Lenders, REITs See Ongoing Transformation and Uncertainty in Senior Housing

Occupancy and expense pressures related to Covid-19 will continue to adversely affect senior housing investment in the coming year, and are even tempering refinancing opportunities.

And the pandemic will force more smaller owners and operators to exit the sector, frustrated by the operational intensiveness of the product type, compressed net operating income (NOI) and tighter returns.

Finally, the distribution of vaccinations to senior housing will not be an immediate panacea for the industry’s investment woes, and it will take months before consumers and investors regain confidence to return to the sector.


These are among the main takeaways of a webinar Thursday hosted by real estate brokerage and services firm Marcus & Millichap, featuring leaders from National Health Investors (NYSE: NHI), Sabra Health Care REIT (Nasdaq: SBRA), Freddie Mac and the National Investment Center for Seniors Housing & Care (NIC).

Among the most notable effects of Covid-19 is how the pandemic has clarified that senior living is a health care rather than a residential or hospitality-driven type of real estate — which is something that many investors in the past failed to fully appreciate, said Talya Nevo-Hacohen, EVP and Chief Investment Officer of Sabra Health Care REIT (Nasdaq: SBRA).

“It’s been transformational in the sense that there has been a shift that is absolutely clear that senior housing is now part of the health care continuum,” she said.


Operational pressures reducing refinancing activity

Covid-19 resulted in a considerable downturn in senior housing transaction activity in 2020. Transaction volume across NIC’s 31 primary markets declined 75% in the second quarter, compared to the previous year, and 67% in the third quarter, NIC Chief Economist Beth Burnham Mace said.

Lenders pulled back from the market during the pandemic’s early weeks, to see where the dust would settle. Nine months later, there is still an imbalance in the debt and equity markets. Notably, a recent 70% of operators with development pipelines reported postponing construction projects because they could not secure funding, according to a new report from Senior Housing News and architecture and design firm LWDA.

The cash crunch has extended to refinancing opportunities, as well. While low interest rates are contributing to a refinancing boom across the wider commercial real estate landscape, pandemic-related pressures on occupancy and expenses are resulting in fewer successful refinancing opportunities for senior housing debt, Freddie Mac Senior Director, Seniors Housing Lending Kathleen Ryser said.

“We’re just not seeing it just because you can’t pencil out the debt to refinance it even at a lower rate,” she said.

To the extent they can get underwriting to pencil, lenders are using trailing income to model where NOI would trend. Freddie Mac has seen NOI declines for sponsors ranging from 25% to 40%, and requires up to 70% leverage from borrowers in some refinancing cases to get underwriting to pencil.

In conjunction with increascing debt coverage requirements, Freddie Mac adjusted its underwriting to a forward-looking forecast, based on further occupancy reductions and expense increases. It also instituted a 12-month debt service reserve with new underwriting.

“That’s been very instrumental to offsetting some of the issues with knowing how deep NOI can fall,” Ryser said. “Coupled with an interest-only component, is helping us to move to move in and to securitize [underwriting].”

More smaller owners will exit sector

The pandemic will force many owners with single communities or smaller portfolios to exit the sector, not wanting to deal with the intensive operational component of the product — especially when compounded by the pandemic, the panelists argued.

This will give seasoned, patient operators and investors more opportunities to build scale, and investors will gravitate to opportunities tied to operators that proved their mettle handling the outbreak, Sabra’s Nevo-Hacohen said.

“Investors concerned about understanding senior housing have to understand that it’s a non-government subsidized health care model, not a real estate model. That’s going to make a difference,” she said.

Vaccines are no silver bullet

The webinar panelists predict continued pressures to occupancy through at least the first half of 2021 — and that will be dependent on several factors.

Owners and operators still need to finalize the necessary logistics for deploying vaccines to residents and staff, before operators can resume marketing communities to prospects in a meaningful way, National Health Investors Senior Vice President, Investments Michelle Kelly said.

Vaccine distribution will go a long way to alleviating safety concerns about senior housing from prospective residents and their families. Until vaccinations occur in a smooth, efficient manner, and families can visit their loved ones where they live, industry leaders expect the pace of move-ins to continue at their current levels.

“That’s the linchpin for material movement on occupancy,” she said.

Neva-Hacohen stressed that vaccinations will take time to prove their efficiency, whether it is in senior housing or the general public. Seeing the outcomes from vaccinations will be further proof that operators provide evidence-based outcomes, and that senior housing has earned a place within the greater health care continuum.

“That’s something we always talked about in other situations, whether it’s addiction treatment, skilled nursing, or acute care,” she said. “Now, senior housing operators can provide potential customers evidence that shows how residents have fared during the pandemic, versus those that resided in the general population.”

Walgreens and CVS, which have been tasked by the Department of Health and Human Services (HHS) to distribute vaccinations to long-term care facilities, are expected to mete out vaccines over the course of three clinics as these require two separate inoculations, one month apart. This will ensure that operators have adequate staffing to work through the vaccination process, by reducing the number of workers who might be impacted by side effects at any one time.

A harder sell is getting full staff compliance on accepting a vaccine. Nevo-Hacohen noted that the pandemic has become so politicized that it stands to reason that some staff may not be willing to get vaccinated.

“The reality is, if you get 50% of employees vaccinated, you are so much further ahead than where we are today. That’s already going to make a difference,” she said.

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