LOS ANGELES — Seniors housing has generally been considered a niche asset class with niche residents. After all, there are age restrictions, finite timelines for most residents, third-party advocates (namely, the senior’s family), elevated rental rates, highly trained operators, a limited selection of amenities and oftentimes residents with special needs. None of the above has changed in recent years.
What has changed, however, is the onslaught of Baby Boomers inching toward that stage in life where seniors housing services can accommodate their growing needs. What has also changed is the larger investment community’s perception of this product type and its potential, noted Investment Market Update panelists at InterFace Conference Group’s Seniors Housing West event, held March 7 at the Omni Los Angeles.
The amount of capital chasing deals was a theme throughout the day-long conference, with numerous speakers noting there just isn’t enough supply to keep up with demand.
“Seniors housing and skilled nursing has all this capital chasing it because it’s suddenly not an alternative asset class,” said Talya Nevo-Hacohen, CIO of Sabra Healthcare REIT. “The perception is that this is suddenly mainstream.”
Panelists expressed concerns that this sudden interest may entice the wrong type of investors — and operators. While seniors housing may, at first glance, seem like an attractive investment to those in the hospitality and multifamily sectors, the variables listed above should make it clear that this asset class isn’t for everyone.
“What continues to surprise me is the amount of capital that continues to flow in,” said Rutul Shah, fellow panelist and partner at Birchwood Healthcare Partners. “The assisted living market is also experiencing a shift from a hospitality-based model to a care-based model. That’s only going to continue. There’s a lot more nursing care that’s being provided and we do feel that a lot of the higher-acuity levels should deserve a higher cap rate than traditional product.”
Discipline demanded
Like all savvy investors, seniors housing experts were resolute in the notion that, when competition increases and opportunities dry up, you don’t panic and dig your heels in even further. Rather, you sit patiently on the sidelines and wait for your next move to materialize.
Panelists also made it clear this “next move” is different for every investor based on their unique needs and criteria.
“We focus on stabilized assets, which are hard to find in today’s market,” said Clint Malin, executive vice president and CIO of LTC REIT. “We’re looking for one-off opportunities — and that’s like a needle in a haystack.”
Dan Brewer, principal and chief fund manager at Senior Living Fund, was familiar with the pains of taking the slow-and-steady route as the rest of the industry engages in a bidding war, driving up prices and settling for less than what was desired. Senior Living Fund has seven funds.
Shah noted his firm has experienced a similar dilemma as the breakneck pace of this atmosphere has caused disciplined dealmakers to sit out on most of these deals.
“We have seen a lot over the past year that really fits our model,” he said. “But in order for us to get interested, we need a lot of conviction. We’ve struggled to make deals work at even great price points.”
Nevo-Hacohen sees opportunities if investors can find properties that can be added to an existing operator with a master lease or through a triple-net basis. Meanwhile, panelist Mark Lamb, CIO at CareTrust REIT, likes to pick up the slack where less-seasoned investors have dropped the ball.
“Our ideal acquisition is a building or set of assets that aren’t particularly well-run,” he noted. “We bring our own operator in from day one that can make changes to the cost structure. We continue to see all kinds of transactions based on pro formas and less on actuals. As the spread on pro formas and what actually happens at kick-off widens, we’ll be back in a buyer’s market.”
Change afoot
Aside from a run on assets, technology was another reason panelists believed it was prudent to remain disciplined in this current environment. While it may be true that Baby Boomers are aging and bringing in a new crop of customers, the advances in healthcare, communications, media and customer service have had a profound effect on the way many services are provided. Seniors housing, panelists argued, is no different. And this trend is just getting started.
“Sitting here today trying to predict what people are going to want 15 years from now is really hard,” Nevo-Hacohen asserted. “I would’ve laughed if you told me what my phone was going to do 15 years ago. The world is transforming, and as the Baby Boomer generation ages, they’re reluctant to age. Medicine is keeping up with them, allowing them to live longer, potentially healthier lives. I don’t know if technology and the shared economy is going to allow people to stay home.”
The basic needs of seniors are one of the primary drivers behind assisted living, but in-home sensors, surveillance cameras, video conferencing, medical alert devices and mechanical lift and mobility aids can provide some of these services.
Another keen motivator for the seniors housing environment is to stave off isolation and provide a sense of community for aging relatives. Technology is once again stepping in however, as social media, video conferencing, online games, and even humanoid and pet robots can keep seniors more connected than ever before. Add rideshare apps, Amazon, home-health services and a barrage of meal-delivery options, and many tasks that once fell on the shoulders of adult children or neighbors have now been outsourced in a convenient, affordable way.
As Nevo-Hacohen noted, these advances have allowed seniors to remain in their homes longer, thereby also reducing the length of stays for many residents as they stave off this transition. This delay also means that when many seniors finally do make it through the door, they have larger medical needs than the generations before them.
“There is a generational change in tastes,” she continued. “Just 10 to 20 years ago, many seniors went into nursing homes. These people don’t go into a nursing home nowadays if they can afford it. They go into assisted living. The age of people coming into seniors housing has risen, meaning their levels of frailty, mobility and vision have also changed. This means layouts and amenities have to change. What worked for seniors 20 years ago doesn’t necessarily work for today’s residents.”
Nevo-Hacohen pointed to long hallways and common areas with furniture clusters as two examples of problematic designs for today’s senior residents who may have mobility and vision limitations. Moderator Jacob Gehl, senior managing director at Blueprint Healthcare Real Estate Advisors, has seen this trend as well, with the line blurring between various product types.
“As the acuity level continues to go up in these buildings, the length of stay is going down,” he agreed. “Nursing homes trade at higher cap rates than assisted living facilities, but assisted living residents seem to look more like nursing home residents day after day.”
The impact of technology to the seniors housing industry is likely years away from being truly realized. Panelists believe it will be a large factor to consider, however, when you take into account the amount of hospitality and multifamily investors and less-than-stellar operators that are circling this space due to its attractive nature. The fallout, they predict, will be inevitable.
“There is an elongated lease-up if you have patient capital,” Malin said. “On the operation side, there is distress out there. There will definitely be more distress and opportunities on broken capital structures. You can find those opportunities on a one-off basis.”
Shah has seen this already as exit strategies haven’t played out exactly as some investors have hoped.
“I’ve seen a lot of opportunities where developers come in and they’re already looking to sell,” he said. “It’s likely because the projects are taking too long to build and construction costs are high. There are some interesting pressures on the debt market. These developers are trying to craft the right story and then they’re making their exit.”
Lamb noted that the investment market can pontificate on a litany of points, from construction costs to Boomer preferences to the question mark that is technology. These may be valid points to consider, he said, as long as the key investment fundamentals remain the same.
“In a perfect world, we’d all love to have 10 to 20 assets and operate in California, Oregon and Washington,” he said. “At the end of the day, anybody can build a building. It’s how much rent load can your building sustain?”
— Nellie Day