In Distress

Written by Tyler Kastelberg

October 3, 2021

Happy Sunday!

My family and I spent this weekend with friends in the Santa Cruz mountains. On Friday night, we heard a pop 💥 and the whole mountain went dark … bye-bye electricity. We lit a few candles and ate dinner under a starry sky. It was awesome.

It’s easy to get lost in the excitement of chasing the next deal or building a business, but there is nothing quite like a weekend in nature with friends (and no electricity). It’s good for the soul.

Grab a drink, sit back, and let’s get to this week’s letter. If you’re new, make sure you subscribe to this newsletter so you don’t have to wait for someone to forward it to you next week.

Times are good … for some of us.

If you spend time on LinkedIn, you’ll see constant “done deal” announcements with another multifamily property in [insert any market] trading at an all-time high price.

True story – one of the investors I follow showed sale records for a Phoenix multifamily property that has appreciated from ~$2 million (in 2000) to ~$40 million (in 2021). The kicker? It traded in 2018 at ~$20 million.

Most commercial real estate investors have benefited from the government and fed’s response to covid — stimulus and cheap borrowing costs. However, this story isn’t consistent for all asset classes … senior housing is in distress.

I spoke with two prominent real estate investors this week who told me about their senior housing assets post-covid.

1) A private equity professional in SoCal shared that their portfolio’s NOI dropped nearly 50% compared to pre-covid.

2) A landowner in Dallas shared that their senior housing operator defaulted on their land lease last month – noting that occupancy has dropped to less than 70% at the property (and less than 50% in memory care). This particular asset has more than $100 million in improvements on the property – now at risk.

Logically, it makes sense … senior housing was an epicenter of covid outbreaks last year. As such, seniors and their families aren’t excited about joining senior communities.

However, there hasn’t been much press about the challenges in the industry. I googled for recent news, and the only articles I found were from April 2021:

1) Ares Management Raises $1.7B Fund, Distressed Senior Housing a Target

2) Distressed SNFs Finding They Have Plenty of Buyers: JLL

The second article talks about how some investors are buying distressed senior living communities and converting them into affordable or student housing.

In summary …

1) Senior housing is in distress

2) Occupancy is getting crushed

3) Operators are defaulting on their land leases

4) … and nobody is talking about it.

Reply with your opinion … is this a great opportunity to take advantage of a distressed asset class, or is it a trap for investors?

Catch you next week …

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