US senior living providers are expected to take a hit as the already struggling industry grapples with the spread of the novel coronavirus, two sellsiders and four advisory sources said.
Fear around the impact of the pathogen — which causes Coronavirus Disease 2019 (COVID-19) — intensified after a deadly outbreak occurred in late February inside a nursing home in Seattle. Public officials for the facility said during a press conference on 7 March that 70 staff members and six residents had fallen sick with symptoms associated with the new disease. On 19 February, the facility – operated by Life Care Centers of America – had 120 residents; now there are fewer than 60, according to local Seattle news reports.
Amid the outbreak, public names in the low-margin, highly-levered senior living facility sector have recently seen their stock prices tumble as they face added risk.
Capital Senior Living [NYSE:CSU] has plunged 76.9% since its high in February, when the virus started having an impact on the US markets, opening at USD 0.70 for a roughly USD 24.7m market cap today. The already troubled company has been working with Norton Rose Fulbright and Ankura Consulting amid ongoing liquidity issues. Five Star Senior Living [NASDAQ:FVE] is down 42.6% from February highs, opening at USD 3.00 today for a roughly USD 96.5m market cap, while Sienna Senior Living [TSX:SIA] has dropped 23.7% to open at CAD 13.03 for a roughly CAD 870.9m market cap. Meanwhile, Brookdale Senior Living [NYSE:BKD], one of the largest senior care providers in the US, has nosedived 57.3% since 19 February, when the company reported better-than-expected earnings, to open at USD 3.58 for a market cap of around USD 645m.
“The market is concerned,” said Frank Morgan, an analyst at RBC Capital Markets who covers the space. “When the market reacts, sometimes it reacts in extreme. But this might be an overreaction. On the long haul, the world will adjust.”
In the near-term, however, the virus concerns are a pile-on to an industry that has already faced pressure amid low occupancy rates and increased staffing costs, the sources said. Senior living has remained a low-margin business in the US, with high leverage, low cash flows and flat-to-negative profitability, they noted. Employees requesting overtime pay to care for infected senior residents could also compress margins and impact profitability, added Colleen Blumenthal, COO of HealthTrust, a valuation and advisory services firm.
“When you have a business that is such a fixed investment, you need to have occupancies, and the cashflow is not helped by the fact that wages are increasing much faster than reimbursements,” said Matt Wolf, a senior health care analyst at RSM.
Although average senior housing occupancy rates rose 10bps in 4Q19 and 30bps in 3Q19, from a record low of 85.1% in 2Q19 – according to data from the National Investment Center for Senior Housing & Care – the spread of coronavirus threatens to thwart that momentum as consumer confidence wanes, the sources said.
And as virus concerns impact senior living occupancy rates and push revenue and EBITDA lower, escalating operating leverage could become an issue for some senior care providers, the sources continued.
Brookdale had 54,181 units and an 83.9% occupancy rate in its senior housing segment as of 4Q19 on 31 December, versus 56,492 units and an 84.3% occupancy rate at the end of 2018, according to SEC filings.
A hypothetical 1% drop in those occupancy rates would translate to a USD 2.3m decline in senior housing resident fees and a USD 1.13m drop in the company’s EBITDA, one of the sellsiders estimated. Brookdale booked USD 401.1m in adjusted EBITDA off USD 4.1bn in total revenue for 2019.
It is still too early to make absolute projections, the sources agreed. “We just don’t know enough about the virus and how it spreads,” Wolf said. “If [a company finds itself] in a situation where it doesn’t have enough cash to cover the operation and it ends up having to open a new line of credit to make payroll, that can increase the risk of default,” he noted.
The thing to watch for in the long term is whether the virus concerned is strong enough to shift consumer behavior, making seniors and their families choose remote monitoring technologies or artificial intelligence over live-in facilities, Wolf continued. Examples include virtual healthcare applications and automatic doors or cameras that are linked to smart phones, he said.
The virus could push family members to take their loved ones home, driving occupancy rates down, Sam Alberts, a restructuring lawyer at Dentons, added. “On one level, you can see someone who is already weak due to financial issues, this could put them over the top,” he said.
“There is a real possibility that the coronavirus hysteria will change consumer behavior,” Wolf noted. “People that wouldn’t usually use these technologies might realize they are great and might want to continue.”
In addition to earnings declines, facility valuations could also feel an impact from the outbreak. The threat is industry-wide, but smaller providers face added challenges, said Zach Bowyer, a senior living valuation analyst managing director at JLL. There is a bifurcation between new, modern nursing homes that are well located, and more rural properties that have been neglected from a capital investment standpoint, Bowyer went on. “Larger operators that have scale and good platform support can see a competitive advantage.”
“It will probably have an impact on occupancies and valuations, but it is mostly a short-term scare that will work its way through the population,” he said.