Experts Make the Case for Senior Housing
In an uncertain economic environment, what’s an investor to do?
That question was explored during two educational sessions at the 2022 NIC Fall Conference, held September 14-16, in Washington, D.C.
At the session, “Why Now is a Good Time to Invest in Senior Housing,” experts mapped out the positive case for investment today, along with some timely caveats.
Separately, in a lively session patterned after the popular TV game show, “Deal or No Deal,” lenders and investors took a deep dive into real transactions. The format highlighted the strategies of different investors, who revealed their “Deal or No Deal” decisions by opening a replica of the show’s iconic briefcase.
Putting the senior housing market in broad context, Robert Chapin moderated the session on why to invest. “We’re in this for the long game,” said Chapin, CEO at Bridge Investment Group, with $42 billion of assets under management. “We have to make sure we have the right product to get ahead of the demand curve.”
Panelists agreed that demographic trends will continue to drive the overall investment case for senior housing over time. By 2030, all baby boomers will be age 65 or older. “We have to see through the current uncertainty,” said Adam Zeiger, director, Senior Housing Vertical, Hudson Advisors.
Today, investors face a long list of uncertainties: high inflation, rising interest rates, the overhang of the pandemic, occupancy challenges, and the possibility of a recession.
“Focus on what is in your control,” advised David Selznick, chief investment officer, Kayne Anderson Real Estate Advisors. Select markets carefully. Analyze the property’s net operating income and how to increase cash flow over time. “The key is to be disciplined and patient,” he added.
The panelists said that the higher cost of borrowing is slowing new construction starts which will eventually result in less competition—another reason to invest today. “If you can build now, you will look smart in a couple years,” said Selznick.
Ryan Companies had a robust pipeline of new projects in 2020. “We pushed forward,” said Julie Ferguson, executive vice president, Senior Living, Ryan Companies. “We knew when we opened we would be in a less competitive environment.”
Long-standing debt and equity relationships allowed Ryan Companies to continue building. But rising construction costs have been a challenge, compelling the company to focus on high-end markets that can command high rents.
Transaction volume is down for the year, the panelists noted. Rising interest rates, the war in Europe and the possibility of a recession have pushed some buyers to the sidelines. “Fear is pervasive,” said Selznick.
Another drag on transactions is the pricing mismatch between buyers and sellers. They can’t agree on valuations. Owners who can afford not to sell are waiting to see if the market improves.
Investors face other challenges. Underwriting transactions is tricky. Labor costs and other expenses are hard to predict.
Also, the recovery from the pandemic is uneven. Some markets are regaining occupancy faster than others. “We focus on where we can build and be successful,” said Ferguson. She explained that Ryan Companies analyzes the local labor market, gauging unemployment rates and wage trends. Consumer demand is another big factor. The company evaluates where customers are coming from. The pro forma document stress tests underwriting assumptions.
Kayne Anderson focuses on markets with high levels of in-migration and high net wealth. Bolstering the case to invest in senior housing, Selznick added that the pandemic demonstrated the importance of socialization for older adults. “Senior housing is the most helpful setting,” he said.
The panelists addressed the question of whether investors will have pricing power in the next 24 months. Recent price increases have generally been accepted by consumers. At the Ryan properties, rents are up 8-10% and the cost of care is up 15%. “Families get it,” said Ferguson, adding that operators are prepared to talk about the need for price increases with consumers.
In the near term, the panelists expect revenue to grow and expenses to moderate. The consumer will absorb some of the higher costs for labor and other expenses.
Low levels of new construction will help margins rebound over the next few years. “If you plan to hold a property for five to seven years, you should be buying senior housing today,” said Selznick.
“Deal or No Deal”
Debt and equity lenders, and owners took the stage for the “Deal or No Deal” session. The panel was moderated by Ben Firestone, CEO & co-founder, Blueprint; and David Harper, senior vice president, Originations, Capital One.
Panelists gave their perspective on several case studies. For example, National Health Investors, a senior housing REIT, is focused on cash-on-cash yield to enable the payment of dividends to its shareholders, according to Michelle Kelly, senior vice president at the REIT.
Equity sources—represented on the panel by Dana Scheppman, vice president, PGIM Real Estate—are more patient, willing to wait longer for solid returns. Meanwhile, lenders are concerned about debt service coverage. Banks want to understand the borrower and check their assumptions, said panelist Chris Taylor, managing director, Capital One.
The “Deal or No Deal” case studies highlighted different types of properties. Stand-alone memory care is difficult to underwrite. A value-add property could be good deal but may also be too risky in this economic environment.
The panelists agreed that the deals might have been slam-dunks three years ago. Now, there’s more to consider with the rising cost of capital and higher expenses. “There are a lot of moving parts,” said Kelly.