Conducted in September, the e-mail survey asked professionals to provide their 12-month outlook on a number of issues in the seniors housing space. The survey netted 147 respondents.
“I was a little surprised by people expecting M&A activity to increase next year. Obviously, the market has been fairly robust for a number of years,” said Chris Taylor, managing director at Capital One Healthcare, during an interview with Seniors Housing Business at the fall conference of the National Investment Center for Seniors Housing & Care (NIC). The three-day event, held Oct. 17-19 at the Sheraton Grand Chicago, attracted more than 3,100 attendees.
One possible explanation for survey respondents’ optimism over M&A prospects in the year ahead, according to Taylor, is that while it’s getting more difficult for investors to acquire Class A product in light of the compressed cap rates and rising interest rate environment, they see more value-add opportunities going forward.
“M&A obviously covers a variety of things, not necessarily just core assets, but properties that are more of a turnaround opportunity,” said Taylor. “If you are not going to be in that range where you can pay the aggressive cap rate for A-quality product, you’ve got to develop and do new construction, or you’ve got to find those value-add opportunities where you may be completely changing the complexion of the product to a higher acuity.”
Appetite for acquisitions
Approximately 37 percent of respondents indicate that acquisitions of existing facilities provide the most opportunity over the next 12 months, followed by the repositioning of older properties (25 percent), new development (24 percent), and sales and exit strategies (14 percent).
Which region will provide the most opportunities in seniors housing over the next 12 months? About 28 percent of respondents cite the Southeast, followed by the West Coast (19 percent), the Northeast (15 percent), the Midwest (13 percent), the Southwest (10 percent), the Mid-Atlantic (9 percent) and international (6 percent).
“This is completely hypothetical on my part, so take it for what it’s worth. I would argue that some of the barriers to entry, or the challenges, are certainly less in the Southeast than they are on the West Coast or in the Northeast. So, that would make sense to me,” said Taylor. “A construction project that takes you five years in California maybe takes you two in in Atlanta, and Atlanta is growing.”
What borrowers are looking for
With a continued focus on M&A activity, survey respondents expect real estate term loans will be the primary driver of financing in the year ahead. More specifically, 34 percent of respondents indicate term financing will be the most important form of financing for their organizations over the next 12 months. Highlighting the strong interest in new development, construction loans were cited by 28 percent of respondents as their principal financing need.
“Construction lending has been one of those things that has kind of ebbed and flowed,” said Taylor. “My perception a year ago was that some of the banks were retrenching somewhat. That doesn’t seem to be the case to me right now. I haven’t had anybody say they are having a hard time finding construction loans.”
Any concern over disequilibrium between supply and demand in seniors housing has to be balanced against the idea that lenders want to “get dollars out the door and want to lend money” to the right borrowers, emphasized Taylor.
When asked to identify the greatest financial challenge for the seniors housing sector in the next 12 months, executives overwhelmingly indicate that labor cost pressure is their chief concern, with 48 percent of respondents stating so. The second most frequently concern, cited by 39 percent of respondents, is supply and demand imbalances.
What began as a concern over efforts in many states to boost the minimum wage for workers, which in turn put pressure on seniors housing operators, has graduated to a supply-demand issue, said Taylor. In short, the seniors housing industry is struggling to attract and retain caregivers in a highly competitive environment.
But haven’t wage pressures always existed to some extent in the seniors housing industry?
“If someone is making $8 or $9 per hour at McDonald’s, and a caregiver is making $12 to $13 per hour, there is a big spread there,” said Taylor. “And that’s who you are competing with, not necessarily just other operators. You are competing with fast food, you are competing with Home Depot. There are a lot of other jobs competing for that same labor force.”
If that gap between the hourly wage at McDonald’s versus what a caregiver earns at a seniors housing facility narrows or closes altogether, a caregiver might want to re-evaluate his or her job situation. On one hand, being a caregiver is potentially more rewarding than working in the fast food business, but on the other hand it’s a difficult job, explained Taylor.
If that floor for the hourly wage is raised in the fast food sector, by definition competing industries have to follow suit or risk the possibility of workers looking for greener pastures elsewhere.
Skilled nursing under microscope
Executives continue to closely monitor the pulse of the skilled nursing sector. Opinion on investor interest in the sector over the next 12 months is divided, with 29 percent predicting increased investor interest and 32 percent foreseeing a decrease in interest.
Occupancies and net operating income at skilled nursing facilities have dropped across the board the last two or three years as a result of the change in the reimbursement model, said Taylor. The question is whether that trend has bottomed out. “Until you have that figured out as to what the new normal is, it’s hard from both a financing and certainly from an acquisition perspective.”
According to NIC, occupancy rates at skilled nursing facilities across the United States continue to fall in urban and rural areas, hitting a new record low of 81.7 percent in the second quarter of 2018. NIC experts say policy changes related to reimbursement and shortened lengths of stay, as well as competition from assisted living and home health, factor into the occupancy decline.
“There is still a fair amount of uncertainty around skilled nursing,” concluded Taylor.
— Matt Valley