faster than it has been.
This is according to executives from real estate investment trusts National Health Investors (NYSE: NHI), Ventas (NYSE: VTR), and ReNew REIT, who shared their industry prognoses during the 2020 Argentum Senior Living Virtual Conference.
One thing is for certain: there will be no return to a “pre-coronavirus normal.”
“The coronavirus has accentuated the need for rapid progress. And we all want to be a driving force in those efforts,” ReNew REIT CEO George Chapman said.
That progress could come in the form of more creative financial structures to align interests between owners and operators, which has already begun to take place in the context of the pandemic. Communication between owners and operators is also laying the groundwork for a post-pandemic landscape to capitalize on positive demographic trends, and ensure tighter protections for residents in the event of future viral outbreaks on a scale comparable to the coronavirus. Providers and REITs may also be facing the possibility of a more tightly regulated industry in the future.
Meanwhile, the REITs have played a larger role in supporting operations due to Covid-19. Some REITs have assumed responsibility for sourcing and acquiring personal protective equipment, freeing up operators to focus on keeping residents and staff safe. Others are restructuring leases with operators to provide long-term financial relief, allowing providers to turn their attention to fighting the virus.
Finding the right structure
REITs have spent the pandemic working with operating partners – in both RIDEA and triple-net contracts – on restructuring to give providers financial relief during the pandemic.
Chicago-based Ventas has restructured its master leases with Brookdale Senior Living (NYSE: BKD), Holiday Retirement and Capital Senior Living (NYSE: CSU). The Brookdale deal saves that company $500 million in rent over the next five years and gives Ventas a potential equity stake in the company. The restructuring with Capital, along with a similar agreement between the Dallas-based operator and Welltower (NYSE: WELL), reduces total lease and debt liabilities by approximately $469 million, while improving annual cash flow by nearly $32 million.
The Holiday agreement converted the properties Ventas owns from triple-net to management contract structures, and the REIT holds an option to convert the Capital lease to a management contract by the end of the year, Senior Vice President, Asset Management Chris Cummings said. Ventas prefers the op-co/prop-co split, as it gives some predictability, courtesy of the fee income under a management contract.
“That’s particularly true with smaller operators looking to protect their near-term liquidity,” he said.
NHI prefers triple-net leases. The main sticking point with triple-net structures centers on annual rent escalators, which can quickly outstrip inflation in a low-inflation environment, CEO Eric Mendelsohn said.
NHI tends to be conservative with its escalators, in order to be better prepared for trying times such as the Covid-19 era. Another sweetener NHI offers its operating partners is an ownership stake after a set period of time, typically 10 years. If an operator chooses to exercise that option, the REIT has the option to recapitalize the building and write the operator a check for the equity it built in the operations, or they can buy the building back from the owner.
This approach works for NHI, but it runs counter to current trends in the space favoring RIDEA.
“Some days I feel like the Willy Loman of senior housing,” Mendelsohn said, referring to the famous character in Arthur Miller’s play Death of a Salesman.
ReNew is a RIDEA devotee. Chapman was one of the pioneers of the RIDEA structure in his previous role as CEO of Health Care REIT, now known as Welltower (NYSE: WELL). He believes the management contract structure does a better job of aligning the interests of owner and provider. And both sides share in the risk and the reward.
Moreover, Chapman sees RIDEA gaining even more favor in a post-pandemic landscape for specifically these reasons.
“Unless there is good alignment between the operator and the capital partners going forward, we’re not going to do everything that is essential for making senior housing better,” he said.
A more active role
The pandemic taught the REITs to take a more active role in creating value and supporting their operating partners during taxing times.
Ventas assisted its operating partners to secure PPE, provided lobbying assistance to include provider relief through the CARES Act, and disseminated the program’s details and the Covid-19 responses of operators to its stakeholders, Cummings said.
The REIT stepped up its passive communication strategy, gathering information on rent rolls and sales data. It is doing this monthly with triple-net operators, where appropriate, and at least weekly with its operators under management contracts.
“We need to be apprised of the issues in more of a real-time basis, given our direct exposure to the [profit and loss],” he said.
Mendelsohn agrees that more timely information is needed from operators, and NHI is raising its game to demand that. Currently, there are delays ranging between 45 and 60 days on occupancy reports, and 60 and 90 days on consolidated financial statements.
“It can be like pulling teeth to find out what really happened,” he said.
Accelerated data is near the top of ReNew’s immediate goals, and while Chapman acknowledged that things are getting better, it remains a challenge.
REITs are also bracing for the possibility of more regulation of senior living, particularly if Joe Biden wins the presidency, and both houses of Congress come under Democratic Party control. Historically, Democrats have been more supportive of health care subsidies and support, and are willing to expend political capital to achieve that.
The tradeoff to that will likely be more regulation of the industry. That is already being hinted at by Senator Elizabeth Warren, whose name has been floated as a potential Treasury Secretary under a Biden administration.
The Massachusetts Democrat took a lead role in pushing for more scrutiny for private-pay assisted living providers, and sponsored a report that revealed at least 7,000 Covid-19 deaths tied to assisted living.
NHI, through its operating partners, received letters from Warren asking specific questions about pandemic relief received by private-pay providers and how it was used, which Mendelsohn said read like an “inquisition.” He expects the industry to pay the piper, if Biden and the Democrats take control.
“If Elizabeth Warren becomes our next treasury secretary, there will be a massive clawback based on the questions in this letter,” he said.
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