Last week, we hosted a webinar tackling the differences between two classes of seniors housing communities: “A” quality versus “B” quality. Often, buyers and investors of one group do not do much business in the other, so it is worth breaking out the differences in valuation, operations and investment strategies. So, for the last several years in our annual Senior Care Acquisition Report, we have divided seniors housing properties into these categories based on a combination of their age, size and location.
Leading up to the pandemic, prices paid for “A” quality properties were surging as labor and occupancy headwinds seemed to be affecting “B” (and “C”) properties even more. Buyers clearly wanted to pay up for the ability to target a higher income resident and potentially charge higher rents to offset any expense increases from labor or elsewhere. “B” properties, generally, did not have that luxury, and buyers discounted them as a result.
But did the pandemic throw a wrench in these trends? With the higher basis required to acquire or develop “A” properties, would buyers account for that added capital cost risk in their pricing of the property? Could the potential higher returns that “B” properties can offer, possibly a little lumpy, attract more buyers following the pandemic, resulting in bidding wars pushing up prices, and pushing cap rates down?
We had a lot of questions about the market and were joined by Amy Sitzman of Blueprint Healthcare Real Estate Advisors and Chris Kronenberger of Blue Moon Capital Partners on the panel. The wide-reaching conversation can be heard here. But we also wanted to learn from our audience and posed a couple of questions to them. Here is their response.
Would you develop A or B communities today?
A communities – 62%
B communities – 38%
Emerging from COVID, should returns be higher when buying A or B communities?
A communities – 27%
B communities – 73%
Interestingly, our audience would more often develop an “A” community but would expect a higher return from a “B” community coming out of the pandemic. As far as new development is concerned, we don’t hear of a “brand-new, Class-B property” being built that often. And “B” properties, in the right markets with the right operators, can still be very profitable despite not having all the bells and whistles of an “A” property. And if an investor can get in at a much lower basis, that can take a lot of risk out of the investment. Listen to the webinar and give us your thoughts!