Maravilla, Santa Barbara, CA
Why Invest In Seniors Housing? Presented by Beth Burnham Mace, Chief Economist, NIC ALFA Conference Tampa, Florida
May 5, 2015
Key Takeaways From Today’s Presentation • From an Investors’ Point of View: • Seniors housing is an emerging commercial real estate asset type and will eventually be considered a “core real estate asset class” • The sector has become more understandable and transparent to the investment community. • Both debt and equity providers are providing capital to the sector • Investor interest in seniors housing is growing and the market is more liquid • There continues to be a sizeable risk premium offered to investors for seniors housing 2
©2015 Na)onal Investment Center for Seniors Housing & Care (NIC)
Key Takeaways (cont’d) • The Seniors housing and care’s market value is $300 billion and growing. • Seniors housing investment returns outperformed other commercial real estate property investments during the past 10 years. • Three of the 15 largest REITs are now health care REITs. • Seniors housing was a resilient real estate sector during the economic recession. • Strong outlook for seniors housing market fundamentals.
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©2015 Na)onal Investment Center for Seniors Housing & Care (NIC)
Outline of Today’s Presentation I.
Capital Provider Interest in Seniors Housing
II.
Who Are the Players?
III. What Do Capital Providers Look For? IV. Supply and Demand Considerations V.
Pricing, Interest Rates and Risk Premium
VI. Outlook for Seniors Housing Market Fundamentals
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©2015 Na)onal Investment Center for Seniors Housing & Care (NIC)
I. Capital Provider Interest in Seniors Housing
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©2015 Na)onal Investment Center for Seniors Housing & Care (NIC)
Possible Motivations of Capital Providers • From A Capital Providers’ Point of View: • A pension fund wants to generate relatively high risk-adjusted returns in order to meet actuarial return requirements to meet obligations of funding retired staff pensions • A large lender wants to place debt capital in an alternative real estate asset type • A private equity fund wants to invest capital on behalf of high net worth individuals, pension funds and endowments • A REIT wants to invest in an operator (RIDEA vs NNN option)
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©2015 Na)onal Investment Center for Seniors Housing & Care (NIC)
Possible Motivations of Capital Seekers • From A Capital Seeker Point of View: • A developer needs to source financing for building a new property • An existing operator needs to find capital for repositioning his property • A large operator needs to refinance his business since their existing financing is expiring • An operator needs working capital • An operator wants to share risk/reward with a joint venture (JV) partner
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©2015 Na)onal Investment Center for Seniors Housing & Care (NIC)
Positive Investment Attributes • Seniors Housing Has: • Solid Returns • Low Delinquency Rates • Favorable Demand Drivers (Demographics, Rising Penetration Rates) • Improving Liquidity and Growing Transaction Volumes • Rising Prices and Cap Rate Compression (but, will it continue?) • Favorable Behavior Relative to Other Real Estate Asset Classes • Good and Improving Market Fundamentals
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©2015 Na)onal Investment Center for Seniors Housing & Care (NIC)
Strong Institutional Interest in Seniors Housing Relative Attractiveness of Investing In Various CRE Investment Types, 2011-2014 (1= least, 5=most)
Source: 2013 Plan Sponsor Survey; Kingsley Associates; Institutional Real Estate, Inc.
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©2015 Na)onal Investment Center for Seniors Housing & Care (NIC)
Seniors Housing Returns Outpace Other Property Types Annualized NCREIF Total Returns, As Of Q4, 2014 0.20 0.18 0.16 0.14 0.12 0.10 0.08 0.06 0.04 0.02 0.00 NPI
One Year Apartment
Three Years Hotel Industrial
Five Years Office Retail
• Source: NCREIF, NIC MAP® Data Service
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©2015 Na)onal Investment Center for Seniors Housing & Care (NIC)
Ten Years Seniors Housing
Demand Pull/Cost Push Pressures Favor Seniors Housing • • • •
Aging, Demographics, Acuity Levels and Disabilities Rising Penetration Rates Fewer Family Caregivers Social Engagement, Support and Emotional Well-Being Age-‐ Restricted Housing
Independent Living
Assisted Living
Memory Care
Skilled Nursing
Hospital
• Accountable Care Organizations • Post Acute Care Collaboration • Fee-For-Service Framework vs. Quality and Value-Based Outcomes (Cost Considerations) 11
©2015 Na)onal Investment Center for Seniors Housing & Care (NIC)
Favorable Demographic Drivers… • Caregiver Support Ratio • AARP Study Suggests Ratio of Caregivers (45-64 year olds) To Those Over 80 Will Shrink
• •
• 7:1 2014 • 4:1 2030 • 3:1 2050 Declining Fertility Rates Among Baby Boomer Women Baby Boomers Shift from Being the Caregivers to being the Receivers of Care
Source: AARP Public Policy Institute, “The Aging of the Baby Boom and the Growing Care Gap…”
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©2015 Na)onal Investment Center for Seniors Housing & Care (NIC)
Rising Liquidity with Growing Transaction Volumes
Source: NIC MAP® Data & Analysis Service :
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©2015 Na)onal Investment Center for Seniors Housing & Care (NIC)
Market Fundamentals Are Generally Positive Majority Assisted Living Historical Supply-Demand; MAP31 2006Q1 – 2015Q1 3000
91%
2500
90%
2000
89%
1500
88%
1000
87%
500
86%
0 -‐500
85%
-‐1000
84%
New Supply
Demand (Net absorp)on)
Occupancy (right)
Source: NIC MAP® Data & Analysis Service
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©2015 Na)onal Investment Center for Seniors Housing & Care (NIC)
Strongest Occupancy Since Late 2007 Majority Independent Living Historical Supply-Demand; MAP31 2006Q1 – 2015Q1 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 -‐500 -‐1,000
93% 92% 91% 90% 89% 88% 87% 86% 85% 84% 83%
Supply QOQ
Demand (Net absorp)on)
Occupancy (right)
Source: NIC MAP® Data & Analysis Service
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©2015 Na)onal Investment Center for Seniors Housing & Care (NIC)
Asking Rents Keeping Pace With Inflation Annual Asking Rent Growth/Inflation Primary Markets | 1Q07 – 1Q15 5%
4%
3% Majority IL Majority AL
2%
Core Inflation 1%
0% 2007
2008
2009
2010
2011
2012
2013
Source: NIC MAP® Data & Analysis Service
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©2015 Na)onal Investment Center for Seniors Housing & Care (NIC)
2014
2015
Asking Rents Comparatively Stable Annual Asking Rent Growth 10% 8% Office
6% 4%
Hotel
2%
Apartment Seniors Housing Retail
0% -2% -4% -6% -8% -10% 2007
2008
2009
2010
2011
2012
2013
2014
Source: NIC MAP® Data & Analysis Service
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©2015 Na)onal Investment Center for Seniors Housing & Care (NIC)
II. Who Are The Players?
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©2015 Na)onal Investment Center for Seniors Housing & Care (NIC)
Capital Providers: The 4-Quadrants
©2015 Na)onal Investment Center for Seniors ©2015 Na)onal Investment Center for Seniors Housing & Care (NIC) Housing & Care (NIC)
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©2015 Na)onal Investment Center for Seniors Housing & Care (NIC)
Sources of Debt Capital for Seniors Housing • Government-Sponsored Enterprises (GSEs) •
Fannie Mae
•
Freddie Mac
• Department of Housing and Urban Development (HUD) • Commercial Banks • Commercial Finance Companies • Tax Exempt Financing (or Bonds) • CMBS • Insurance Companies • High Yield Bonds 20
©2015 Na)onal Investment Center for Seniors Housing & Care (NIC)
Sources of Equity Capital for Seniors Housing • Private Equity Funds • Public Equity REITS • High Net Worth Individuals • Pension Funds • Nontraded REITS
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©2015 Na)onal Investment Center for Seniors Housing & Care (NIC)
III. What Do Capital Providers Look For?
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Key Considerations by Capital Providers •
Operator/Partner Experience, History and Performance
•
Strategy • Position in the Marketplace • Stabilized Property vs Renovation vs. New Construction
•
Local and Primary Market Area Conditions • Supply and Demand, Vacancy Rates, New Development
•
Pricing • Replacement Cost/Price Per Unit • Cap Rates
•
Exit Strategy/Market Liquidity
•
Rents/Affordability/Ability to Pay 23
©2015 Na)onal Investment Center for Seniors Housing & Care (NIC)
Transparency • Investors and capital providers need to: • be able to understand and explain the investment characteristics of seniors housing to their stakeholders • address the perceived risks of the sector • have data to demonstrate the sector’s performance during business cycles and analyze property market fundamentals data • measure return performance against other investment options • understand pricing and transaction data • quantify operator risk and be able to judge the ability of the operator to perform. 24
©2015 Na)onal Investment Center for Seniors Housing & Care (NIC)
What Does Capital Look For In An Operator? • Operator’s track record of meeting NOI goals • Operator’s ability to compete in evolving sector with changing consumer preferences • Operator’s vision and long-term plans • Turnover of residents and staff • Systems and technology
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©2015 Na)onal Investment Center for Seniors Housing & Care (NIC)
Perceived Risks of Investing in Seniors Hsg. • Valuation and exit risk (all real estate sectors have this risk) • Supply risk (not unique to seniors housing) • Obsolescence risk (physical plant no longer meets the needs of its tenants/residents) • Liability risk (associated with standards of care for residents) • Resident credit risk (extremely low for today’s cohort of residents) • Turnover risk associated with high churn rate for seniors housing • Reimbursement risk for non-private pay seniors housing properties 26
©2015 Na)onal Investment Center for Seniors Housing & Care (NIC)
Capital Providers Make Many Assumptions • Investors and capital providers need to make underwriting assumptions regarding: • Rent and rent growth assumptions • Expense Growth Rates • Lease up velocity • Competitor behavior • Operator Performance • NOI Margins • Margin Growth • Share of Return from Cash Flow versus Residual Sales Price • Capital Reserves • Debt • Exit cap rates
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©2015 Na)onal Investment Center for Seniors Housing & Care (NIC)
IV. Supply, Demand & Occupancy
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©2015 Na)onal Investment Center for Seniors Housing & Care (NIC)
Seniors Housing Occupancy Remains Generally Strong Seniors Housing Occupancy 4Q05 – 1Q15 93% 92% Secondary Markets All Markets Primary Markets
91% 90% 89% 88% 87% 86% 2008 Source: NIC MAP® Data Service
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2011
2014
Preliminary Construc)on Starts Consistent with Last Few Quarters
Source: NIC MAP® Data & Analysis Service; Bureau of Labor Statistics; NIC Research & Analytics
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• ©2015 Na)onal Investment Center for Seniors Housing & Care (NIC)
Construction Comes In Cycles; Some Markets Active, Others Not Seniors Units Under Construction Low to High
Source: NIC MAP® Data Service Source: NIC MAP® Data Service
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©2015 Na)onal Investment Center for Seniors Housing & Care (NIC)
Understanding of Market Fundamentals and Cycles Is Key Boom Market
Hyper Supply Phase
Expansion Phase
Declining Occupancy Falling Values RAPID Construction OVERBUILDING Saturated Market
Rising Occupancy Rising Rents Rising Values NEW Construction BUILD AND SELL
Recovery Phase
Recession Phase Falling Occupancy Falling Values NO new construction
Trough 2008-‐2011
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2012-‐2014
Rising Occupancy Rising Rents Rising Values NO new construction BUY
2015?
©2015 Na)onal Investment Center for Seniors Housing & Care (NIC) ©
V. Pricing, Interest Rates and Risk Premium
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©2015 Na)onal Investment Center for Seniors Housing & Care (NIC)
Pricing Trends In Seniors Housing • Prices and Valuations, as measured by Price Per Unit (PPU) or Cap Rates (NOI/Value) are Rising (PPU) or Falling (Cap Rates); note these two concepts work in opposite directions • Cap rates are related to risk-free interest rates (10-year Treasury yields) and often rise and fall with interest rates • Most economists project higher interest rates in the coming months. • If interest rates rise, will cap rates rise and will values fall; will write-downs occur? • To keep values flat or for values to rise, operators will be required to grow revenues and increase NOIs 34
©2015 Na)onal Investment Center for Seniors Housing & Care (NIC)
What Is Price Per Unit for Seniors Housing? Seniors Housing Rolling 4-Qtr Price/Unit United States | 1Q08 – 1Q15 $250k
$200k All Properties $150k
Qualified Properties*
$100k
$50k
$0k 2008
2009
Source: NIC MAP® Data Service
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2010
2011
2012
2013
2014
2015
* Closed transactions of $2.5 m or more; real estate portion only.
©2015 Na)onal Investment Center for Seniors Housing & Care (NIC)
Ten Percent of Properties Trading Above $250,000 per unit
Source: NIC MAP® Data Service
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• ©2015 Na)onal Investment Center for Seniors Housing & Care (NIC)
Cap Rates Generally Stable
Source: NIC MAP® Data Service
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• ©2015 Na)onal Investment Center for Seniors Housing & Care (NIC)
Consensus Among WSJ Economists Is For Rising Rates U.S. 10-‐Year Treasury Note (%)
Forecast
4.00 3.50 3.00 2.50 2.00 1.50 1.00 2009Q1
2010Q1
2011Q1
2012Q1
2013Q1
2014Q1
Source: Wall Street Journal
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©2015 Na)onal Investment Center for Seniors Housing & Care (NIC)
2015q1
2016Q1
A Risk Premium of 500 Basis Points for Seniors Housing U.S. 10-Year Treasury vs. Seniors Housing Cap Rates (4-qtr moving average) 10
10
9
9
8
8
7
7
6
6
5
5
4
4
3
3
2
2
1
1
0
0 Difference (right) 4 Qtr Mov. Avg 10-‐Year Treasury Rate (lea)
4-‐Qtr. Mov. Avg. RCA/NIC Current Value Cap Rate (lea) Average Difference =5.12% (right)
Source: RCA., NIC, Federal Reserve
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©2015 Na)onal Investment Center for Seniors Housing & Care (NIC)
VI. Outlook for Seniors Housing Fundamentals
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©2015 Na)onal Investment Center for Seniors Housing & Care (NIC)
Rising Occupancy Levels For Independent Living Majority Independent Living Supply-Demand Forecast Inventory Growth (L) Primary Markets | 1Q06 – 1Q16’F 4k
Absorption (L) Occupancy (R)
95%
3k
93%
2k
91%
1k
89%
0k
87%
-1k
85%
Source: NIC MAP® Data & Analysis Service
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©2015 Na)onal Investment Center for Seniors Housing & Care (NIC)
Generally Balanced AL Supply/Demand Outlook Majority Assisted Living Supply-Demand Forecast 4k Primary Markets | 1Q06 – 1Q16’F
Inventory Growth (L) Absorption (L) 95% Occupancy (R)
3k
93%
2k
91%
1k
89%
0k
87%
-1k
85%
Source: NIC MAP® Data & Analysis Service
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©2015 Na)onal Investment Center for Seniors Housing & Care (NIC)
Conclusions • Improving market fundamentals • Solid and relatively stable investment returns • Increasing presence of institutional investors • A range of investment strategies that potentially also diversify a multi-asset portfolio
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©2015 Na)onal Investment Center for Seniors Housing & Care (NIC)
Update Select Industry Data Sources Source
Characteristics
NIC Investment Guide 2014
Biannual publication serving as a primer for investors. This focuses on performance, investment characteristics, and leading industry players of the sector.
NIC MAP (www.nicmap.org)
Quarterly data service providing supply, demand, occupancy, rent, and sales transaction information.
NCREIF (www.ncreif.org)
Twice yearly articles comparing seniors housing equity returns to other forms of commercial real estate.
Seniors Housing Construction Trends Report
Annual publication summarizing construction activity in the past year.
RCA-NIC Seniors Housing and Care U.S. Quarterly Report
Quarterly report overviewing investment trends, buyer/seller composition, and recent transactions.
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©2015 Na)onal Investment Center for Seniors Housing & Care (NIC)
Maravilla, Santa Barbara, CA
Why Invest In Seniors Housing? Presented by Beth Burnham Mace, Chief Economist, NIC bmace@nic.org ALFA Conference
Tampa, Florida May 5, 2015