More senior housing owners plan to sell assets in 2021 compared to recent years, which is likely an indication of the steep toll that Covid-19 has taken on the industry. And as smaller players head for the exits, regional operators are expected to step up as buyers.
About 600 subscribers responded to Senior Housing News’ 2021 outlook survey, and 26% said their companies plan to sell assets in the coming year. That is up from just 7% who said they plan to sell in 2019.
The sell-side advisory practice at Lument has seen Covid-19 play a role in motivating sellers, according to Aaron Becker, the firm’s Senior Managing Director, Head of Seniors Housing & Healthcare Production. Lument — the entity that combined senior housing financing firms Lancaster Pollard, Hunt Real Estate Capital and Red Capital Group — sponsored the SHN outlook survey.
Some Lument clients were considering a sale but “on the fence” when the pandemic hit, Becker told SHN. They did not want to sell at a low during the Covid-19 crisis, but as operations stabilize in 2021 they are determined to pursue a transaction.
“This is a business that gets harder every year,” Becker said. “The pandemic … is the last challenge many people want to endure.”
Already, some M&A activity is occurring because of these dynamics, he noted. However, there is uncertainty about the pace of a Covid-19 recovery and when more sellers will feel confident that they can command a desirable price.
Among survey respondents, 41% expect senior living valuations to rise in 2021, 36% expect them to fall and 24% expect them to remain stable.
There are a lot of variables at play in terms of where valuations are headed, Becker noted. Interest rates have remained low and cap rates have not moved up as aggressively as it appeared they might when the pandemic first hit. In 2021, Class-A product is more likely to see valuation growth than Class-B product, in Becker’s view, and market dynamics will also play a role.
“Early on, as we come out of the pandemic, it will be more deal specific, market specific, asset specific,” he said. “We’re also coming out of an unprecedented, exogenous event in the industry, so there’s a lot of uncertainty.”
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It’s worth noting that the survey concluded shortly before the Food and Drug Administration approved the Pfizer vaccine for emergency use.
If the survey were to be conducted today, Becker believes that the vaccine would lead to a bias toward more positive outlooks on metrics such as occupancy. He notes that occupancy continues to fall in senior housing, but the efficacy of the vaccine will be “a big factor in how the year unfolds.”
“It will be a tough winter, but I think you could see some benefits to the industry heading into the spring and summertime,” he said.
In fact, even before the first vaccine was approved, about half of survey respondents thought that occupancy would rebound to pre-Covid levels nationally in the second half of 2021, while 33% said that would occur in 2022.
“I don’t think we’ll get back to pre-pandemic occupancy in one quarter, but there will be an initial pop and then a gradual return to where we were before,” Becker said.
As for what types of assets will be most attractive to investors in the next 12 months, 26% of respondents picked assisted living, up from 23% in 2020. Meanwhile, 25% picked independent living as the most attractive investment in 2021, which is down from 29% in 2020.
This shift in sentiment stands to reason, given that assisted living is a more needs-based settings, while older adults might defer moves to independent living if they have continued concerns related to infection risks or visitation restrictions, Becker said.
Active adult saw a sharp decrease in investor sentiment, with 10% of respondents picking it as the top target in 2021, compared to 20% in 2020. This is despite some indications of active adult resilience, with reports of older adults preferring these settings to traditional IL because visitor restrictions have been less strict.
In terms of who will be buying in 2021, 27% of respondents said private REITs will be the biggest buyers, and 20% picked private equity. In the last two years, more people were anticipating big private equity plays, with 43% of respondents picking PE as the top buyer in 2019 and 38% doing so in 2020.
Though not surprised that private REITs led the pack, Becker was slightly surprised that so few people tapped PE to be the biggest buyer in 2021. Even during the pandemic, private equity firms made some noteworthy acquisitions, and there is plenty of dry powder on the sidelines.
Another notable survey result: 19% of respondents said regional operators will be the biggest buyers in 2021, while no one identified them as the biggest acquirers in last year’s survey.
This finding corroborates that as smaller owner/operators head for the exits, these communities are attractive targets for larger regional players with economies of scale, Becker observed.
“So, I very much expect regional operators to be a big part of the buyer base going forward, as some of these smaller operators have decided enough is enough,” he said.
Click here to access the complete 2021 Senior Housing Outlook Report.