Seniors Housing Equity Players Talk Investment Strategy

Seniors housing investors are re-examining their portfolios—as well as their strategies for new transactions in 2021. Attendees of the latest NIC Leadership Huddle, titled, “Seniors Housing Equity Players Talk Investment Strategy” heard how three equity capital providers are viewing seniors housing as an investment opportunity today. The discussion included real-life examples of recent acquisitions and dispositions, as well as go-forward investment strategies in a post-pandemic world.

Despite seeing lower occupancies through the pandemic, the investors are seeing some light at the end of the tunnel. “It’s been very refreshing to see some very promising trends in our portfolio,” said Dustin Warner, Director, Harrison Street. He continued, “With the onset of the vaccine rollout, we’ve seen COVID cases down to just a handful of residents in late first quarter of this year.” Leads have increased, too. “They’re at the highest level since the onset of the pandemic,” Warner said. He also is seeing higher move ins, nearly at pre-COVID first quarter of 2020 levels.

The discussion facilitator, Jerry Taylor, Vice President of Operations, National Health Investors, Inc., pointed out that there is a need for strong operators, particularly in a post-pandemic world. He asked whether there was anything to look for when looking for a quality operator partner. Blake Peeper, Partner/Co-Chief Investment Officer, Bridge Seniors Housing Fund Manager LLC, described how the pandemic drove customer behaviors to change. Prospects were shopping online more, forcing sales departments to adjust and adapt at the corporate level. He looks for larger operators who have the resources and infrastructure it takes to quickly and effectively adapt to new customer behaviors – and to innovate to meet new demands.

Asked whether the pandemic will soon be in the rearview mirror, both panelists expressed cautious optimism. Warner is seeing positive movement in the market – but also pointed out that he feels his operators are now better prepared to handle whatever might come next. He also pointed to a new supply and demand picture. With historically low new construction starts, which he expects to stay low at least in the short term, “You’ve got somewhat of a runway here to work with. You combine that with what we perceive as a pent-up demand, a year of residents that want a place to live, and its kind of a nice, optimistic landscape for the future, in my opinion.”

Peeper shared the optimism. “We’ve observed that the value proposition of seniors housing has really been validated,” he said. “The sharp recovery that we saw in March is indicative of that…it’s a really interesting time in the cycle, whereby we’ve had a real hit to occupancy, yet the medium and long-term outlook from a fundamental perspective is really quite strong. We’re generally bullish.”

On dispositions, and when the market will return to normal, with transaction volumes similar to 2018, the panelists both agreed that it is still too early to tell. Peeper said, “When we get to a point whereby the gap between where we are today and stabilized value shrinks some and shrinks to a point where those types of deals are financeable in a reasonable manner, I think then you really open the market back up.” Peeper said he views occupancy outlook as a key driver, but owners will eventually become sellers, even if they do so a little earlier than they’d like.

Taylor raised the fact there is plenty of capital, with somewhere from $9 billion to $12 billion in liquid assets, or ‘dry powder’ waiting to invest in the sector. For Warner, the acquisition pipeline, which had dried up by late March of 2020, began to see new life as debt markets opened up. “We ended the year with over $1.6 billion in new senior housing investments across development and acquisitions,” he said. Having strong relationships, established long before COVID hit, was a major factor in getting deals done.

New opportunities are also coming from old relationships. “We’ve got 22 different operators across the country,” said Warner. “They’re very intimately involved in their submarkets.” Well established relationships with large institutional players have also yielded some new opportunities for Warner.

Taylor asked whether the panelists were seeing value-add opportunities, given the stresses of the pandemic. “Not every value-add deal is distressed, but, of those that are, there are really two different types of distress that we’ve seen,” Warner said. He described properties that were “truly” distressed due to fundamental issues, such as functional obsolescence, or they might be located in over-saturated markets, or have poorly suited debt structures. Many of these, according to Warner, were, “likely on their way to being distressed prior to COVID.” The other type of distress is less severe and can occur even in quality properties in good markets. He explained that these owners, many of whom are relatively new to the sector, now wish to exit. “They were very slowly leasing up pre-COVID, COVID set them back quite a bit…they just want to get out of their basis.” Those are opportunities worth pursuing.

This and other past NIC Leadership Huddles can be viewed here.