The 2020 NIC Fall Conference, though held on a virtual platform, presented all the relevance, insight, and expert analysis that attendees have come to expect from the industry’s premier event. Always a staple, sessions focusing on valuations this year were, for some, of particular interest. Amidst a historic global pandemic, which has driven sharp declines in occupancy rates, increased costs, drawn unprecedented media attention, and hastened operational disruption, NIC hosted two discussions on how all of this is impacting valuations across both seniors housing and skilled nursing property types.
Some themes ran through both sessions. Chief among these was the sense that there is plenty of opportunity for investors and operators. While some capital providers appear to be sitting on the sidelines, others are seeing long-term value, along with market fundamentals that will remain long after the pandemic is behind us.
“Valuations in Seniors Housing: How Have Trends Changed and Why?” began with a calming assessment of the realities of a market that, despite major setbacks, is still seeing deals get across the finish line. Moderator Manisha Bathija, former senior investment officer, independent consultant, kicked off the discussion by asking “What’s happened in the acquisitions market since COVID began?” In his response, Ryan Maconachy, vice chairman, healthcare & alternative assets, Newmark Knight Frank, observed that he’s seen, “new deals, and different types of deals, than we’ve ever had to bring to market.” He continued, “There is a lot of volatility. The market is moving on a daily and weekly basis. The one thing we all have going for us is that there’s never been more capital looking at the seniors housing industry to invest in.”
Maconachy also observed that, “We’re seeing folks get very creative, which again, shows you the resiliency of our industry, that we’re not so in a box that we can’t pivot when necessary, and I think folks are getting more comfortable with that by the day.”
For his part, Ben Firestone, executive managing director & co-founder, Blueprint Healthcare Real Estate Advisors, agreed with his co-panelist, but added that, while capital is available, investors are looking for operators who are able to adapt and survive during this time of disruption. He said, “There’s all sorts of capital – tourists and mainstay investors – but the scarce commodity remains the operator that’s going to get it right.”
In agreeing with that point, Maconachy underlined just how important operators are, saying, “Never before has the operator impacted valuation more than today…the operator premium today is as big as it’s ever been. That’s a huge factor in our opinion, on valuation of a deal with operator A and operator B.”
While pricing is being depressed by drops in occupancy, uncertainty, and higher costs associated with COVID-19, both experts indicated that they are looking at a more positive long-term value in the market. Firestone summarized his outlook, saying, “While pricing might be down a little bit, driven largely by NOI, I think we’ll see a rebound. We’ll see rent growth prevail, we’ll see cash flows continue to grow, and we’ll see absorption. Ultimately, I think we’ll get back to where we were, and then some, in the next 12-18 months.”
In “Valuations in Skilled Nursing: How Have Trends Changed and Why?” Moderator Zach Bowyer, managing director/ head of alternatives, JLL Valuation Advisory, discussing the complexity of skilled nursing, reminded the panel, “There’s an old adage in the space: if you’ve seen one skilled nursing facility, you’ve seen one skilled nursing facility.”
When asked who’s buying and who’s selling in the space, Josh Kochek, CIO, Hana2.0, indicated that activity is far from grinding to a halt, “There are still tremendous amounts of opportunity in the marketplace. We have a fairly robust pipeline today.” He explained, “Some of the traditional buyers in terms of public owners of real estate have pulled back a little, either working through maybe some owned assets they’re having difficulty with, and figuring out how to reposition, transition, and recapitalize. Paired with a little bit of depression in the stock prices that has put some of those traditional buyers on the sidelines, for what will probably be the near term, I would expect that at some point before long they’ll be back in the market.”
Panelist Aaron Becker, senior managing director, Lument (formerly Lancaster Pollard), agreed that activity continues. On valuations, he observed that they appear to be holding up better than expected. He said, “Valuations are remaining relatively stable…We’re not seeing as much distressed property as I think some people would expect…”
Not everyone, however, is making capital available at pre-COVID prices, or at all. According to Kochek, “What we’ve seen are lenders that don’t necessarily convey that they’re out of market, but have changed their terms so substantially vs what they were six to twelve months ago, either with LIBOR floors that were either non-existent or 25 basis points, historically, now starting to get into the 50 to 100 basis point range on the LIBOR floor, which in effect is driving up your cost of borrowing.”
Cap rates have been much discussed in recent months. Becker indicated they aren’t the major problem some may have feared, “on the cap rate side, they haven’t risen as much as we feared early on. The cap rates haven’t been much of an issue on the valuation side. The challenge for lenders is focusing on the cash flows.”
Becker seemed in agreement on that point, and offered his outlook, which echoed the optimism expressed in the seniors housing session. “We will get back to a period where its more “normal,” where things will look better on an income statement, the balance sheet, etc., so just navigating this difficult time right now is really just a function of the passage of time.”