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As revenue grows and operators claw back margins this year, senior living operators hold a favorable outlook for the sector’s path ahead. This optimism has come through in recently released survey data, as well as in conversations I’ve had with industry leaders – and in a bullish investor note that analysts with Jefferies released this week, as the investment bank and securities research firm initiated coverage of Brookdale Senior Living (NYSE: BKD).
“While investors have been aware for over a decade of the tailwinds from the aging ‘boomer’ population for H/C [healthcare] providers, the fact that these seniors are now hitting their late 70s should usher in the ‘golden age for senior housing,’” the analysts wrote.
But all this optimistic talk should not obscure another fact: There is still a bumpy runway to navigate before the industry achieves liftoff. In this week’s exclusive SHN+ Update, I analyze the current sentiment in senior living and offer key takeaways, including:
- Key data providing the outlook on the industry’s investment future
- What factors are contributing to near-term distress
- Why 2025 is poised to be a turning point year for the sector
Working through distress, threatening to hinder the industry’s rosy outlook on growth is a wall of debt maturities this year and in 2025. Meanwhile, recent data highlighted during a National Investment Center for Seniors Housing & Care (NIC) webinar found that 5.3% of operators have a current unit vacancy rate of greater than 25%. And this comes as 19% of properties tracked by Trepp, the industry’s largest commercially available database of securitized mortgages, are not fully covering debt service payments.
Lonnie Hendry, chief product officer of Trepp, notes that the 19% figure is a “pretty good indication” of “pent-up delinquency and distress” that could play out over the next 24 to 36 months. Over that same time period, the Federal Reserve is likely to continue to take action on interest rates.
While the Fed’s mid-September rate cut buoyed spirits in senior living (and beyond), actual results of this rate cut and any subsequent ones will take time to play out. The recent Fed action is a “start” that could set the stage for more favorable economic conditions in 2025 and the years ahead.
“What we’re struggling the most with right now in the industry is access to equity capital, and when is that going to change,” Sparrow Partners CEO Jeff Patterson recently told me. “I think the economics of our deals and projected returns will improve.”
Earlier this week, Federal Reserve Governor Chris Waller noted that any future interest rate cuts will be less aggressive compared to the Sept. 18 action. “Whatever happens in the near term, my baseline still calls for reducing the policy rate gradually over the next year,” Waller said, noting that economic data was signaling “the economy may not be slowing as much as desired,” which could cause problems down the road.
But, it appears the September rate cut was “not a slam dunk” in all aspects, with prominent economists such as Larry Summers saying that a strong jobs report and other indicators signal that a more cautious approach to rates still is needed. Regardless of what actions the Fed takes going forward, more time will be needed before the effects of rate cutting are substantially felt.
These unknowns are being felt in the senior living industry, with Willow Ridge CEO Michael Morris telling me that where interest rates settle “will determine” what future challenges look like. Willow Ridge often deals with distressed acquisitions, with Morris noting that recent deals, prior to the Fed action, have required a “much larger equity check.”
“With the rate decrease, I think it’s making more options available to us,” Morris recently told me. “The timing of the rate decrease was perfect and now we’re hearing optimism from our debt providers that is encouraging.”
By focusing on the remaining distress and uncertainties, I don’t mean to throw cold water on the enthusiasm that is so palpable among senior living leaders at the moment. It might not be long before transaction fundamentals align and make attractive options for operators and investors to grow in core-plus, value-add acquisitions and pursue new development.
“Input costs have come down, material costs and labor costs have also come down, and we’re appreciative that interest rates are coming down,” Discovery Senior Living CEO Richard Hutchinson told me. “You can look forward to deals now and it won’t be long before these lines intersect and the pro forma works.”
This cautious optimism, I believe, is warranted, supported by the improving revenue and margins reported by some operators in the last 12 months. Net operating income margins grew to 30.6% in 2023, up from 29% three years ago, Trepp data shows.
This comes as operators have increased occupancy and revenue this year, and I believe this shows that while distress could still drive deals in 2025, owners and operators appear poised to pursue new growth.
While development remains muted, Jeffries’ outlook on Brookdale is fueled by demographic trends and a lack of new supply. Operators such as Brookdale are improving their operating performance, which is translating to improved margin and earnings performance.
Ultimately, regardless of the unknowns that impact the senior living industry, providers can’t go wrong by keeping their strategies pegged to the essential value proposition of senior living, such as improving the health and lifestyles of those living in communities.
