The seniors housing industry has done a good job of protecting residents and maintaining occupancy from COVID-19. Although there have been regionalized outbreaks, most operators are reporting normal attrition and flu season occupancy rates, proving that assisted living is a safe place to house seniors. The biggest risk to occupancy, thus far, seems to be a caution over new admissions by operators and not a lack of interest by clients. Smaller operators have had a better chance of protecting their facilities with the unique ability to minimize harm. With fewer facilities, residents, and staff members to manage, these operators have the unique ability to hyper focus on protocol to provide a facility level focus.
Fear is gradually being replaced by reality, and there finally seems to be a light at the end of the tunnel. Although a return to normalcy will be slow, and seniors housing may be at the tail end of the process, the industry is in a good position to make a full recovery.
It is too early to predict what the long-term effects will be within our industry as a result of the pandemic. We are hearing that many operators feel the need to better store up PPE, and that there could be a slight increase to insurance premiums with the addition of pandemic insurance. Historically, however, the seniors housing business has been fairly recession proof. When it comes to property valuations, we expect that high-end AL communities, seeing compressed CAP rates before the outbreak, will take the biggest hit. But owners that can show historic recovery from similar flu season drops may see very little impact to their overall value.
When it comes to transactions, the pandemic has not been a deal killer, but has noticeably changed contract negotiations. Both buyers and owners are wanting to better protect themselves. COVID-19 clauses aimed at a percentage-based census loss may be here to stay. These clauses, based on the T-12 ADC, are triggered with a 10-20% occupancy drop during the escrow period. The clauses often give the buyer a provision to back out and give the owner an opportunity for correction, or an overall reduction in price is instituted based on actual resident income and NOI. Notwithstanding this cautionary step these occupancy clauses are common in most transactions as seasonal fluctuations in occupancy are not uncommon.
Lenders, although cautious now, should see that the perceived risk is short lived. The timeframe for admission normalization, which may hinge on the availability of rapid testing, is currently the biggest unknown. The longer that banks take to re-engage, the more that deal bounce back could be affected. Term sheets should be out next month, and new underwriting practices may be dictated, but the outlook from those we have spoken with is very positive. Stabilized assets with no COVID issues will likely come back first, with value-add deals following behind.
We could very soon experience a great window of opportunity for both buyers and sellers. The pent-up demand for seniors housing still exists, and earmarked money will gradually begin to flow again. REITS are already starting to move forward with deals, although with caution, and smaller investors are in the wings watching and waiting. Both buyers and sellers should stay in close contact with brokers/advisors to be first in line should a major sell off occur.
Owners desiring to explore future exit strategies, should take this opportunity to have us run your numbers and assess/update your current value. Owners needing to exit the business immediately still have lease to purchase options available, despite the current events. Whether you are looking to sell, buy, or just weather the current storm, we would like to be a valuable resource to enhance your business strategies.
Knapp Group and Stahler Group represent east and west coasts teams of Marcus & Millichap’s National Seniors Housing Group. With a combined 125+ years of experience, knowledge, and resources, together our advisors can provide the most thorough and up to date information from both local, regional, and national perspectives.