As the seniors housing and care sector enters the third quarter of 2021, there is cautious optimism that the second half of this year will bring increased property sales transactions activity in the capital markets. Nothing is certain, however, given the fact that many challenges still persist, such as low occupancy rates, rising insurance costs and labor shortages. However, investor interest is strong, and fundamentals have seemingly stabilized. Some owners and operators will be on the offensive, looking for ways to transform their business and increase the chances of a successful future. Others may be more in survival mode given the challenges, and that could bring opportunities for additional buyers.
The second quarter 2021 NIC MAP data, powered by NIC MAP Vision, showed that nursing care property occupancy increased from its record low of 74.0 percent in the first quarter to 74.7 percent. However, the skilled nursing care industry is still challenged by very low occupancy—the occupancy rate stood at 86.6 percent prior to the pandemic in the first quarter of 2020. Further, government stimulus funds for the nursing care sector may soon be exhausted unless more federal funds are provided, putting additional pressure on operators of skilled nursing properties.
For private pay seniors housing, occupancy was unchanged at 78.7 percent from the first to second quarter, but it was well below its pre-pandemic level of 87.4 percent in the first quarter of 2020. There was a solid pickup in demand in the second quarter of 2021 as net absorption—the number of units leased on a net basis—was positive, marking the first positive quarterly absorption since the first quarter of 2020 and the most positive absorption since 2019. Anecdotally, many operators have mentioned that resident move-ins have accelerated and this pick-up in demand confirms that trend. The flat occupancy rate was largely due to new inventory coming on-line, which in turn reflected the number of projects that broke ground pre-pandemic that finished construction and opened in the second quarter of 2021.
Seniors housing and nursing care property sales activity continued to remain relatively low in terms of closed dollar volume throughout the first half of 2021, according to the NIC/RCA second quarter 2021 preliminary data. In terms of the dollar volume of seniors housing and care property sales, the first half of 2021 registered $5.0 billion. The $5.0 billion represents a 34.0 percent decrease from the first half of 2019, when volume registered $7.6 billion. However, the $ 5.0 billion in 2021 thus far represents a 13.2 percent increase from the first half of 2020, when volume registered $4.5 billion. This increase in volume confirms that activity is picking up again and is likely to continue increasing as the sector progresses through the second half of 2021.
One reason for the optimism on increased activity are the recent property acquisition announcements from two large public healthcare REITs—Welltower and Ventas. These are larger deals, over $1 billion each. They were announced in the second quarter and are expected to close in the second half of this year. Many believe activity will increase in the second half of the year as additional deals start to close and underwriting standards continue to loosen after tightening during the pandemic as more buyers get comfortable with the expected recovery, and some sellers elect to come to market with properties and/or are forced to come to market by lenders.
Even though sales volume was relatively muted in the first half of the year, there were four larger deals worth noting. All four transactions involved Healthpeak as the seller as the REIT continues to divest its seniors housing properties. The smaller of the four transactions was for $334 million as the institutional investor Lonestar bought 10 properties comprised of 1,428 units, and the largest transaction was for $654 million as Brookfield bought 31 properties comprised of 3,136 units. The other two Healthpeak transactions include Omega Healthcare Investors buying 22 properties comprised of 2,270 units for $454 million and Harrison Street buying 11 properties comprised of 972 units for $531 million.
The state of capital markets
In the beginning of 2021, many of the most active lenders and equity participants in seniors housing thought that private pay seniors housing institutional transaction volume would accelerate as the year unfolded. This is proving to be the case. The first half of the year included purchases of Healthpeak’s seniors housing portfolio by Harrison Street, Brookfield, Lonestar and Fortress. As the year has progressed, the largest REITs have been active by purchasing lower acuity properties. With much “dry powder” available from institutional capital equity raised prior to pandemic in March 2020, there will be a lot of interest in deploying that capital in the upcoming months of 2021 and into 2022. Perhaps the second quarter was the start of that capital coming into play. The risk of higher interest rates in 2022 and beyond may also accelerate deal activity in 2021 as the Federal Reserve has indicated that higher rates are in the cards.
In addition, and specifically as it relates to skilled nursing care, it is likely that more transactions will take place once federal government stimulus money to nursing homes is exhausted. It is expected that some “mom-and-pop” owner/operators, ones that have just one or two properties, will continue to be sellers. If that is the case, they will continue to find plenty of buyer appetite from private capital including many larger private family-owned regional buyers, who have been the dominant capital providers in terms of nursing care equity during the past few years.
Because investor interest in both private pay seniors housing and skilled nursing property types is significant, it is likely that private market valuations will be pushed higher as buyers become more aggressive to win deals. Until now, the bid/ask spreads have been wide. Further, many skilled nursing transactions involve real estate buyers replacing the in-place operator with an existing operating partner of their own. These buyers can underwrite more aggressively with the expectation that the new operator will outperform the outgoing operator. In addition, and while not huge to date, there is likely to be some level of distressed properties coming on the market, as borrowers can’t service their loans and as some operators sell or refinance to prevent default. That may lead to an increase in opportunistic buyer activity as well.
In conclusion, it’s likely that property sales volume will continue to grow in the remaining months of 2021, barring any calamity with the COVID-19 Delta variant. There is much capital to deploy among lenders, REITs and equity groups. Further, market fundamentals should continue to improve as the expanding economy and job market supports consumer confidence and resident move-ins and as the pause in the development pipeline during the pandemic takes root to lessen near-term growth in inventory. Combined, these conditions should support rising occupancy rates in the sector, providing capital providers an opportunity to underwrite a bit more optimism in their projections.
Bill Kauffman as senior principal and Beth Burnham Mace as chief economist with the National Center for Senior Housing and Care (NIC).