Some have argued that the independent living market will fare better than assisted living or skilled nursing in the immediate aftermath of COVID-19. This is easy to see, given independent living’s longer average length of stay, lower expenses and younger, healthier resident population. Long-term may be a different story, as we brought up in the June edition of The SeniorCare Investor.
But interestingly, in the trailing-12 months ended June 30th, the IL sector recorded the largest drop in values from 2019 compared with the other senior care sectors. The average price per unit fell 16.5% from $233,600 in 2019 to $194,900 in the last four quarters, according to The Senior Care Acquisition Report. And this decline occurred despite two huge IL deals (Welltower’s two portfolio sales revealed in June) being valued significantly higher than that average.
Further examining the sales, it appears that the high-end market, which drove the record-high average prices in 2014 and consistently high average values from 2016 to 2019, represented a much smaller share of sales recently than in the past several years. Based on the transactions closed in the last 12 months, the average independent living price per unit had already started its decline before COVID-19, but we also do not know how much more of the decline we can attribute to the pandemic, at least not yet.
The average cap rate also reflected the lower quality of properties sold but also likely some degree of increased caution by buyers in 2020. It rose 60 basis points from 6.7% in 2019 to 7.3% in the most recent four quarters, which was also a bigger increase compared with the other sectors. One has to go back to 2014 to record a higher average IL cap rate (7.4%), although 2019 saw the lowest-ever average cap rate by a margin of 30 basis points. A further increase in the average cap rate would not be surprising, especially as lenders continue to offer conservative term sheets and if the perceived risks of investing in a seniors housing property do not abate much before a vaccine can be distributed.
