Senior Housing REITs Take Stock Amid Turbulence

Executives at three real estate investment trusts discussed pandemic responses and partnership options at a conference held by Argentum.
Clockwise from left: Chris Cummings; Stephen Monroe (Partner & Managing Editor, Levin Associates); George Chapman; Eric Mendelsohn

A year of crisis has generated extraordinary challenges for senior housing operators, as well as the capital partners that play a vital role in housing and caring for nearly a million elderly residents across the U.S.

“2020 has been a real gut punch for the operators and REITs alike” as they deal with COVID-19, hurricanes in the Southeast and wildfires on the West Coast, according to Chris Cummings, senior vice president of asset management at Ventas Inc. These emergencies came on top of pre-existing challenges over the past year with new supply entering the market and higher labor costs that have pressured financial performance, he noted.

Cummings spoke as part of a panel of senior living REIT executives on the second day of the Argentum Senior Living Executive Conference, the first virtual trade show held by the nation’s largest senior living association. Like many of its peers, Ventas, a $26 billion listed REIT with 742 senior housing communities in its portfolio, sprang into action during the pandemic.

The company lent a hand to its senior housing operating partners by securing personal protective equipment (PPE), assisting with efforts to lobby for government aid and providing relief to tenants in the form of rent deferral and other liquidity programs, while sharing crucial information on pandemic-related issues such as testing.

“I’m not sure the operators are looking for REITs to guide them through COVID, but certainly they’re looking for us to provide resources and flexibility,” said Cummings.

Powering through

Image courtesy of Pexels

Ventas is seeing light at the end of the tunnel. In April, with pandemic restrictions in place, a large portion of the REIT’s senior housing communities were closed to new move-ins and visitors and had strict limits on resident activities. Now only 3 percent of communities fall into that tightly restricted segment, with virtually all communities now open to move-ins.

Government relief has helped the industry weather the storm. The U.S. Department of Health and Human Services has distributed nearly $2.5 billion of a planned $5 billion aid package to nursing homes for upfront COVID-19-related expenses, and the Trump administration announced details in early September of the next $2 billion allocation of funds.

George Chapman, CEO of privately held ReNew REIT, which has a portfolio of about 98 communities, added on the same panel that his firm had taken similar measures in response to the pandemic. The company’s team has also spent a great deal of time evaluating service companies as well as looking into innovative solutions around air quality, environmental services and cleaning, such as UVC and ionization technology, he said.

Escalating debate

While the REIT executives were aligned in their responses to the pandemic, they offered divergent opinions on the optimal way to partner with senior housing operators. An ongoing debate in the industry revolves around the pros and cons of sale-leaseback versus RIDEA (REIT Investment Diversification and Empowerment Act).

In a sale-leaseback investment, the REIT purchases the property and leases it back to the seller for an annual rent payment plus annual increases called escalators. The RIDEA structure, on the other hand, is more of a partnership that allows REITs to capture net operating income of the property.

“Leases have been frowned upon the past few years and RIDEA has been the favorite structure,” said Eric Mendelsohn, president & CEO of NYSE-listed National Health Investors, which has more than 200 senior living facilities across the U.S. He added that National Health Investors offers very modest escalators and items like purchase options 7 or 10 years down the road.

Chapman noted that ReNew has become a devotee of the RIDEA structure for a number of reasons, among them the company’s desire to improve the quality of senior housing. “We really believe that the RIDEA-based partnerships do a better job of aligning interests of the operator and the capital partner over the long term,” he said.

“I personally believe that unless there’s really good alignment between the operator and the capital partner going forward, that we’re not going to do everything that’s essential for making senior housing better,” Chapman added.