Despite the near-term upheaval of COVID-19, an asset management firm was able to raise nearly half a billion dollars as institutional investors look to play the long game in post-acute, long-term care, and senior housing.
Locust Point Capital this week announced the closure of a $428 million debt fund to support its direct lending efforts in the senior housing and care space. The vehicle, Locust Point Seniors Housing Debt Fund II, builds on an earlier $312 million fund that beat the Red Bank, N.J.-based firm’s projections back in 2018.
The second fund also exceeded its target amount, according to Locust Point, with a mix of 75% domestic and 25% European-based backers; the lender uses the funds to deploy a mix of senior mortgages, preferred equity, and subordinate debt to owner-operators of senior housing and care facilities.
While the long-term future of the sector remains unclear given the devastating toll of COVID-19, Locust Point CEO and managing partner Eric Smith explained the strong investment demand by putting seniors housing and care in the wider context of the general real estate marketplace.
Among the company’s base of pension funds, endowments, insurance companies, and other large institutional investors, skilled nursing facilities could look pretty attractive compared to hospitality, student housing, and various additional asset types battered by pandemic-driven shifts in demand, according to Smith.
“They’re essentially looking for yield within an asset class that’s relatively recession-resilient,” Smith said of Locust Point’s investors. “When you compare seniors housing to other real estate asset classes, I think it’s probably outperformed during the pandemic.”
That said, Smith and Locust Point managing director Dan Contardi are aware of the fundamental differences between senior living properties — particularly high-acuity SNFs — and other common real estate investment targets.
“We have spent a tremendous amount of time educating our investors about seniors housing and long-term care, and our argument to our investors is: You really need to invest with a specialist as opposed to a generalist, simply due to the complexity of the asset class,” Smith said.
That complexity will likely only grow over the coming years as lawmakers and advocates sort out what went so wrong during the COVID-19 pandemic.
While reform efforts are gaining steam in Washington and state houses around the country, the calls last week started coming from inside the house: A group of 95 investment firms, including BMO Global Asset Management and a wide swath of pension funds, wrote a letter to major publicly traded nursing home operators and their real estate investment trust (REIT) partners, calling for the industry to adopt stronger staffing practices and raise frontline caregiver wages, among other demands.
“As the sector recovers, and we reflect upon the damage to our societies and the loss of human life during the pandemic, we must seize this moment to ensure the industry changes for the better and develops a more humane and resilient model,” the group wrote.
Locust Point hasn’t heard that level of concern from its investors, according to Contardi, but he emphasized the need for finding solid operational partners.
“Quality of care is always the first thing we look at when we’re ascertaining the quality of the operator we’re lending to,” Contardi said.
Back in 2018, Locust Point had set a target of about 30% to 40% for skilled nursing assets within the initial fund; the pandemic threw off those numbers somewhat, with the portfolio currently sitting at about 25% SNF and 75% other senior housing.
“Throughout the last 12 months, during the pandemic, there were certain skilled assets we were looking at underwriting, and it was kind of difficult to get our arms around some of the decline in occupancy,” Contardi said.
Locust Point is far from alone in that regard; the influx of government support scrambled investors’ ability to put a firm number on a property’s value even without accounting for future unknowns. But given gradually improving occupancy rates and skilled mix, Locust Point believes they can return to the 35%-40% range for skilled assets moving forward.
The underlying sentiment behind Locust Point’s optimism — that the pandemic proved the long-term stability of SNFs and senior housing campuses — has become something close to gospel among those with financial stakes in brick-and-mortar skilled nursing and senior living properties.
In the short term, the fire hose of CARES Act cash and other federal support, such as Paycheck Protection Program loans and temporary Medicaid rate boosts, actually flipped the script in the narrower senior housing and care investment space.
Long considered a riskier bet given government regulations and their near-complete reliance on Medicare and Medicaid for income, SNFs emerged from the pandemic as a more attractive target than independent and assisted living; given their discretionary nature and lower levels of federal assistance during COVID-19, private-pay senior housing properties suddenly had a murkier outlook for some investors.
Eric Mendelsohn, CEO of National Health Investors (NYSE: NHI), went so far as to call skilled nursing “the bright spot in this pandemic” during a recent event held by SNN’s sister publication, Senior Housing News.
“My overarching thought on skilled nursing is before the pandemic, people were worried about what they called ‘stroke-of-the-pen risk’ — by that I mean CMS or other payer programs just unilaterally cutting payment terms,” Mendelsohn said. “Now you’ve had the opposite of that. You’ve had a unilateral assistance from the government in a positive way, so the reactions from the market could be skilled nursing becomes more valuable [and] cap rates go down because it is less of a perceived risk.”
But set against problems elsewhere in real estate, the short-term SNF and senior living distinctions may not matter much to investors looking for stability over the course of decades.
“It’s reinforced the thesis that institutional investors have — that the seniors housing and long-term care industry is too important of an industry to fail,” Smith said.
The optimism doesn’t necessarily mean that the investment landscape won’t change post-COVID; Locust Point has already seen a shift toward interest in higher-acuity skilled nursing facilities, for instance. With home health companies already pouncing on residents’ and families’ understandable concerns about institutional rehab and long-term care options, it’s likely that the SNFs that remain will serve an even more medically complex population than in recent years.
Even before COVID, the October 2019 shift to the Patient-Driven Payment Model (PDPM) for nursing homes already set that trajectory into motion by more closely linking payments to resident acuity.
“Operators were starting that conversation, or that shift, in the type of care pre-pandemic, and we just think it’s going to continue,” Contardi said.