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Memory Care is Down But Not Out, Say Investors

InterFace Seniors Housing Investors

The investment panel at InterFace Seniors Housing Southeast included, from left, Adam Heavenrich of Heavenrich & Co. (moderator), Kevin Pascoe of NHI, Matthew Andriano of Marcus & Millichap, Jeff Sands of HJ Sims, Isaac Dole of Birchwood Healthcare Partners and Kelly Sheehy of Artemis Real Estate Partners.

ATLANTA — Seniors housing investors are pumping the brakes on acquiring memory care facilities as the property type’s fundamentals and high turnover have proven to be worrisome.

That’s according to an investment panel during the annual InterFace Seniors Housing Southeast conference. Held on Wednesday, Aug. 28 at the InterContinental Buckhead Atlanta, the one-day conference attracted more than 430 seniors housing professionals from all over the Southeast.

Memory care is a subsector of seniors housing real estate for seniors suffering from Alzheimer’s disease or other forms of dementia. According to the National Investment Center for Seniors Housing & Care (NIC), memory care is often located within assisted living facilities but also exists in standalone settings. Memory care residents are typically separated from assisted living residents in a secured area with specialized programming.

The panelists said that memory care was a hot product type in the recent past but that the sector’s current distress is a direct result of overzealous developers.

“Memory care was low hanging fruit for developers but now it has become overbuilt and has fallen out of favor,” said the panel’s moderator Adam Heavenrich, managing director of Heavenrich & Co., a seniors housing investment brokerage firm based in Chicago.

Nationally there are more than 12,000 memory care units under construction, which represents an 8.5 percent construction to inventory ratio, according to second-quarter research from CBRE. Independent living has a construction to inventory ratio of 5.4 percent, while assisted living’s figure is 6.5 percent.

Memory care occupancy also lags behind the other main seniors housing product types. Memory care’s occupancy rate was at 83.6 percent in the second quarter, while independent living posted 90.6 percent occupancy. Assisted living and skilled nursing had nearly identical occupancy rates — 86.5 and 86.7, respectively.

The panel also noted that a fundamental issue facing memory care is high turnover. The average length of stay in memory care is 1 to 2.4 years, per data from American Seniors Housing Association (ASHA). That’s a shorter window than the other product types in the seniors housing continuum.

“The average acuity across all settings has increased, which reduces average length of stay,” said Isaac Dole, CEO of Birchwood Healthcare Partners, a Chicago-based healthcare and seniors housing real estate investment firm. “We aren’t averse to pursuing additional memory care, but in the event we do we have contemplated putting assisted living programming into the building to smooth out that length-of-stay issue.” (Assisted living’s average length of stay is longer at 1.4 to 3.4 years.)

Another complication raised about memory care acquisitions is that lenders are bearish on providing capital to investors seeking to buy standalone facilities.

“There’s a lot of pushback from lenders getting comfortable with standalone memory care,” said Matthew Andriano, senior associate at Marcus & Millichap’s National Seniors Housing Group. Andriano said his firm has brokered several sales of standalone memory care facilities in recent years, but those deals have had their share of complications.

“Typically groups that are putting in letters of intent are expecting 75 to 80 percent leverage on a standalone memory care facility that’s not performing. They’re getting 60 to 65 percent leverage, so that’s changing the transaction in the middle of the deal,” he said. “We’ve had to get creative and find additional mezzanine lenders and more risk-taking buyers.”

The investors on stage said that there’s still demand for memory care and that the product type may be down, but not out. The key is that buyers need to understand the risks involved with memory care at this point in time.

“Memory care is a product that is needed,” said Kevin Pascoe, chief investment officer of NHI, a Murfreesboro, Tenn.-based seniors housing REIT. “We’re going to have to get comfortable with a little bit lower occupancy and faster turnover.”

Silver lining
The panelists likened memory care’s current softness to skilled nursing, which is also a high-acuity product type that faced a similar valley recently. Skilled nursing also fell out of favor with investors due to overbuilding.

“There was a lot of money poured into skilled nursing because the need-based nature of the asset type gave investors confidence,” said Dole.

“Skilled nursing is almost a precursor to memory care,” added Pascoe. “There had been some distress [in skilled nursing], but we’re seeing more companies invest in that space now.”

The panelists said that the higher acuity nature of both memory care and skilled nursing offers an attractive hedge against any upcoming market slowdowns or recession.

“Higher acuity is pretty durable during a recession,” said Dole. “People move into those facilities because they need it.”

Jeff Sands, managing principal and general counsel of HJ Sims, said that the Great Recession was the perfect litmus test for the durability of memory care.

“In 2008 and 2009, independent living and CCRCs got killed because they relied on sales of residences for people to move in,” said Sands. “The need-driven product did well, and as an industry seniors housing did much better than most other segments.”

— John Nelson

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