Why Do Investors Like Seniors Housing?

Why Invest In Seniors Housing? Presented by Beth Burnham Mace, Chief Economist, NIC

ALFA Conference Tampa, Florida May 5, 2015

Maravilla, Santa Barbara, CA

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.


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


I. Capital Provider Interest in Seniors Housing


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)


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


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


Strong Institutional Interest in Seniors Housing

9

Source: 2013 Plan Sponsor Survey; Kingsley Associates; Institutional Real Estate, Inc.

Relative Attractiveness of Investing In Various CRE Investment Types, 2011-2014 (1= least, 5=most)

©2015 Na)onal Investment Center for Seniors Housing & Care (NIC)

Seniors Housing Returns Outpace Other Property Types

10

• Source: NCREIF, NIC MAP® Data Service

Annualized NCREIF Total Returns, As Of Q4, 2014


0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

0.16

0.18

0.20

One Year Three Years Five Years Ten Years

NPI Apartment Hotel Industrial Office Retail Seniors Housing

Demand Pull/Cost Push Pressures Favor Seniors Housing

11

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)

•  Aging, Demographics, Acuity Levels and Disabilities •  Rising Penetration Rates •  Fewer Family Caregivers •  Social Engagement, Support and Emotional Well-Being


Favorable Demographic Drivers…

12

•  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…”


Rising Liquidity with Growing Transaction Volumes

13

Source: NIC MAP® Data & Analysis Service :


Market Fundamentals Are Generally Positive

Source: NIC MAP® Data & Analysis Service

Majority Assisted Living Historical Supply-Demand; MAP31 2006Q1 – 2015Q1

14

84%

85%

86%

87%

88%

89%

90%

91%

-‐1000

-‐500

0

500

1000

1500

2000

2500

3000

New Supply Demand (Net absorp)on) Occupancy (right)


Strongest Occupancy Since Late 2007


Majority Independent Living Historical Supply-Demand; MAP31 2006Q1 – 2015Q1

15

83% 84% 85% 86% 87% 88% 89% 90% 91% 92% 93%

-‐1,000 -‐500

0 500

1,000 1,500 2,000 2,500 3,000 3,500 4,000

Supply QOQ Demand (Net absorp)on) Occupancy (right)


Asking Rents Keeping Pace With Inflation

16



0%

1%

2%

3%

4%

5%

2007 2008 2009 2010 2011 2012 2013 2014 2015

Annual Asking Rent Growth/Inflation Primary Markets | 1Q07 – 1Q15

Majority AL

Majority IL

Core Inflation

Asking Rents Comparatively Stable

17


Annual Asking Rent Growth


-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

2007 2008 2009 2010 2011 2012 2013 2014

Apartment

Retail Seniors Housing

Hotel

Office

II. Who Are The Players?


Capital Providers: The 4-Quadrants

19

©2015 Na)onal Investment Center for Seniors Housing & Care (NIC) ©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


Sources of Equity Capital for Seniors Housing

•  Private Equity Funds

•  Public Equity REITS

•  High Net Worth Individuals

•  Pension Funds

•  Nontraded REITS


III. What Do Capital Providers Look For?

22

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


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.


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


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


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


IV. Supply, Demand & Occupancy


Seniors Housing Occupancy Remains Generally Strong

29

Source: NIC MAP® Data Service

86%

87%

88%

89%

90%

91%

92%

93%

2008 2011 2014

Seniors Housing Occupancy 4Q05 – 1Q15

All Markets

Secondary Markets

Primary Markets

Preliminary Construc)on Starts Consistent with Last Few Quarters

• ©2015 Na)onal Investment Center for Seniors Housing & Care (NIC) 30

Source: NIC MAP® Data & Analysis Service; Bureau of Labor Statistics; NIC Research & Analytics

Construction Comes In Cycles; Some Markets Active, Others Not

31


Seniors Units Under Construction Low to High



Understanding of Market Fundamentals and Cycles Is Key

© 32

Trough

Hyper Supply Phase Declining Occupancy Falling Values RAPID Construction OVERBUILDING Saturated Market

Recovery Phase Rising Occupancy Rising Rents Rising Values NO new construction BUY

Recession Phase Falling Occupancy Falling Values NO new construction

Expansion Phase Rising Occupancy Rising Rents Rising Values NEW Construction BUILD AND SELL

Boom Market

2008-‐2011 2012-‐2014 2015?


V. Pricing, Interest Rates and Risk Premium


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


What Is Price Per Unit for Seniors Housing?

35

Source: NIC MAP® Data Service * Closed transactions of $2.5 m or more; real estate portion only.

$0k

$50k

$100k

$150k

$200k

$250k

2008 2009 2010 2011 2012 2013 2014 2015

Seniors Housing Rolling 4-Qtr Price/Unit United States | 1Q08 – 1Q15

All Properties

Qualified Properties*


Ten Percent of Properties Trading Above $250,000 per unit



Cap Rates Generally Stable



Consensus Among WSJ Economists Is For Rising Rates

38

Source: Wall Street Journal

1.00

1.50

2.00

2.50

3.00

3.50

4.00

2009Q1 2010Q1 2011Q1 2012Q1 2013Q1 2014Q1 2015q1 2016Q1

U.S. 10-‐Year Treasury Note (%) Forecast


A Risk Premium of 500 Basis Points for Seniors Housing

39

Source: RCA., NIC, Federal Reserve

U.S. 10-Year Treasury vs. Seniors Housing Cap Rates (4-qtr moving average)


0

1

2

3

4

5

6

7

8

9

10

0

1

2

3

4

5

6

7

8

9

10

Difference (right) 4-‐Qtr. Mov. Avg. RCA/NIC Current Value Cap Rate (lea) 4 Qtr Mov. Avg 10-‐Year Treasury Rate (lea) Average Difference =5.12% (right)

VI. Outlook for Seniors Housing Fundamentals


Rising Occupancy Levels For Independent Living


41

85%

87%

89%

91%

93%

95%

-1k

0k

1k

2k

3k

4k

Majority Independent Living Supply-Demand Forecast Primary Markets | 1Q06 – 1Q16’F

Inventory Growth (L) Absorption (L) Occupancy (R)


Generally Balanced AL Supply/Demand Outlook


42

85%

87%

89%

91%

93%

95%

-1k

0k

1k

2k

3k

4k Majority Assisted Living Supply-Demand Forecast Primary Markets | 1Q06 – 1Q16’F

Inventory Growth (L) Absorption (L) Occupancy (R)


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


Update Select Industry Data Sources

44

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.


Why Invest In Seniors Housing? Presented by Beth Burnham Mace, Chief Economist, NIC

[email protected]

ALFA Conference Tampa, Florida May 5, 2015

Maravilla, Santa Barbara, CA

Why Do Investors Like Seniors Housing?

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