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In a normal year, Capitol Seniors Housing (CSH) is used to working on six development projects. But in 2023, the company is resetting its growth expectations for the immediate future.
Capital market disruption and a “no man’s land of interest rate hikes” have left companies like CSH in a tougher position than they are used to, according to Founder and Managing Partner Scott Stewart.
Part of the problem is floating-rate debt, which CSH and similar companies use to fund acquisitions and developments. The future of U.S. interest rates is still up in the air, and Stewart said that has led to loan servicing costs doubling in “virtually all” of the Washington, D.C.-based company’s communities financed with floating rate debt.
That has sent some previously cash-flowing communities into the red, at least temporarily. And as long as the timing of future relief remains uncertain, interest rates will present a barrier to expansion.
“Until they hit a peak … and they start making their way back down, I think a lot of people will have their growth and their operations stymied,” Stewart told Senior Housing News. “A lot of projects, including ours, are sitting on the sidelines.”
That said, the Washington, D.C.-based company is finding ways to grow during tougher-than-normal times, with multiple projects recently completed and more on the way.
“We’re still executing,” Stewart said. “We’re just not doing it as fast as we originally had planned to.”
‘We’ve set our expectations accordingly’
CSH has leaned on its close relationships with capital partners Bain Capital and Carlyle to grow in 2023. In particular, the company has upped its return thresholds in order to keep deal flow moving, according to Stewart.
“Obviously, seniors housing — any kind of development for that matter — is going to have some measure of risk associated with it,” Stewart said. “So, we raised the bar on our returns and I think that that was a good and prudent move.”
CSH also has relied on its close relationships with lenders, which date back to the company’s founding 20 years ago. But, those companies’ “rules of engagement” have changed with the new and unclear capital market environment in 2023.
As major national lenders have hit the pause button on doling out cash due to market uncertainty, CSH has instead sourced construction debt through syndicated loans with a small handful of lenders.
“That gives them a greater sense of security that they’re making the right move,” he said.
Stewart acknowledged that the company’s 12 operating partners and 40 communities are under pressure to deliver in 2023, and noted that in some cases they have had to be “creative” with concessions in order to move in residents — “even if it has us deviating from our our game plan to maximize NOI utilizing market rates,” he said.
“At least temporarily, we think it’s more important for us … to get our buildings full,” Stewart said.
While the industry has pushed rates higher in recent years — sometimes by double digits — Stewart believed some of that was a “knee-jerk reaction” to precipitously falling NOI. He is of the mind that margin recovery is likely to be more tortoise than hare when it comes to speed, “and we’ve set our expectations accordingly,” Stewart said.
All the while, he is wary of pricing out potential customers who are dealing with their own economic issues in the short-term.
“We have another situation like we had during the great financial crisis of ‘09 where people were waiting longer to come into the communities, and therefore they needed that incentive with lower rates,” he said.
M&A pricing reset and future growth
With the future of interest rates still uncertain, 2023 is shaping up to be a slow year for mergers and acquisitions.
Stewart, like other industry-watchers, sees currently tough conditions for senior housing making way for a pricing reset — at least a temporary one.
With banks on the sidelines, operators and owners are unable to refinance debt during challenging times for their bottom lines.
“A lot of folks who are facing debt maturities are the ones who are reluctantly looking to the market to move some of their product,” he said.
That even includes operators that work with CSH and their communities, a small handful of which have run into challenges that have prompted the company to look for “creative exits.”
“We want to weather the storm, with interest rates start going back down; and see banks get off the sidelines,” Stewart said. “That’s what’s going to fuel the return of seniors housing being the ‘it girl’ with institutional investors.”
As for future growth, CSH will continue to focus on a “barbell” strategy of investing in both active adult communities on one side — which internally the company calls “55-plus” — and assisted living/memory care on the other.
The company also is soon to open a new active adult project in Indianapolis and another assisted living and memory care community in New Jersey with Chelsea Senior Living.
Where the company is opening new communities, Stewart said, he is seeing strong demand and fast lease-up periods — “more than a glimmer of hope” that the industry is in a good spot with regard to future demographics.
This year, Capitol Seniors Housing is coming up on its 20th year as a company. Over those years, Stewart said it has endured “bumps and bruises and battle scars.” And while this may be one of those challenging times, Stewart also is heartened that the company will continue to learn from the lumps it takes.
“When we have an outcome that’s less than what we set out for — we experience a minor loss, for example — we dissect that, and we learn from it,” he said. “And I think that’s made us a stronger, more effective organization.”