Great uncertainties cloud the immediate outlook for the U.S. economy and the seniors housing industry in the wake of the COVID-19 pandemic.
But one thing is certain: Unlike other industries that have been forced to shut down, senior living communities are open and continue to serve residents.
With that framework in mind, a March 26 webinar sponsored by the National Investment Center for Seniors Housing & Care (NIC) addressed the ongoing financial implications of the COVID-19 pandemic for operators, developers and capital providers. The webinar is the first in a series of NIC-hosted webinars to address industry challenges related to the pandemic.
Webinar participants included Beth Mace, NIC chief economist; Jim Costello, senior vice president, Real Capital Analytics; Kurt Read, principal, RSF Partners; Matthew Ruark, senior vice president, head of commercial and healthcare mortgage production, KeyBank Real Estate Capital; and Kevin McMeen, president, real estate, MidCap Financial Services.
Early impact
The immediate financial repercussions of the pandemic include a stall in transactions, a rise in lender caution, confusion over valuations, and a search for clarity on how the disease will impact occupancies going forward.
The most startling data point was noted by Mace at the outset. Weekly jobless claims March 26 hit 3.28 million, the highest level ever recorded. “The great American job machine has ground to a halt,” noted Mace.
The implications of a recession are just starting to set in. While the short-term impact looks dire, the question of whether the economy will snap back or take longer to recover weighs heavily on investors.
Prior to the disease outbreak, the seniors housing and care industry was performing well, according to Costello. Investors were attracted to the relatively high yields of the sector compared to other commercial real estate assets, which could be a plus for the industry going forward.
Falling REIT stock prices could be a harbinger of bad news for privately held businesses. But Costello noted that public and private markets are not always in sync. “There’s a lot we don’t know yet,” he said.
Lender Ruark said the level of risk is unknown, which has already resulted in a higher cost of capital and lower leverage levels. But, he added, financing is available.
The Federal Reserve is pumping massive amounts of liquidity into the market. Ruark added, however, that credit officers read the headlines and are being very cautious.
Agencies to the rescue
A big plus for the sector is the availability of capital from agency lenders Fannie Mae, Freddie Mac and HUD. “They are committed to providing liquidity in this market even at peak volatility,” said Ruark. “There is liquidity for those who need it.”
MidCap’s McMeen addressed the unprecedented nature of the situation and the inability to truly assess investor risk. His focus for now is on supporting MidCap’s existing portfolio.
Discussions with borrowers are ongoing. Should loan covenants be modified? Do borrowers need a period of relief? What day-to-day challenges do operators face? How is that impacting occupancies?
RSF Partners own 7,000 units in 40 senior living communities. Like other investors, RSF’s Read is focused on supporting the company’s current portfolio and its liquidity needs. He emphasized the importance of transparent and frequent communication with investors, lenders and operating partners. “Those who are transparent and forthright will be viewed favorably once we get through this current crisis,” he said.
In order to improve transparency, NIC has launched a new monthly survey of operators on move-ins and move-outs, changes in occupancy rates, staffing considerations and construction delivery pipelines.
Transactions will slow; loans will take longer to underwrite. Investors and capital providers will still demand due diligence, but the pandemic adds a level of complexity to decision making. For example, property tours have been restricted, with some being held digitally. “We are trying to be creative,” said KeyBank’s Ruark.
Development activity will be the first casualty, webinar participants agreed. New development carries additional risk making it difficult to underwrite loans that provide returns attractive to investors.
Questions on valuations have emerged. Some cities have shuttered non-essential commercial real estate projects and it could be difficult for parties to agree on land valuations.
Webinar participants emphasized the immediate need to protect residents and workers from infection. But with millions of Americans unemployed, senior living operators could take this opportunity to recruit new workers. Also, expect to see more use of telehealth, virtual video communications, and new protocols for cleaning and sanitation.
Taking a clue from the past, the industry performed well during the last downturn, in part because assisted living is a needs-based product. That could be a sign that capital will gravitate to the sector.
“The industry has shown resilience over other asset classes,” said Ruark. “Hopefully we will get to the other side and get back to normal.”
—Jane Adler