While Occupancy is trending in the right direction — and demand seems to be holding in the midst of the latest Covid-19 surge — Senior living providers appear to be in for another tough year of working toward a recovery.

Still, the finance and investment outlook for the sector continues to brighten.

“I would say I’m actually pretty cautiously optimistic about our sector in this next year,” Beth Mace, chief economist at the National Investment Center for Seniors Housing & Care (NIC), said last week during a 2022 outlook webinar hosted by Senior Housing News.

Her sentiment was echoed by LCS COO Chris Bird. Des Moines, Iowa-based LCS — the nation’s second-largest Senior Living operator with about 135 communities — recently completed a recapitalization and is looking to build on a strong December for move-ins.

And there now is “plenty of capital for the space,” said Casey Moore, managing director of agency finance at Lument.

However, the senior housing sector continues to face rampant labor shortages, historic inflation, and, of course, health and safety challenges resulting from continued mutation of the Covid-19 virus. And Mace, Bird and Moore all expect that the industry as a whole will not reach pre-pandemic occupancy levels until 2023, with margin recovery lagging further behind.

Occupancy expectations

The senior living industry has made progress on regaining pre-pandemic occupancy levels, with growth in the last two quarters of 2021 — even in the midst of infections caused by the delta variant of Covid-19. However, with so much ground to make up to reach pre-pandemic levels, Mace personally does not foresee that threshold being reached in the next 12 months.

The Q4 2021 senior housing occupancy rate was 81%, and although that represents “great” progress, it is 6.4 percentage points below its pre-pandemic level, she pointed out.

“In my view, to think that you’re going to get that 6.4 percentage increase in 2022, I don’t think is realistic,” she said.

She is even doubtful that the pre-pandemic level will be reached in 2023, given that not only will vacant units have to be filled, but new supply that has come into the market since 2020 will have to be absorbed.

Moore shares the outlook on 2022. Rounding up, occupancy appears to be improving by approximately 1% per quarter, he observed. Therefore, it would take nine consecutive quarters of 1% improvement to reach 90%.

“If there are improvements in that quarterly percentage, then we could see 90% reached in early 2023,” said Moore. “So, it’s a function of how quickly Chris (Bird) and his fellow operators can improve occupancy levels.”

LCS does have a positive story to tell on occupancy, with its second-best month for move-ins ever in December 2021, Bird said. And inquiries are remaining strong to start 2022.

“I think the customer who recognizes senior housing as a safe environment is not afraid to keep looking at this option going forward, even with the omicron variant wreaking its way throughout the country,” he said.

And across LCS and other operators he has talked with, many buildings already are at or above pre-Covid occupancy levels, he noted. He expects to see the occupancy rebound accelerate even from its 2021 pace.

“But when you put it all together, it’s going to be into 2023,” he said, of the sector as a whole posting pre-pandemic occupancy.

Their predictions are in line with the findings of the 2022 outlook survey conducted by Senior Housing News and sponsored by Lument, which gleaned responses from about 350 industry professionals in November and December 2021. Although, there is a significant contingent who still hope for pre-pandemic occupancy in 2022.

When asked when occupancy rates will return to pre-pandemic levels nationally, most people — 42% of respondents — said in 2023, and 36% said the second half of 2022.

Margin recovery to lag

Senior living margins likely will take even longer to recover than occupancy rates, given that expenses are rising faster than revenue, despite operators’ efforts to drive rate.

Labor is typically the largest operating expense in senior living, and rate increases are lagging labor cost increases, Mace pointed out.

Workforce pressures are not expected to ease any time soon, with 37% of respondents to the SHN/Lument survey saying they will not ease until after 2023 and 33% saying that they will start to ease in 2023.

Bird hopes that improvement will come sooner, but LCS has connected with traveling nurse organizations that have orders through the first half of 2022.

“That’s why we believe it’s going to be more towards the latter part of the year before we start to see the winds of improvement, which just makes it even more important for us as operators to make sure that we’re embracing those that we have and making the adjustments we need that they will not want to leave your house and go to a different industry,” he said.

And labor is not the only expense that is pressuring operators’ bottom lines. In December 2021, inflation was up 7% on a year-over-year basis as measured by the consumer price index (CPI), and this was the largest increase since 1982, Mace said.

The rise in prices is due to several factors related to Covid-19, including supply chain disruptions. But these elevated prices might not subside even as infection rates wane.

“There was a lot of consideration that this inflation increase was probably transitory, but now we’re a little bit longer into it, it’s looking like maybe it isn’t completely transitory,” Mace said.

Given that senior living communities are basically fully expensed when occupancy reaches the low-80% range, Moore expects margin compression until buildings are up to around 90% full.

For Bird, predicting margin recovery is “tougher for us to sort through” than occupancy recovery, given uncertainties about how expense pressures will play out over the course of 2022. But, he anticipates that margins likely will recover closer to the end of 2023.

The positive news is that LCS — like other providers — has been able to push rate more aggressively than the usual 4% to 5% annual bump. Residents understand the labor and expense pressures businesses of all sorts are currently facing, Bird noted.

Investors still bullish

Despite all the near-term headwinds, the demographics remain the same, meaning that demand for senior living is poised to spike dramatically in the years ahead. Furthermore, the pace of recovery will vary based on operator, location, level of care and other factors.

“There are a number of properties that have been above 95% occupancy, for example, for the entire duration of the pandemic,” Mace noted.

Meanwhile, although the Federal Reserve has signaled likely interest rate increases, rates currently remain low.

The upshot is that investors remain interested in senior living and lenders are increasingly eager to come off the sidelines. Transaction activity has ramped up, with deal volume increasing from $9 billion in 2020 to $14 billion in 2021, according to data from NIC MAP Vision and Real Capital Analytics.

While credit standards are not necessarily loosening, banks have plenty of money to lend, and Fannie Mae, Freddie Mac and HUD are also set to increase their activity, Moore said.

“The agencies were under budget last year, and they’re chomping at the bit, they want to get money out, they love the space,” he said.

Meanwhile, private equity funds are “flush,” Mace said. Globally, real estate private equity reached a peak in 2019 at $186 billion, and 2021 came close to that with $186 billion raised, she noted.

In 2022, 48% of respondents to the SHN/Lument survey expect banks/finance companies to be their top financing source, followed by private equity at 32%, institutional capital at 11% and agencies/HUD at 9%.

And 36% of respondents said private equity will be the biggest buyer of senior housing assets this year, with 19% identifying regional operators as the biggest buyers, 17% naming public real estate investment trusts and 17% naming private REITs.

Independent living emerged as the consensus choice for most attractive investment category (27% of respondents), followed closely by assisted living (25%) and active adult rental (23%).

Distress deals are likely to become more commonplace in 2022, given the operational headwinds and ongoing financial hardships caused by the pandemic, Lument’s team believes. Sellers that have been holding out will reach an inflection point, and existing bid-ask spreads could compress as a result. The public REITs likely will have a harder time than private equity in competing for these types of value-add deals. Conversely, stabilized properties with good margins will command a premium.

Mace has observed that the industry is diversifying, notably as operators, developers and investors begin to target the large and underserved middle market. This means that senior living increasingly is not a “generic product,” and investors will have to become more sophisticated about what part of the market they are targeting.

“We’ve been talking for a long time that we’re like the hotel industry, and I think we’re moving in that direction, from Motel Six up to like a Ritz,” she said. “And so as that happens, I think you’ll see different buyers and sellers come in and be more selective about what they want.”

LCS is anticipating a year of opportunity in 2022, continuing to pursue ground-up development, acquisitions and third-party management. In 2021, the company added 15 new communities, taking an ownership stake in some and purely operating others.

Some people within LCS anticipated even more activity last year based on the “stresses” that owners and operators are facing, Bird said, and he thinks that these opportunities might appear in 2022.

“So we’ll be active, we want to be very dedicated and disciplined to our guideposts … I do believe there’s going to be a lot more opportunities on the M&A front for the industry,” he said.

With contributions from Nick Andrews.

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