Last week, we sat down with Alan Plush and Colleen Blumenthal, partners at national valuation and consulting firm HealthTrust, based in Sarasota, Florida, to talk about how the coronavirus pandemic will impact valuations and how they will go about their work.
We all know that COVID-19 is taking a toll on the senior care sector, particularly skilled nursing. Why are appraisals and valuation consulting in general more important today than ever before, when done by professionals who have been through a few crises before?
Alan Plush – It allows moderation on both sides. First, values don’t decrease too much (as if assuming this lasts forever), and second a reasonable impact is forecast (not ignoring the reality). Colleen Blumenthal – Experience coupled with data allows the seasoned professional to better predict the length and shape of the recovery, discerning hype from reality. These grey hairs can identify what is déjà vu and what is different this round.
Do you think appraisals will change in the future, in terms of being able to identify infection control protocols, analyzing their PPE readiness, and how that might impact value? And then you have the matter of virtual inspections.
AP – Expenses will increase for PPE and other protocols until some form of treatment that moderates the impact is developed. Virtual inspections are temporary, likely as the industry further responds people will be able to go back into buildings.
CB – The model that we developed for ASHA’s and Argentum’s appeal to HHS primarily revolved around the FTE – the driver behind the increased wages and benefits and the primary consumer of the PPEs and test kits. In fact, the task force agreed that the number of FTEs at the property level inherently recognized the size and acuity of the community and some real COVID-19 impacts. Going forward, appraisals will need to be more granular with understanding the property’s infection controls and the financial cost of sustaining that. As far as virtual inspections go, I think for some lower leverage deals or asset work-out situations, they may continue as a lower cost alternative to in-person inspections.
In a time like this, how do you do a feasibility study on a new development when no one really knows what is going to happen?
AP – This depends on when it would open. Demand is demand and most believe that this will be managed eventually and some sense of normalcy will return. Assumptions that have a project opening in 24 months likely can expect a moderation of the impact of C-19.
CB – It’s hard; at this point, there are no data points to suggest that the pandemic has frightened seniors or their children from seniors housing, so we assume that overall penetration rates will not decrease. However, we did see a slow down during the last recession resulting from seniors not being able to sell their homes (to finance their residency) or moving in with their unemployed adult children to help make ends meet. Massive losses in the stock market and rampant job losses coupled with depressed occupancies coming out of the pandemic will certainly increase fill times for most projects in the development pipeline and will likely serve to delay many.
The impact that CV-19 is having is really varied by state, and then by counties or cities within states, and even building to building in a city or town. But it seems senior care is getting a bad rap with a broad brush across the industry. Are you seeing buildings where there has been little to no impact, and why do you think that is?
AP – Absolutely it is not evenly impacting the industry. However, even if a building doesn’t have active cases, the overarching impact is on move ins. In most markets, decision makers are frozen, waiting to see what the stock market does, what path the outbreaks take, and if facilities become adept at isolation and treatment. As with the slow reopening of the US, there is no one size fits all when it comes to valuation impacts. It’s market by market, case by case.
CB – The longer the pandemic runs, the fewer buildings we see with little or no impact. The incidence rate does vary tremendously, and yet, the coronavirus is ubiquitous: for states that have published listings of properties with COVID-19, it is a who’s who of the biggest, brightest and best operators in the nation. Most operators do not have rampant outbreaks but very few have their entire portfolio COVID-free. Those that are COVID-free generally benefit from geography outside of hot spots; early March action to restrict access; aggressive procurement of PPEs; and testing. However, the last is expensive, difficult to acquire and requires repetition to be effective.
Several weeks ago, we predicted that there is a good chance that overall seniors housing occupancy may drop to 80% or lower by July 1. But is that number really relevant? Won’t there still be communities with 90% occupancy, even in areas hit by CV-19, or where CV-19 never entered the building?
AP – Macro industry statistics, while a favorite of capital markets, don’t tell the entire story. If market occupancy is 80% but I own a building that is at 70%, do I really care about “market occupancy”? Of course not. The same occurs in buildings where we see minimal occupancy impact. If one of those buildings is mine, I wouldn’t consent to having it valued based on national averages either.
CB – While in aggregate, the “market” occupancy will drop, the range in actual performance will grow: IL communities outside of hot spots with good protocols may see no material change, whereas memory care communities in a hot spot could be devasted by an outbreak.
So, when people say valuations will drop, do you think it will be across the board, regardless of a community’s occupancy or cash flow? Or will that low-end building maintain its value, and some high-end ones as well?
AP – Market by market, building by building. The best buildings will be those that are newer, in high barrier to entry markets with little CV-19 impacts. Older buildings were already suffering due to the development cycle; I think they will be disproportionately affected by this. However, the new high-end building in an overbuilt market will still suffer from over building. So again, building by building, market by market.
CB – Lenders requiring more equity and “tourist” capital sources fleeing will inherently increase capitalization rates, probably despite lower interest rates. However, committed PE, while pausing now, will still have an appetite for quality assets. And if the extremely low yields from other asset classes continue, the sector may still attract investors who are desperate for yield, provided limited headline risk.
What advice to you have for lenders as this pandemic takes its toll?
AP – Cautiously underwrite assuming near term stress but longer-term recovery. And as always, bank the operator as much as the building.
CB – Be cognizant of the immediate adverse financial impact – likely six figures per building per month. CARES has some relief and many states are stepping up with Medicaid increases, but for the private pay sector, there has been no relief thus far outside of some PPP loans and they are essentially self-funding their pandemic responses.
How about for investors and REITs? Should patience be the key?
AP – Patience and a blindfold. The model is solid but as a large concentrated capital provider to the space, it has a target on its back.
CB – For REITs, same as lenders above. For investors with risk tolerance, there will be opportunities in the next six months for thinly capitalized providers – especially in the private pay side where little relief is forthcoming.
What is going to happen near term in the market?
AP – Lending and transaction volumes should decline for the next three to four months, after which we should start to see some stability, providing no “second wave.”
CB – And maybe Tampa Bay in the Super Bowl, I mean, Brady and the Gronk! If there is a Super Bowl.
