Inside the Forces Driving Senior Living Valuations in 2022

Depressed occupancy, staffing shortages, higher expenses, compressed margins, community age — these are some of the forces that have affected senior living valuations in the age of Covid.

According to the latest data from senior housing and health care real estate advisory services firm HealthTrust, average senior living sale prices per unit dipped slightly last year, continuing an annual trend that started in 2018, when valuations peaked.

When the Covid-19 pandemic hit in 2020, capital providers largely shut off the tap amid uncertainty about the future, ultimately leading to an M&A landscape that was more wide than deep. But looking to the year ahead, there are some signs that these trends could change — and some signs that they won’t.

Some senior living operators have made good progress solving operational challenges. Public companies have largely returned to providing guidance. And at the same time, senior living capital providers are coming off the sidelines, with deal brokers noting an increasing appetite for senior housing assets — in particular, for new or well-performing Class A properties or those with strong operators, according to Brian Chandler, who is managing director in senior living brokerage JLL’s Valuation and Advisory Services.

“Investors are getting more into this sector, and there’s a lot of capital still on the sidelines and being invested in this industry,” Chandler told SHN. “We definitely see that continuing in 2022.”

Given the uncertainty of the last two years, senior living investors, owners or operators would be wise not to declare the arrival of the post-pandemic era just yet. That is the attitude of leaders at some real estate investment trusts, including at Healthcare Trust, Inc. (HTI), which is currently holding off from selling properties in its 54-community portfolio or acquiring riskier non-stabilized properties without a guaranteed return given the uncertainty ahead.

But as average occupancy rates increase and certain operational pressures ease — not to mention the prospect of looming positive demographics — there is a sense that the market is returning to more normal conditions, which could portend an increase in per-unit senior living community prices in the months ahead.

Valuations are typically “backward-looking” and usually reflect more conservative analyses from appraisers that are “probably a little bit below what the owners themselves may be thinking” now, according to Beth Mace, chief economist at the National Investment Center for Seniors Housing & Care (NIC).

“It’s just a matter of time for things to catch up,” Mace told Senior Housing News. “I would anticipate that, as we go forward and as the market settles a little bit more, we will see prices go up in terms of the property price per unit.”

Slow descent in pricing

In 2018, senior housing valuations hit a peak of $246,000 per unit — and they have fallen annually ever since, according to data from HealthTrust. As of last year, senior living valuations registered at $179,321 per unit, which is just a few thousand dollars above where they were in 2012.

Much of that decrease has to do with the fact that senior living margins have tightened in recent years as labor and Covid-19 have blown up operating budgets.

The price-per-unit decrease in 2021 was likely due to the nature of the assets sold, with many either less than five or 20-plus years old, and most underperforming, according to Colleen Blumenthal, who is is partner and COO at HealthTrust.

One notable development in recent years is how senior living and skilled nursing valuations have narrowed, with skilled nursing average price-per-unit registering at $104,635 in 2021.

“Many investors are looking at the billions SNFs received during the pandemic, with under $1B excluding PPP to seniors housing, and are rethinking risk,” Blumenthal told SHN. “Overall, most people think despite the labor challenges, this sector remains very desirable and supply challenges will evaporate over the next decade with the arrival of the oldest boomers.”

At the same time, senior housing cap rates — which help forecast expected return on investment — have inched up annually since 2019, when they hit 7.42%. As of 2021, senior living cap rates had grown to 7.67%, according to the report.

Cap rates ranged by property age in 2021. Properties that opened as many as five years ago carried average cap rates of 7.13% in 2021, while those that opened between six and nine years ago carried average cap rates of 7.77%. For communities between 10 and 19 years old, average cap rates were 8.12%; and for communities 20 years or older, they were 8.6%.

“Many newer properties that opened between 2015 and 2019 and sold last year did so with a 7-handle, largely due to never stabilizing or Healthpeak looking to get out,” Blumenthal said. “Older buildings that were under-performing were typically 50 to 100 basis points above that.”

While the average trends reflect the general direction the industry is moving, it does not account for wide variations in pricing from one market to the next — even within the same market.

John Rimbach, who is president of healthcare facilities with the advisor of New York-based Healthcare Trust, Inc. (HTI), told SHN that he has seen a bifurcation in the market between Class A properties with strong operators, and Class B properties or those with lackluster operators.

“That older product is not garnering as much purchase interest as some of the newer product, or the stuff that has been kept up and maintained in a market,” Rimbach told SHN. “And I think we’re seeing that same dynamic play out in the Covid pandemic recovery.”

Valuations in 2022

There are a variety of forces influencing senior living valuations this year.

One is labor costs, which have exploded amid the pandemic as operators have relied on agency staffing and overtime to fill gaps in their operations. As such, underwriters are now making more “realistic assumptions” regarding the cost of labor. Still, “whether that is showing up in valuations is yet to be seen,” Mace said.

Underwriters are now also taking a greater focus on senior living operators’ track records to forecast their communities’ future performance and thus their valuation.

“For someone who is doing valuation or someone who’s financing a deal, you can look more recently at the track record of those operators, especially during the crisis of Covid,” Mace said. “You can see how well they did to maintain occupancy, you can see what they did for labor.”

Given the fact that capital providers seem to be more open now to investing in senior living, 2022 will likely be a busier year for transactions than in 2021, JLL’s Chandler noted. For one, both Chandler and Mace have noticed the bid-ask spread is narrowing, with buyers getting more aggressive to close deals and sellers getting more realistic about the sale price.

“The focus has shifted to acquiring the quality assets that have upside and can be purchased at a slight discount to current replacement cost,” Chandler said.

The senior living market is also more competitive today than in previous years with regard to lending and equity. That, too, could drive up valuations in the future.

“It’s more competitive, with more lenders bidding at attractive pricing,” Mace said.

It is also widely believed that the Fed will raise interest rates in 2022, which may spur deals among companies looking to close transactions before that happens.

Still, for HTI, now is not the time to put communities on the market. For one, the company believes its senior living portfolio has room to grow occupancy and rates in the coming year, and thus could command better prices down the road.

“If I go out today, I’m going to get discounted on my price expectation,” Rimbach said.

At the same time, any acquisitions the company makes must carry a clear rate of return in the near-term.

“I don’t have the capital source ability to take a risk on undervalued or underperforming assets,” Rimbach said.