Senior Housing’s Capital Stack and the Pandemic

Although COVID-19 has led to a sector-wide shake-up, members of a panel at the NIC fall conference detailed how the outlook for assisted and independent living properties looks positive in the long term.
(Clockwise from top left) Steve Schmidt, Talya Nevo-Hacohen, Mark Cotsakis, Sarah Anderson

It’s no secret the senior housing sector is facing challenges during these extraordinary times. What may be less clear, however, is that there is light at the end of the tunnel. Although net operating income has broadly fallen as operators implement safety measures amid occupancy losses, opportunities exist for sharp investors and financiers.

Sarah Anderson, managing director of Newmark Knight Frank’s senior housing and care platform, said that, while new investment was largely put on hold during the initial shock of COVID-19, “ever since May or June, we’ve seen a lot more investor activity and appetite for new opportunities.” Her comments were part of a panel of the National Investment Center for Seniors Housing & Care (NIC) fall conference’s second day.

Anderson was joined by Talya Nevo-Hacohen, executive vice president, chief investment officer & treasurer of Sabra Health Care REIT, and Mark Cotsakis, executive vice president & head of seniors housing finance for Wells Fargo. Freddie Mac’s Steve Schmidt moderated the discussion. The group addressed the perspectives of debt and equity providers in the “new normal” of the pandemic.

Ongoing challenges

A national fall in senior housing occupancy—pegged between 6 percent and 8 percent—underpins many of the sector’s current struggles, though the challenges are as diverse as the actors.

Sabra’s Nevo-Hacohen mentioned that one major issue specific to health-care REITs is “the ability in the public equities markets to take a somewhat longer-term view rather than an immediate accretion view of transactions. … Everything is, essentially, in an ‘awaiting recovery’ mode.” She added that the environment today—where it’s difficult to pin down any sort of predictable recovery timeframe—results in public REITs being able to close deals that encompass some uncertainty but not on a large scale.

From a borrower perspective, loan terms have become a bit less favorable. Speaking to loan-to-value ratios, Anderson commented that “60 percent is the new 65,” with Cotsakis adding that “loan-to-cost leverage (is) probably down 5 to 10 percent and is depending on the nature of a deal.” He also noted that, though regional banks have been the most active lenders, there has been a shift toward terms with repayment recourse, with percentages likely increasing as well.

Finding the upside

Nevo-Hacohen sees a silver lining amid the sector’s struggles, however. In addition to demographic tailwinds, “we think that COVID-19 has burnished reputations of operators who have done well by caring for and creating a safe environment for vulnerable seniors in their communities, so we think that there’s actually an enormous opportunity for promoting senior housing now to consumers.”

From a private equity perspective, Anderson pointed out that most funds are maintaining some levels of activity, “but of course everyone’s being highly selective, probably passing on acquisition opportunities more than they are digging in and underwriting. … (There are) still plenty of great plays and ways to invest in our space, so I don’t see … too major of a slowdown into 2021.”

Cotsakis noted that, even as national banks largely had taken a wait-and-see approach until recently, debt funds joined the fray, as “they can still get yields and probably push leverage up a bit higher … even on construction deals.” Regardless, “the best sponsors are the only ones that are getting deals done.”

What do we know?

Though opportunities are present, several major unknowns cloud the sector’s recovery. A potential second wave of coronavirus infections could drastically alter the landscape, and Nevo-Hacohen is expecting it to hit, following new increases in COVID-19 diagnoses worldwide. It’s difficult to assess how much or how little it could affect senior housing across the board, though, and the impact will not be “a uniform impact, because COVID-19 is not uniform across our country.” Testing will be the key to safely operating senior housing communities across the country, she anticipates.

However, even as challenges abound, the future is far from bleak. The industry “has created a change in reputation and image, and has sealed itself as being a part of the continuum of health care in this country,” said Nevo-Hacohen.

While the near-term outlook for senior housing properties may be cause for concern, one major upcoming shift seems certain to leave a positive mark. “The one thing (this sector) has going is this demographic wave that’s going to start in 2024, 2025, (when) Baby Boomers are hitting 80,” said Cotsakis, adding that, as many of the current concerns appear to be short-term in nature, “I can’t imagine that that demographic wave isn’t going to overcome that in a big way.”