While conditions for senior living mergers and acquisitions could thaw this year, many senior living providers could remain at the mercy of the capital markets in the near-term. As optimism abounds, lurking debt maturities in the industry could pose a challenge to future prosperity.
That’s according to financial experts who participated in a National Investment Center for Seniors Housing and Care (NIC) webinar on Tuesday. While the climate for acquisitions may be improving, senior living operators seeking growth must establish consistent lending relationships. That’s even as simple as maintaining cash flow to support debt costs.
“The people who are taking intelligent risks right now will do very, very well and be rewarded in the next five years,” said PGIM Real Estate Managing Director and Senior Housing Strategies Portfolio Manager Steve Blazejewski.
Panelists from investment bank Ziegler, real estate investment trust (REIT) National Health Investors (NYSE: NHI), regional investment bank Synovus and asset management firm PGIM Real Estate highlighted keys to accessing capital in 2024 as a senior living provider and forecasted an early outlook for the lending environment in the year ahead.
Keys to access to capital in 2024
As occupancy trends upward, senior living providers could be in a unique position to improve the balance sheet, but consistency and sustainability is needed to improve net operating income (NOI), according to Sarah Duggan, who is Executive Director of Wholesale Banking, Seniors Housing and Healthcare at Synovus. Synovus has $3.9 billion in senior living and skilled nursing commitments.
Higher occupancy rates – which NIC forecasts to reach nationwide pre-pandemic levels in 2Q24 – can’t alone sustain NOI growth as it once was just a few years ago, NIC Head of Research and Analytics Lisa McCracken noted.
“We need to start looking for a six-month trailing trend of sustainable NOI coverage,” Duggan said. “It’s bounced up and down from a cash flow basis and I think that accessing capital is dependent upon having sustainable cash flow—sponsors and borrowers know they have to have liquidity.”
The methodical pace of the industry’s ongoing recovery is “bogged down” by lenders who must underwrite more conservatively in today’s economic climate of elevated interest rates, according to Blazejewski.
“We haven’t seen the fallout of debt maturities and we’re not seeing returns commensurate with what’s going to be required and that’s particularly the case with interest rates right now,” Blazejewski said. “Despite all the positive stories, executing is the difficult part right now.”
In today’s environment, seemingly all lenders have changed leverage parameters and some have noted the bid-ask spread and other dealmaking factors must reset for conditions to improve. That means leverage needs to be lowered in order for cash flow to support debt costs, Duggan added.
Amid a wave of operator consolidations and third-party management agreements, capital partners must rely on past relationships between firms that have joined forces.
“Those types of challenges are creating a very different dynamic in our sector with respect to capital decision making,” Blazejewski said.
Vetting relationships is half the battle and operators and lending partners seeking to grow must rely on fundamental communication in regard to shared values and future financial goals, which goes back to the “fundamentals of choosing” a capital partner, NHI Senior Vice President of Investments Michelle Kelly said during Tuesday’s webinar.
“The key is early communication and then just doing your homework before you even partner up, Kelly added.
REITs to ‘lead the recovery’, multi-site CCRCs ‘doing well’
Well capitalized REITs have spent the last four years recovering from the onset of the Covid-19 pandemic, jettisoning operator partners at a quick pace and identifying new ways to grow with the implementation of self-management platforms and technology to improve operations.
“I think what next year will look like is that REITs are going to lead the recovery,” Blazejewski said, referencing the jumpstart REITs gave the industry between 2008 and 2010. “They were the ones to jumpstart the market because of the cost of capital, so I think that’s going to be an important trend we see playing out a little bit right now.”
With larger REITs in the industry poised for continued growth, they could serve as an outlet for operating partners looking for financial help to solve short-term woes and create long term relationships in future, Kelly said.
In recent years, debt costs for REITs have elevated, but costs of capital for REITs hasn’t followed suit, she added, putting REITs in a driver’s seat and a “much more competitive position” for future operating partnerships. This comes as seller expectations have changed and Kelly forecasted more deal activity in the second-half of the year.
“We’re looking for cash yield first and foremost as opposed to looking at what is the proforma on the exit in five years,” Kelly said of what NHI seeks in an operating partner. “If we’re going to do a triple net lease, that’s hugely important so that everybody is set up well out of the gate.”
In the nonprofit and CCRC sectors, multi-site facilities are “doing well, great to well to fine” and a forecasted “deteriorating climate’ by Fitch Ratings for the sector has not impacted deal making activity, according to Ziegler CEO and Head of Investment Banking Dan Hermann. Problems for the sector have stemmed from single-site locations with severe debt exposure and a lack of portfolio, he added.
That resulted in a number of smaller organizations affiliated into larger systems, which “eliminates a risk vehicle” and allows companies to combine dry powder and operational success, Hermann noted. As distressed assets and defaults slide off the balance sheet in 2024, Hermann forecasted a “fairly smooth market” after 2024.
“The market is open and has been open for business,” Hermann said. “The reason it’s open is a steady cash flow coming in from mutual funds and [exchange-traded funds] that have invested in high-yield municipal debt.”
Outlook for 2024 capital involves ‘intelligent risks’
While the outlook for senior living access to capital could improve, the industry’s pace of recovery could continue to be dictated by the current economic climate.
In a poll of webinar attendees, 51% of respondents estimated that the U.S. Federal Reserve will take action on its first interest rate cut in the second half of this year, while 22% said they believed the Fed would move on interest rates in June and 20% in May of 2024. Attitudes of Thursday’s webinar attendees appeared split on how optimistic to be regarding the year ahead as 50% of respondents said 2024 would be an improvement upon 2023 compared to 44% estimated the year to be similar to 2023, according to the live survey results.
Going forward, Kelly said that operators and capital partners must consider pushing through development headwinds to meet future impending senior living demand.
“By the time we get the capital markets situated again, we are going to be behind the eight-ball in terms of planning these projects so any pre-development work that can be getting done should be,” Kelly said.
Also being able to maintain trust and credibility with an operator’s lending partner will be a key for driving the future of senior living capital relationships, Duggan said.
“Those that have done that over the last three years will have a much easier time accessing capital going forward with transactions,” Duggan added.
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