If even a week ago, you had told me I would be writing an article defending REITs or driving traffic to a competitor’s website I would have said you were nuts. (Actually, I love what the team at Senior Housing News does).
Senior Housing News, on November 11, published an article titled “Confessions of an Owner/Operator: REITs Sacrifice Quality for Margin, Resident Voices Lost in Pandemic Response”. This article does not necessarily represent SHN’s opinion but rather commentary from an anonymous operator. It was a bold courageous move to publish this. I would have done the same. However, I am not so sure I agree with much of what is written. Here is why:
- In discussions like this, there is a fundamental assumption that is 100% wrong. The wrong assumption is that the best way to maximize profits is by cutting staffing levels and staff pay. While it might get you short-term relief, it is a long-term path to failure. That is not to say that some companies have tried this and are trying this.
- Tolerance — REITs have been surprisingly tolerant of their buildings being out of covenants and all of the external evidence suggests they are doing a lot to work with operators to get through the pandemic. Lest you think I am going to easy on the REITs, I do get that given the circumstances, what else can they do?
It would be impossible for them to change operators on every single building that is struggling. And even if the mechanics were possible, who would they pick as the new operator since the pandemic has hit everyone? - Lease Restructuring — If you go look at the last couple of earnings reports, you will see that a number of REITs have done substantial restructuring of leases to benefit struggling operators.
- Separating the good from the not so good — We know that when a crisis like this current pandemic hits, one of the results is separating the good and not so good operators. Ultimately REITs are only going to change operators when they come to believe the existing operator can not fix the problem.
Who can blame them for not wanting a problem to fester, which means it will get worse and not better.
Fairness means that sometimes even a good operator can end up in a situation where a given community is a wrong fit. - Transparency — My sense is that, too often, operators do not start working with their REITs to find solutions until things have become unsalvageable. While I think the REITs might have done more to be proactive, this is primarily the operator’s responsibility.
- REITs came together to help during the pandemic — The REITs have put I don’t exactly how much money but can safely say, in the hundreds of thousands of dollars, to lobby for PPE and other kinds of relief and to paint a positive image of senior living in the public arena.
- REITs have gotten operators talking to each other to share best practices and pool ideas and resources. This was and continues to be a powerful tool for surviving the pandemic.
- Operators made the Deal — REITs had the cash and operators had the burning desire to build more communities or extract capital. And they made the deals they made with REITs. Ultimately though the REITs are responsible to their investors to provide maximum returns.
BUT, when things go south as in a pandemic, achieving maximum looks very different. It means making sure good operators have the tools and resources they need to first stabilize their operations and then over time move back to higher occupancy and profitability.
At the End of the Day
At the end of the day, I believe that REITs will do the right thing for residents and staff. And sometimes that might very well mean changing operators. They will do this for two reasons:
- It is the right thing to do; it is the human thing to do.
- It will, over time, maximize the return on their investment.
When I look at the REIT senior living landscape, I am convinced that REITs will take significant hits that they will never be able to recover. Some are unavoidable no matter what. But much of that loss will be because they are careful, conscious capitalists who are committed to making the world a better place.
The Rest of the Article
I do agree that many operators have been way too protective of residents. In some cases, this is because of government requirements. But in many cases, it is done in “an abundance of caution”. While I think residents should have the option of isolating in their apartments, they should also have the option to take some risks and continue to socialize.
Most of the risk to residents is not resident-to-resident transmission but staff to resident. And so we end up protecting residents from the lowest risk and allow the higher risk activities to continue. This is nuts.
The confidential source suggests that we are primarily selling care and not hospitality. Maybe, but really this is a complicated discussion that needs to be a separate article. Ultimately though, the value proposition for senior living is the benefits of congregate living way more than the care.
I would love to hear your reactions on or off the record.
