The pandemic has thrust healthcare for seniors into the spotlight. The latest NIC Leadership Huddle event, titled, “Value-Based Care: What’s in It for Me?” explored how operators and their partners are navigating what is likely to become a new normal: bringing healthcare to seniors where they live. The webinar and discussion explored the argument that–with or without COVID-19–every seniors housing organization must understand how providing access to healthcare services is now a part of their value proposition for both residents and investors.

Two operators and a broker shared their approach to providing healthcare and participating in value-based care models. Each vignette was followed by live commentary from Jim Lydiard, vice president, Strive Health, and Amy Kaszak, president of Special Needs Plans, AllyAlign.

Kaszak, pointing to exploding healthcare costs and the expansion of value-based models, said, “As hospitals, therapy, primary care, home health, and skilled providers adapt to new payment models and incentives, senior housing communities–even those who do not bill for Medicare services–will have opportunities to engage in value-based relationships.”

Jonathan R. Cook, president and CEO, LifeSpire of Virginia, an operator of four CCRCs (or life plan communities), with 1,450 residents across the Commonwealth, walked through several key advantages of a recent partnership with AllyAlign. He pointed out that every hospital readmission takes up about five hours of a staff nurse’s time, filling out paperwork as residents are admitted and then returned. The new partnership has significantly decreased readmissions. Cook said, “Being able to take that five hours, over 30% of readmissions, and put those nurses and those team members back on the floor to provide more direct care – huge win for our clinical teams.”

Another advantage for Cook has been the implementation of advanced telehealth tech. Residents, particularly during the COVID-19 pandemic, fear making trips to the doctor, and this innovation allows them to receive the same level of care, while staying safe at home. Cook said, “By having one provider unite the care coordination on our campuses, it’s going to create better outcomes, better care management, and better care transitions for our residents. We believe that’s going to reduce costs, it’s going to reduce heartache, it’s going to reduce the anxiety that those residents and families have as they age and need more care programs and services.”

Kaszak, who is very familiar with the LifeSpire model, summarized, “The primary care team, in partnership with the community team, delivers the value, and the Medicare Advantage plan pays for the value and value-added services. Value-based payments go both to the primary care team and to the community.”

Tim Nelson, executive director, Mountain View Retirement, a senior living community in Tucson, Arizona, has seen significant benefits in a partnership with CareMore Health. “We’ve been able to retain our residents longer, give them a happier, healthier life while they’ve been with us, and we’ve also been able to build even stronger community partnerships, with our skilled nursing facilities, and even with the hospitals and different local physicians’ groups.” His community has seen a decrease in hospital readmissions, dropping from 16 percent down to 6.2 percent.

Nelson said, “We’ve been able to do direct admits from our assisted living and memory care, and sometimes even our independent living, straight to the skilled nursing facility and back to us.” CareMore staff are also always available to help facility staff, even when they’re not onsite. “We can call our providers and their support staff 24 hours a day, seven days a week,” said Nelson. Being able to showcase those abilities has been “a huge asset” when touring prospective new residents and their families.

Shane Connor, vice president-Senior Housing Group, Bull Realty offered an investor’s perspective on the integration of value-based care in senior housing. He sees multiple benefits. On recruitment and occupancy rates, he said, “The prospective resident, and certainly their family are ever-more aware of healthcare now than they have been, with COVID.” He said that being able to show integration of value-based care – or third-party partnerships – is now a competitive differentiator.

Healthcare integration also promises to significantly improve length of stay, which will boost occupancy rates. Connor also sees an advantage on staffing, as onsite or visiting clinical staff reduce burdens on facility staff, particularly with higher acuity residents. That can reduce costs. On valuations, Connor explained, “If you’re evaluating a group that implements value-based care, or is embracing value-based care, you’re going to be more confident that they’re going to keep people healthy and be able to keep those beds full. From a valuation standpoint, if I’ve maybe held this facility for five or six years, and we can show the impact that the value-based integration had, on the occupancy, on the bottom-line financials, then when I go to take that out to market for another prospective buyer, you may be able to command a higher dollar, a higher valuation.”

You can register to attend upcoming NIC Leadership Huddles, including both the live webinars as well as the optional, first come, first served participation in peer-to-peer discussions, within the Events tab on www.nic.org. Registrants are provided with a recording of the event, compliments of NIC, and our generous sponsors and partners.

“The respondents of the Wave 24 Executive Survey Insights appear to be cautiously optimistic, with hope that the shadow of the pandemic weathered over the past year is fading. The share of organizations reporting deceleration in the pace of move-ins and declines in occupancy rates is at the time series low for all care segments. In looking back over the past year and the 24 iterations of the Executive Survey Insights results, it’s apparent how closely the survey’s results have mirrored the reality experienced by many operators as they faced daily struggles to keep their residents and staffs safe from contagion—and to save lives.”

–Lana Peck, Senior Principal, NIC

Launched one-year ago in mid-March 2020 as part of a broader effort by NIC to provide timely understanding of the impact of the COVID-19 pandemic across the seniors housing and nursing care sectors—the single biggest challenge ever faced by operators—this continuously running, bi-weekly, Executive Survey Insights analysis has been widely viewed and closely monitored by many industry stakeholders, operators, developers, investors, lenders, and analysts.

Yielding data on properties of every size, type, ownership structure, and across each care segment, every completed questionnaire delivers information from the perspective of an owner/operator’s entire portfolio of seniors housing and nursing care properties. Typically garnering around 80 responses on average, the survey has provided real-time insights on hundreds of buildings and thousands of units across the country every two weeks since near the beginning of the pandemic.

Detailed reports for each “wave” of the survey and a PDF of the report charts can be found on the NIC COVID-19 Resource Center webpage under Executive Survey Insights. Additionally, the full range of time series data for each wave of the survey by care segment for move-ins, move-outs and occupancy rate changes can be found here.

The survey has provided a flexible medium for owners and operators of seniors housing and nursing care properties to deliver transparency to the industry as market conditions have rapidly changed. Early in the time series, in March and April 2020, the survey tracked operators’ mitigation strategies for labor shortages that were aggravated during the pandemic, availability of PPE, and the many ways operators were supporting property staff and their families during the crisis. Later in the series, the survey tracked the needs of operators in keeping residents and staff safe. Answers to questions pertaining to improvement in access to PPE and COVID-19 testing kits, time frames for receiving test results, and, more recently in the 2021 surveys, the availability, administration, and distribution of COVID-19 vaccines—demonstrates how the full continuum of this survey has kept the industry and the media informed about daily challenges and successes on the front lines and in the properties themselves.

With a year’s worth of time-series data documenting the impact of the pandemic on senior living, the survey has and will continue to track a number of standard topics focused on the market fundamentals including the pace of move-ins and move-outs, changes in occupancy rates by care segments, utilization of rent concessions to support occupancy, and factors pressuring NOI.

The result is a cross-section of America’s seniors housing and nursing care industries, a consistent indicator of trends, updated almost in real-time. Each of the 24 “waves” of the survey data has provided directional insights while preceding sources of other data by weeks and months, working to help ensure the wider narrative on the sector is accurate.

Timeline of Executive Survey Insights and the Coronavirus Pandemic in the U.S.

Across the time series from March 2020 to March 2021, the Executive Survey Insights results have shown clear trends that have corresponded with the broad incidence of COVID-19 infection cases in the United States. The chart below illustrates the drastic slowdown in seniors housing and care move-ins by care segment early in the pandemic, followed by somewhat of a stabilization over the summer, and another tapering off as conditions worsened in the fall. By Wave 18, the COVID-19 vaccine had begun to be distributed across the country through the Long-Term Care Vaccination Program (in the latter half of December) and the pace of move-ins accelerated as reflected in operators’ subsequent experiences in Waves 19 through 24. Currently, in Wave 24, the shares of organizations reporting deceleration in the pace of move-ins has fallen to time series lows across each of the care segments.

The following narrative is an examination of the past 12 months of survey data from near the beginning of the pandemic through to current conditions. For context, the chart below, which details 24 waves of survey data regarding the pace of move-ins (for assisted living as an example), shows how closely the survey’s results have mirrored the reality experienced by many seniors housing and care operators during the various waves of the pandemic, and lays out a framework for the time intervals to be discussed. How far has the industry come and how much further does it need to go in order to resume pre-pandemic operations in what will be considered the “new normal” going forward?

Survey Waves 1-10 (March 24 – August 2, 2020)

Early in the pandemic, the most common reason cited by operators for deceleration in move-ins was a slowdown in leads conversions/sales due to moratoriums of moving residents into communities to mitigate COVID-19 contagion within seniors housing and care buildings. Ultimately, these bans on move-ins resulted in challenges backfilling vacancies. Respondents also noted at the time that they were seeing fewer hospital referrals or elective surgeries that had reliably served to bring in residents for therapy and rehabilitation stays prior to the pandemic.

By Wave 9, in addition to bans on move-ins abating, survey respondents commented that resumption of pre-COVID-19 planned resident move-ins, improving availability of COVID-19 testing prior to entry, and lessons learned regarding sanitation measures and enhanced safety protocols for visiting with social distancing were implemented to provide reassurance about moving into seniors housing.

Survey Waves 11-15 (August 17 – November 8, 2020)

Presumably due to new spikes of COVID-19 cases in many areas of the country or possibly due to restrictions on family member visitation rules imposed by some states, more organizations in Wave 11 than in all of the prior waves of the survey cited resident or family member concerns with moving a loved one into senior living.

While accurate and timely COVID-19 testing (within 48-hours) was considered crucial to operators’ ability to settle new residents into communities and keep them safe from outside contagion—which could be brought into community by visitors and staff—nearly two-thirds of organizations were waiting three to five days for test results to come back, and still only about one-half of respondents found it easy to obtain PPE and COVID-19 test kits. Frustration with testing turnaround times was expressed in the survey comments with some respondents fearing that the impact of the testing delays could result in difficulty mitigating infection control, further slowing the pace of move-ins, and hampering their ability to replace census.

By Waves 12 and 13, battling the pandemic was putting a strain on operating costs. Although the pace of move-ins had picked up somewhat in the summer months, more organizations were using agency or temp staff to fill staffing vacancies, adding to increasing operating costs since the pandemic began. Further, the share of survey respondents offering rent concessions to attract new residents in Wave 12 had grown to approximately one-half—a level that remained consistent going forward.

The use of rent concessions appeared to provide some support to occupancy rates as month-over-month seniors housing care segment occupancy changes (from 30-days prior) in Waves 14 and 15 trended higher than in recent waves of the survey. The loss of revenue associated with a decline in occupancy rates across care segments in conjunction with rising expenses associated with staffing, PPE, and testing protocols was putting acute pressure on NOI for many operators and their capital partners. Beginning early in the pandemic, the majority of organizations had been bolstering staffing deficiencies with additional overtime hours. 

Survey Waves 16-20 (November 9, 2020 – January 24, 2021)

The fall surge of the coronavirus resulted in another slowdown in the pace of move-ins, and an increase in the share of organizations reporting residents waiting to move in. Presumably as a result of better and safer visitation protocols and more acceptance, resident or family member concerns cited as a reason for acceleration in the pace of move-outs was then at the lowest level in the survey time series.

By Wave 19, NOI continued to be pressured as nine out of ten organizations were still paying staff overtime hours and two out of three were using agency or temp staff to backfill staffing shortages. The higher levels of care segments (assisted living, memory care, and nursing care) reported increases in PPE budgets commensurate with growing levels of care. Additionally, organizations with the largest portfolios of properties were more likely to report significantly higher PPE budget increases than single-site operators.

The drag on occupancy rates continued to be observed in the Wave 19 survey results, likely reflecting a combination of challenges in backfilling COVID-related vacancies as well as the effects of typical seasonality during the holidays and winter months. Despite reports of record-high COVID-19 cases across the country occurring daily, roughly two-thirds of respondent organizations were not increasing move-in restrictions presumably in part due to operator innovations in infection mitigation and creative visitation protocols which have gained acceptance from many residents and families.

Long-anticipated as a game-changer with regard to improving occupancy, many operators were starting to receive the COVID-19 vaccine. In December, the CDC prioritized skilled nursing and assisted living residents and staff members in phase 1a of the COVID-19 vaccine distribution. In Wave 20, ending January 24, 2021, four out of five organizations had finished their first clinic.

Survey Waves 21-23 (January 25 – March 7, 2021)

Amid growing optimism among operators, in late January when the survey data had yet to show an upward trend in occupancy, respondents were starting to notice an increase in prospect interest specifically related to the availability of the vaccine. Positive signals became palpable in the Wave 22 survey results, which revealed upward shifts in organizations reporting acceleration in move-ins and occupancy increases across each of the care segments. Data compiled in NIC’s Skilled Nursing COVID-19 Tracker clearly showed that COVID-19 cases in skilled nursing communities were falling at a faster pace compared to the U.S. since the launch dates of the Pfizer and Moderna vaccines in long-term care settings, and more organizations with memory care units and/or nursing care beds reported increases in occupancy than decreases since prior to the fall surge of the coronavirus.

Roughly nine out of ten respondents in the Wave 22 survey indicated that educating and motivating staff to take the vaccine was a challenge, and operators applied a variety of strategies to encourage and improve vaccine acceptance. In addition to education/communication campaigns, community and corporate leadership stepped up and publicly took the vaccine themselves and the majority have been personally available with one-on-one support for concerned staff. Few respondent organizations have incentivized staff to take the vaccine with financial benefits.

Nearly one year into the coronavirus crisis, the pandemic has necessitated many changes in the way seniors housing and care operators do business. In the NIC Executive Survey Insights Wave 23 results, respondents were asked to list one of the things that their organization plans to keep doing, stop doing, bring back and further develop. In addition to maintaining COVID-19 and infection mitigation protocols, organizations will continue leveraging virtual technologies for a variety of uses including digital marketing campaigns, entertainment, remote visits, and some activities. With most of survey respondents’ residents being fully vaccinated, seniors housing and care operators have begun to look forward to bringing back communal dining, group activities, resident/employee gatherings, and discontinuing visitation restrictions, meal delivery, pandemic staff benefits, and frequent COVID-19 testing.

Survey Wave 24 (March 8 – March 21, 2021)

Currently, with about nine out of ten organizations reporting their residents are fully vaccinated, operator optimism about occupancy recovery continues to grow. More than one-third (38%) think their organizations’ occupancy rates will return to pre-pandemic levels this year. To boost occupancy, approximately 60% of organizations are now offering rent concessions, approaching the peak reached in Wave 17.

In Wave 24, increased resident demand was cited by 85% of respondents as a reason for acceleration in move-ins in the past 30-days, and the shares of organizations reporting deceleration in the pace of move-ins and occupancy decreases is at time series low for all care segments.

Organizations that have seen a notable increase in prospect interest specifically due to the availability of the COVID-19 vaccine has grown from 25% in Wave 21 to 46% in Wave 24. However, staffing shortages experienced by operators prior to and exacerbated by the pandemic persist in Wave 24: three-quarters (77%) of organizations report staffing shortages in their portfolios of properties.

According to the Wave 24 survey respondents, the average percentage of staff who have been fully vaccinated remains at a stagnant 55%. Between Waves 21 and 24, staff uptake of the vaccine to fully vaccinated levels remained flat. Given these results, one in five respondents (20%) say they definitely or probably will make the COVID-19 vaccine mandatory for staff members—similar to the Wave 23 survey (25%) and higher than in Wave 22 when 11% said they planned to make the vaccine mandatory for staff at that time.

Interestingly, although respondents in Wave 23 indicated they were looking forward to less COVID-19 testing, the lack of staff vaccination growth continues to put strain on operating costs for COVID-19 testing. Where one-half of organizations (52%) are testing staff at least once a week, one-half (54%) are testing residents only if symptomatic.

Going forward as vaccine optimism replaces uncertainty, the NIC Executive Insights Survey will track changes in the seniors housing and care sector with continued focus on the market fundamentals, labor and staffing, and factors that affect NOI. From time to time, new questions will be asked as conditions necessitate. NIC wishes to thank survey respondents for their valuable input and continuing support for this effort to advance clarity and transparency during the course of the pandemic.

Wave 24 Survey Demographics

• Responses were collected between March 8 and March 21, 2021 from owners and executives of 64 seniors housing and skilled nursing operators from across the nation. Owner/operators with 1 to 10 properties comprise more than one-half of the sample (61%). Operators with 11 to 25 properties make up under one-quarter of the sample (20%), while operators with 26 properties or more make up 19% of the sample.
• One-half of respondents are exclusively for-profit providers (51%), one-third (34%) are nonprofit providers, and 15% operate both for-profit and nonprofit seniors housing and care organizations.
• Many respondents in the sample report operating combinations of property types. Across their entire portfolios of properties, 75% of the organizations operate seniors housing properties (IL, AL, MC), 33% operate nursing care properties, and 33% operate CCRCs (aka Life Plan Communities).

Owners and C-suite executives of seniors housing and care properties, we’re asking for your input! By demonstrating transparency, you can help build trust. The survey results and analysis are frequently referenced in media reports on the sector including in McKnight’s publications, Mortgage Professional America Magazine, Senior Housing News, Multi-Housing News, Provider Magazine, and other industry-watching media outlets. The surveys’ findings have also been mentioned in stories by Kaiser Health News, CNN, the Wall Street Journal, and other major news outlets across the U.S.

The Wave 25 survey is available and takes 5 minutes to complete. If you are an owner or C-suite executive of seniors housing and care and have not received an email invitation to take the survey, please click this link or send a message to insight@nic.org to be added to the email distribution list.

Nestled among the many pain points of 2020 were a smattering of bright spots for the seniors housing and care industry. For one, the year ushered in a wave of innovative strategies to combat loneliness in the face of social distancing. Among the top strategies was the use of virtual reality – an area which saw a lot of growth and adoption among operators during the public health emergency. As I delved deeper into researching the topic, I learned that virtual reality – in addition to creating opportunities for socialization and stimulation – has been gaining traction as a staff training tool as well.

Embodied Labs’ person-centered caregiver training, for example, provides immersive learning experiences that mimic many of the common conditions and life transitions that impact people as they age. These lab experiences cover vision and hearing loss, Alzheimer’s Disease, end-of-life conversations, cognitive decline, and LGBT and transgender health and aging. In each of these experiences, the trainee becomes the viewer, and assumes a first-person perspective of how older adults experience different aging challenges.

In Embodied Labs’ virtual reality platform, proprietary software is combined with a virtual reality-ready gaming laptop and a tethered head-mounted display. The labs have found their place not only for existing caregiver staff to hone their skills, but also for caregivers-to-be. Georgetown University, for example, is now in its third year using the experiences with third-year medical students who choose to participate in a geriatric clerkship. For these medical students, this is a powerful  opportunity that really embodies the experience of older patients and is essential practice in being a doctor.

I spoke with Pamela Saunders, PhD, Associate Professor and Director of the Geriatrics Clerkship as well as Georgetown University’s Aging & Health Master’s program on how the Embodied Labs’ experiences are used to improve care for older adults. Dr. Saunders noted, “The idea really is to promote an understanding of the patient’s perspective for students. Students can read about macular degeneration, but to really experience how difficult it is to see with this disease is what we want them to walk away with.” Along with each experience, medical students do a pre- and post-assessment and share their reflections with their professors. “If I had my way, I’d have every medical student do it,” she continued. “It would be an inexpensive and easy way to provide training to students in geriatric medicine and embody the patients’ perspective.”

The virtual reality experiences aren’t just limited to students. Benedictine Living Community-Winona is an assisted living, memory care, and skilled nursing community serving approximately 200 residents in Winona, Minnesota. On the Winona campus is a CNA Training Center, used not just by Benedictine Living staff, but also nursing students from the three nearby colleges. In 2018, a Bremmer Trust Fund grant provided the training center with eight virtual reality headsets to be used with “The Beatriz Lab”, Embodied Lab’s Alzheimer’s module.

I spoke with Jenna Barkeim, RN/CNA Training Instructor at Benedictine Living about the impact of the CNA Training Center and the new Embodied Lab’s training modules. Jenna recalled working as a CNA on the Memory Care Unit and thinking how hard it is to prepare someone for working in an environment like that. “While staff reactions to the training module varies,” Jenna says, “I feel the experiences are really impactful for everyone, especially those that had or have loved ones with Alzheimer’s. I believe our staff is more understanding and sympathetic after viewing these modules.”

Currently, the CNA Training Center at Benedictine Living Community of Winona utilizes all the modules from Embodied Labs and is currently working to incorporate “The Frank Lab,” which is the recently released training program on social isolation and loneliness. As has been highlighted during the COVID-19 public health emergency of the last year, loneliness and isolation is a national public health problem with a very real impact to an individual’s health and well-being.

When it comes to training the caregivers of America’s older adults, there needs to be more than just reading and listening. Virtual reality training experiences, which are now more portable and affordable than ever, give students and trainees an incredibly immersive experience, allowing them to understand various conditions more fully from a first-person perspective. This ultimately produces a more empathetic and compassionate caregiver, which benefits everyone involved.

The total investment return for the seniors housing sector was a positive 0.71% in the fourth quarter of 2020. This marked the second consecutive quarterly gain after one quarter of negative returns in the second quarter of 2020 when total returns were negative 1.00%; that marked the first negative total return since 2012 and prior to that in 2009.

The income return remained positive in the fourth quarter, but at 0.91% it was the smallest increase on record as far back as 2003. The appreciation (capital/valuation) return fell 0.20%, the fifth consecutive quarterly decline. This contrasts with the NPI and apartments, where the valuation return turned positive in the fourth quarter. Many investors have reduced their appreciation expectations for seniors housing as the impact of the coronavirus has weighed heavily on their view of the sector. The valuation return is the change in value net of any capital expenditures incurred during the quarter.

Further, the one-year valuation return for seniors housing was a negative 2.89%, worse than in the NPI (-2.52%), apartments (-2.02%), or office (-2.73%) types. Retail was a negative 11.17% and hotel had a shockingly large negative appreciation return of 24.10%. Meanwhile, investors’ darling—the industrial sector—enjoyed a 7.04% appreciation return on a one-year basis.

Note that the performance measurement cited above for seniors housing reflects the returns of 145 seniors housing properties valued at $7.8 billion in the fourth quarter 2020. This was the highest property count and market value in the NCREIF time series for seniors housing.

See my full Quarterly Highlight in the recent National Council of Real Estate Fiduciaries (NCREIF) Real Estate Performance Report.

In mid-September 2020, even as the COVID-19 pandemic continued to drive weaker occupancy rates, higher expenses, and intense media scrutiny of the senior living sector, a ten-property senior living portfolio was successfully closed in a recapitalization and acquisition deal.

Operated by Seattle-based Merrill Gardens, the portfolio of 1,508 independent living, assisted living and memory care and multifamily units, as well as 29,000 square feet of ground floor retail, attracted a $460 million loan from PGIM Real Estate. In the latest of NIC’s ever-popular Leadership Huddle events, “Deal Structures and Alignment of Interests During a Pandemic: A Case Study with an Operator, Lender and Equity Provider,” three of the principal architects of the deal (with a guest appearance from a fourth participant) got together to discuss its details and the realities of underwriting and capitalizing senior living, even in times of distress.

Bill Pettit, President of R.D. Merrill Company, the parent company of Merrill Gardens, explained that his company, an active developer and operator of seniors housing properties, aims to hold properties over the “very long term.” In 2010, Merrill Gardens financed the ten-property portfolio through a RIDEA structure with Welltower, then called Healthcare REIT. When, in early 2019, Welltower expressed interest in creating liquidity with their 80% share, Pettit agreed to support the move – but was not interested in liquidating Merrill Gardens’ 20%. That triggered a search for new partners.

A central theme of the discussion was the value of trusted, well-established relationships.

Underwriting During a Pandemic

Asked by NIC Chief Economist Beth Mace, who moderated the discussion, what it was like to bring this deal to his investment committee at the height of the pandemic, Brian Sunday, Managing Director of AEW Capital Management, explained the company’s investing philosophy. In addition to investing in some ground-up development, he said, “Our goal is to buy core cash-flowing stabilized assets, obviously with strong operating partners who we have really good relationships with.” The relationship with Merrill Gardens had already yielded several deals, dating back to 2016, according to Sunday. When this deal was presented to him, he was open to taking a closer look at it.

Sunday worked with Merrill Gardens’ team to understand how the pandemic was impacting their business, in order to be able to underwrite it. They looked at projected cash flows over the next several years and were able to “get comfortable” with those models, under the assumption that, as vaccinations come online and the pandemic eases, seniors would return to seniors housing. In investment committee, Sunday’s response to questions on the impact of COVID was to point to pre-COVID performance. “This portfolio was 95% leased for 3, 4, 5, 6 years, maybe longer, and had great NOI growth…if this portfolio doesn’t come back, then the senior housing sector in general is in a lot of trouble.”

Asked about expectations on returns, Sunday acknowledged that they were different than pre-COVID deals. “The hardest part about this deal is that we’re underwriting an NOI that is decreasing…we knew NOI was going to dip 20%-30% from where it was pre-COVID.” He continued, “We wanted a little bit higher return expectation for taking that risk. The lynch pin that really got us over here was the debt. Without the debt this thing was dead on arrival. Based on proceeds and spread and obviously, as we all know, interest rates shot down to basically zero. Where we were able to lock rate really helped us to bridge the gap of the negative NOI drop to the rebound, to make up for that increase in returns that we wanted to get.”

It Isn’t If the NOI Gets Back, It’s When

Trace Wilson, Executive Director at PGIM Real Estate, said, “The starting place of the conversation, on our side, wasn’t if the NOI gets back; it’s when.” His team was already familiar with the portfolio’s markets as well as the assets in question, which helped them avoid logistical problems caused by the pandemic. Like Sunday, Wilson’s team looked closely at various COVID-19 scenarios potentially impacting occupancy, expenses, and numerous unknowns raised by the pandemic. Eventually, trust was a deciding factor. Wilson said, “I think it goes back to the performance of the portfolio beforehand and confidence in Merrill to be able to do what they said they were going to do.”

Asked about alignment of interests, Sunday responded by pointing to Merrill’s willingness to put dollars into the joint venture. Pettit added that “alignment of interest, for us, is the number one objective we have when finding any partner. This industry is complex…the experience and willingness to work jointly with the operator to achieve the best result for the asset is critical.”

Developing Industry Relationships is Key

Mace then asked what happens if an operator doesn’t have a long-standing relationship. Sunday said, “that’s a great question. I think that’s why we haven’t seen a lot of deal flow get done.” Discussing how he develops new relationships, he said, “a lot of this happens over time. You’re seeing people at the NIC conferences. Even though you might not do a deal, you’re starting to build on that relationship…it takes time. Obviously, if you’re just meeting someone for the first time during COVID, during travel restrictions, it’s difficult to get that level of trust.”

Mace also asked about when the panelists see markets returning to normal. Sunday pointed out that some markets are already bouncing back, while other, more deeply impacted markets will lag behind. “It’s going to be a tale of two worlds, unfortunately,” he said, adding, “The stronger markets are going to come back quickly.”

Ryan Maconachy, Vice Chairman, Health & Alternatives Assets, Newmark, was involved in recapping and raising the debt for the deal. He also emphasized the importance of the strong relationships involved. “Fortunately, we had a great relationship to benefit from with not only Bill and Brian, from past transactions, but also Trace and Brian. Trace’s history of involvement with these assets prior to AEW’s involvement was a huge catalyst to getting this done. As Brian stated, this wouldn’t have happened without the debt, and this wouldn’t have happened without Brian and his team having a great relationship with Bill.” Like the other panelists, he expressed doubt that the deal could have been executed without established, trusted relationships.

Network, Network, Network

As with all Leadership Huddle events, the webinar was followed with an optional Zoom discussion session. In small group breakout rooms, attendees discussed how underwriting terms have changed. There was general agreement that banks have been requiring more recourse than in pre-COVID days. Some concluded that smaller mom-and-pops will now be looking to exit the space, creating opportunities for investors. But another topic of discussion centered on relationships. As one attendee said, when asked about relationships, “network, network, network.” Some things never change.

You can register to attend upcoming NIC Leadership Huddles, including both the live webinars as well as the optional, first come, first served participation in peer-to-peer discussions, within the Events tab on nic.org. Registrants are provided with a recording of the event, compliments of NIC and our generous sponsors and partners.