We have been having a series of off-the-record conversations with CEOs in the senior living industry, and while most are a little cranky about the past six months, many are also becoming a little more optimistic and see the light at the end of the tunnel. That’s the good news. 

The bad news is that for most of them census remains at low levels they have never seen before. That is beginning to change as leads, tours and move-ins are now moving in an upward direction, especially in the Northeast which was hit first by the pandemic and recovered first as well.  

We have also been hearing that staffing is returning to more normal levels, with staffing costs for some companies below pre-COVID levels because the census has dropped. In addition, “hero pay” has declined and in some cases no longer exists, while PPE expenses are more under control now than three months ago. 

That is why we question some of the numbers coming out of surveys that claim that 64% of the assisted living respondents said they will not last through the next 12 months with the status quo. If this is the case, the number of defaults on loans and leases will be unprecedented next year.  

The other number that came out is that 73% reported operating at a profit margin of 3% or less. Now, if that was an EBITDA or EBITDAR margin, we would really be concerned. But for your typical assisted living community worth $300,000 per unit and operating at a 30% EBITDAR margin (at least pre-COVID), after taking into account capital costs (mortgage or lease), management fee, depreciation and amortization, that “net margin” can go down to single digits, or lower, even in the best of times. It is all in the definition of profit margin. A 3% “net profit margin” today, all COVID things considered, is not too bad, and some would say great, after all those typical deductions.  

Obviously, we know that those reporting these numbers are doing so partly to get the attention of the federal government in order to obtain some financial relief. The downside is that it is also getting the attention of lenders and investors, who do not want to hear that 64% of assisted living providers may default or shut down within a year without changes or relief. That is just not going to happen. Some will, for sure, and they already have, but not 64%. If that happens, we will let you know when we start our $1 billion distressed asset fund. 

As the Federal Reserve Chairman reiterated last week, interest rates are going to stay at historically low levels for years to come, so that is one part of the capital puzzle one need not worry about, which by itself will help prop up values. Next will be cash flow, and while the upswing will not match the downturn in its velocity, especially with regard to census, it will start to improve. And new development is much less of a worry than even a year ago.  

We are not trying to paint too rosy a picture, but at least some investors will now realize that seniors housing is not just a real estate investment with a sole focus on IRR. It is an operating business with all the twists and turns that operators have dealt with for years.