The latest installment of NIC’s highly popular “Leadership Huddle” webinar series, titled “A Conversation with Brokers During a Pandemic,” took place Thursday, June 4. As thousands of attendees have come to expect, a panel of industry leaders provided timely insights in a lively discussion moderated by NIC Chief Economist, Beth Mace. Thursday’s discussion focused on the perspectives of the nation’s top brokerage firms on the impact of COVID-19 on their businesses.
In her opening remarks, Mace reflected on the continuing need for the webinar series, which was launched in the middle of March in response to the need for information as the seniors housing and care sectors found themselves on the frontlines of the COVID-19 pandemic. “We continue to hold them because so much uncertainty remains in the market today.” She acknowledged that operators across the sector, “continue to work around-the-clock to protect residents and support front line workers,” adding that, “many of the challenges that were evident in the first days of the pandemic remain, unfortunately, especially when it comes to testing and tracing.” As in previous webinars, Mace highlighted the ongoing need for sufficient PPE, testing, and tracing in seniors housing and care properties, and acknowledged the tireless efforts and sacrifice of operators and frontline care workers who are fighting to protect residents’ lives across the country.
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Mace also addressed the need for transparency across the sector: “In a continuation of our mission, NIC encourages transparency in our collective understanding of the virus. As the COVID-19 pandemic has developed, it has become increasingly clear that the availability of data on impact of the virus on the seniors housing and skilled nursing communities is vitally important.” She expressed gratitude to the many operators and capital providers who continue to provide NIC with their data, “even during these very difficult times, so that we can provide transparency into the market. These data providersare improving transparency which leads to credibility, and ultimately trust, by educating not just investors and other operators, but also policy-makers and the general public.”
As the discussion kicked off, Charles Bissell, Managing Director in JLL’s Seniors Housing Capital Markets Group, reflected on his experience dating back to 1986 during the savings and loan crisis, which he experienced in hard-hit Texas. “I can tell you that was probably the deepest cycle that I’ve seen in my career. In Texas not a deal was getting done for a period of several years,” he said. “I’ve seen a few cycles and learned how to get through them, and I do know there’s light at the end of the tunnel here with the COVID pandemic.”
Panelists shared how their businesses are being impacted today. Bissell said, “I’d say, from a broad perspective it’s slowed down a little. We had a lot of things in the pipeline that we were starting to market. Those deals that got signed up pre-COVID ultimately have closed, but some have had some adjustments. Depending on the nature of the seller, some deals are ploughing forward, while other sellers have asked us to put things on hold to see when things become a little more normalized. Now, we are also getting some new requirements: re-financings, people that are having to restructure their debt situations, some sales where people have a need for liquidity or they may have had very successful projects that are still doing well and they don’t want to sit around for who knows how long and they want to test the market. So…we’re busy, but it’s different.”
Richard Swartz, Vice Chairman, Cushman & Wakefield, has had a similar experience. “At the time COVID hit the U.S., we had about $2 billion of assets somewhere in our pipeline, either in marketing or under letter of intent (LOI) or under contract. The vast majority of that has been put on pause. Some of the transactions have continued to move forward slowly. There are significant barriers to getting a transaction done at present. Everything from how do you get a lender to tour the building, how do you get your third parties done, how do you effect a license transfer, how do you even record the deeds when in some cases the county offices are closed. Those barriers have really slowed the transaction flow down. Like Rick said, we are starting to get more inquiries. I’d say the last two weeks have probably been more active than all of April and May together in terms of calls and people starting to look at going back to market, looking for financing, looking for equity for new developments, even. So, we are starting to see signs of life and hope that continues forward.”
Ben Firestone, Executive Managing Director and Co-Founder, Blueprint Healthcare Real Estate Advisors, said that about half of his business is skilled nursing focused. “That submarket has been impacted perhaps more greatly as it relates to actual census and operating expenses. But, it’s a little bit more resilient and need-driven. The capital markets and buyers and the cap rate environment continue to prevail.”
Asked whether government reimbursement was adding investor confidence in skilled nursing, Firestone replied that stimulus money could be temporary relief for a sector hard-hit with dropping occupancy rates and rising costs. He pointed to recent actions from HUD to loosen restrictions and provide an easier path to financing as playing a role, as well as the nature of skilled nursing buyers. “The behavior of the buyers in the (skilled nursing) market is a little bit different,” he said, contrasting them to seniors housing buyers’ behavior, “which is more in line with commercial real estate, traditionally.”
Going back to underwriting, Bissell acknowledged a lack of comparable sales, saying “we’re not even trying to look at comps now. It is very much property by property and it’s very much focused on discounted cash flow. Take the pre-COVID financials, see what happens to the property during COVID, and then make some reasonable go-forward assumptions over a five or seven-year hold period. Some properties experience a significant hit to occupancy. We’ve heard of some dropping 10, maybe even 15 percentage points. Some, on the other hand, have really experienced no change. So, obviously the underwriting for those two properties would be quite different.”
He said investors don’t expect much rental-rate growth for the next 18 months, “but in tight markets you may see some growth.” He also pointed to elevated expenses, “We’ve had elevated expenses due to COVID in relation to the purchase of PPE, hero pay, and higher staffing expenses just overall, using agency and other sources. So, depending on how aggressive you want to get, you burn those down over time. What we try to do is talk to the buyers, find out what they’re doing, and if the buyers are forecasting a burn down of those expenses over twelve months, that’s how we would model it.”
On finance, Bissell pointed out that rates are attractive for Fannie, Freddie, and HUD, and activity in lending markets is beginning to pick up. “You’re able to layer that debt in and do an after-debt cash-flow analysis. The leveraged cash-flow returns for most of the investors we’re talking to haven’t really changed. They’re still seeking the same type of leveraged return. They’re just being more selective, and they may stress-test that cash-flow a lot more aggressively and run a lot more variations to determine their pricing at the end of the day.”
On the elevated expenses associated with fighting COVID, such as PPE and additional staffing costs, Bissell said, “buyers and lenders will recognize those as one-time non-recurring expenses. The properties will not be hit with those (expenses) going forward. Any operator out there that’s not isolating those expenses, should be.”
Firestone agreed, “we’re underwriting one-time expenses and trying to put those ‘below the line’ where possible.” On cap rates, he said, “I think cap rates on skilled nursing in particular will stay stable. From a leveraged stand-point, from the seniors side you’re still seeing attractive rates…but you’re seeing sizing go down, which is an indication of risk and how the institutions are looking at risk and…that’s going to affect pricing eventually.” He sees pro formas “stretching out to longer time horizons,” impacting seniors housing.
In skilled nursing, Firestone said, “in the short run we are going to see Medicaid rate increases in various states, which is going to help, and probably out-pace that seniors housing private-pay rent growth acceleration.” He pointed out that economic factors that impact consumers’ willingness to pay, such as jobs and home values, will have less impact on skilled nursing, which is “far more based on entitlement programs and reimbursement rates.”
Mace asked Swartz for his perspective, particularly on whether the agencies are requiring greater reserves. “Yeah, the agency requirements for reserve sizing have definitely tightened up.” he said. “I would say we still look, as a metric, at stabilized NOI with a traditional cap rate as a starting point, and then we’ll maybe deduct out of that capitalized costs for additional COVID-related expenses over, say, 18-24 months and we’ll do the same thing for occupancy. Even pre-COVID we were used to marketing a lot of properties that were still in their lease-up.” Swartz said buyers are looking for safety in those 12-24 months, “so, I think we’re going to see some structured deals as well, to help compensate for that.”
Despite the impacts of COVID-19, and a barrage of headlines, capital remains available, according to the panelists. “There’s a lot of capital in the market. The groups that we know that were running funds are still raising capital. I think they believe that long-term the demand for seniors housing is not going to change. In fact, we all know demographically its going to keep growing; it’s a need-based service.” Said Swartz.
“It seems every phone call I get is a little bit more optimistic,” said Bissell. “I agree with Rick. The long-term outlook for seniors housing hasn’t changed. There could be a few side-effects of this situation that benefit us. We could see a slow-down in new development, which will eventually result in increasing occupancy levels.” He also pointed to decreased construction costs and the prospect of a “much more favorable” labor market as potential boons to the sector in the long-term.
Firestone’s perspective is similar, “There’s so much capital on the sidelines that needs to enter into this space and will support pricing in the long-run.” Comparing seniors housing to other property types, such as hospitality, retail, and industrial, Firestone said, “We saw last recession seniors housing was last in, first out, and I think hopefully we’ll see that again, with therapies and vaccines and different ways to contain the pandemic…I like the 80 million baby boomers coming on line and I like that eventually that story of putting your loved one in a seniors housing community will come back with a vengeance; so, I’m optimistic.”
Panelists see signs that investors are beginning to see opportunities in the market. “There’s a lot of private equity capital out there that has been waiting years for the opportunity to buy on a distressed basis in the senior housing space.” Said Bissell, who described several deals currently in the works on distressed properties. “I think we’re going to see quite a lot of activity and…a lot of it will be lender-driven.”
Although also seeing interest from potential buyers, Firestone doesn’t see distressed properties becoming “bottom-feeding” deals. “I just don’t think it’s there yet…that bid/ask spread is still too wide. You’ve got so many bidders and so much money and so many buyers out there, so that’s eventually going to support pricing. I don’t think we’re going to see an environment of deeply discounted sweetheart deals. They’re going to be few and far between.”
