2015 OUTLOOK Demographics Sector Trends Capital Markets 2015 Forecast

Transcription

1 Seniors Housing & Health Care Specialty Practice Seniors Housing 2015 OUTLOOK Demographics Sector Trends Capital Markets 2015 Forecast

2 TYPES OF SENIORS HOUSING Senior Apartments Multifamily residential rental properties restricted to adults at least 55 years of age or older. These properties do not have central kitchen facilities and generally do not provide meals to residents, but may offer community rooms, social activities, and other amenities. Independent Living Communities Age-restricted multifamily rental properties with central dining facilities that provide residents, as part of their monthly fee, access to meals and other services such as housekeeping, linen service, transportation, and social and recreational activities. Such properties do not provide, in a majority of the units, assistance with activities of daily living (ADLs) such as supervision of medication, bathing, dressing, toileting, etc. There are no licensed skilled nursing beds in the property. Assisted Living Residences State regulated rental properties that provide the same services as independent living communities listed above, but also provide, in a majority of the units, supportive care from trained employees to residents who are unable to live independently and require assistance with activities of daily living (ADLs) including management of medications, bathing, dressing, toileting, ambulating and eating. These properties may have some nursing beds, but the majority of units are licensed for assisted living. Many of these properties include wings or floors dedicated to residents with Alzheimer s or other forms of dementia. A property that specializes in the care of residents with Alzheimer s or other forms of dementia that is not a licensed nursing facility should be considered an assisted living property. Nursing Homes Licensed daily rate or rental properties that are technically referred to as skilled nursing facilities (SNF) or nursing facilities (NF) where the majority of individuals require 24-hour nursing and/or medical care. In most cases, these properties are licensed for Medicaid and/or Medicare reimbursement. These properties may include a minority of assisted living and/or Alzheimer s/dementia units. CCRCs Age-restricted properties that include a combination of independent living, assisted living and skilled nursing services (or independent living and skilled nursing) available to residents all on one campus. Resident payment plans vary and include entrance fee, condo/coop and rental programs. The majority of the units are not licensed skilled nursing beds. 2 IRR Seniors Housing & Health Care Specialty Practice

3 TYPES OF SENIORS HOUSING Senior Independent Assisted Skilled CCRCs and Apartment Living Living Nursing Combinations State Licensing Not Required Not Required Required Required Required State Approvals Needed to Build Not Required Not Required Not in most states, but there are a few with CON requirements Most states require a CON or application for Medicaid funding Most states have some state approval requirements Resident Funding Private Pay or Section 8. Many have Low Income Housing Tax Credits and have rent and income restrictions Private pay Primarily private pay, some Medicaid Waiver Predominately funded by Medicaid and Medicare Primarily private pay, some Medicaid and Medicare in assisted and/ or nursing components Payment Type Primarily rent by the month About 3/4 rental by the month, 1/4 entry fee Primarily rent by the month, a small percentage are entry fee Primarily rent by the day, virtually none are entry fee Majority of CCRC s require an entry fee for independent living, and some require for assisted living too Typical Size 60 to 250 units average is +/-200 units 80 to 200 units, average is +/-135 units 40 to 100 units, average is +/-90 units 100 to 200 beds, average is +/-120 beds Typically 200+ units/beds, many in the 300 to 500 range Meal Service Limited Typically 1 to 3 meals per day included in rent Typically 3 meals per day included in rent Typically 3 meals per day included in rent Varies by care types within the community Typical Services Provided Trasportation and activities All provided in senior apartments plus meal service, housekeeping, and 24 hour monitoring All provided in independent living plus laundry and assistance with activities of daily living All provided in assisted living plus 24 hour nursing care Varies by care types within the community The 2015 Seniors Housing Industry Outlook 3

4 DEMOGRAPHICS Baby Boomers first started turning 65 in, and Baby Boomers are now turning 65 at a rate of more than 10,000 per day! As a result, the population aged 65+ is forecast to grow at an annual rate of 2.93% over the next five years. This so called graying of America will lead to significant growth in demand for seniors housing over the next few decades. However, it is important to realize that the average age of entry into seniors housing properties is in excess of 80, meaning that the Baby Boom Generation will not start to have a significant impact on demand for another decade. Between 2015 and 2020, growth in the 80+ population is forecast by the U.S. Census to be 1.7% per annum. This is stronger than overall population growth, which is forecast to be 0.8% per annum, but not nearly as strong as might be indicated by recent news headlines. Yes, the Baby Boomer wave is coming to seniors housing, but the vast majority of Boomers will not be ready to give up their homes or traditional rentals for at least another decade. In the meantime, growth in demand will occur, but at a more modest pace than when the Baby Boomers begin to reach 80. Adult Children (and other younger relatives) often play a significant role in selecting a seniors housing residence for a senior. Surveys completed by IRR reveal that adult children and other relatives of seniors are typically highly involved in the selection of a facility, and it is common for 50% or more of a facility s residents to have relocated from outside the market area to be nearer children or other relatives. Therefore, growth trends in the 45 to 64 year old age cohorts are important to understand. These are the cohorts most likely to have a senior parent who is 80+. Adult child households (those headed by a year old) tend to be relatively mobile, and relocations for employment are common. As shown on the heat map on the facing page, the number of adult child households is forecast to decline Elderly Adults as a Share of the U.S. Population, 2000 to 2050 in 34 states. This includes the rust belt states, the Midwest, parts of the south and southeast, and parts of the mountain west. States with the strongest forecast growth in adult child households are Texas, Utah, and Montana. The District of Columbia will also have strong growth. Clearly, adult child households are moving to where new jobs are being created. 4 IRR Seniors Housing & Health Care Specialty Practice Growth in senior households occurs due to aging in place and relocations. All 50 states are forecast to experience growth in the number of 75+ households from 2015 to 2020, but growth rates vary significantly from just over 3% in Rhode Island to 28% in Alaska. The top 5 states are Texas, Georgia, Colorado, Nevada and Alaska. The District of Columbia also ranks highly.

5 DEMOGRAPHICS HHs Ages 45 to 64 Household Growth Rates by State 2015 to 2020 HHs Ages % to 0.0% 0.0% to 4.9% 5.0% to 9.9% 10% to 14.9% 15.0% and up The 2015 Seniors Housing Industry Outlook 5

6 SECTOR TRENDS Occupancy NATIONALLY Fourth quarter occupancy levels were up relative to the same quarter in for three of the four sectors. This is attributable to continued improvement in the national economy and the housing market. Independent Living Occupancy continued to strengthen in. Up 130 bps since the end of, the sector finished the year at 91.4%. Freestanding independent living facilities showed the most annual occupancy improvement of any care type. This sector relies the most heavily upon consumer confidence, and as a result took the biggest hit during the recession. The continued improvement in independent living occupancy is indicative of continued improvement in the US economy. Assisted Living Occupancy increased 40 bps from reaching 90.5% in the fourth quarter of, up 20 bps over the same quarter in. This modest improvement is more significant when it is considered that supply grew by 2.5% during this period. Memory Care Although often touted as being the sector with the most unmet need, the average occupancy for memory care product ended at 88.4%, unchanged relative to the same quarter in. But it must be considered that the supply of memory care units expanded during the period, by 8.4%. The fact that occupancy remained at the same level with this much new construction is a sign of demand in this sector. But the question is, how long can this level of absorption last, given that a large share of the new supply going forward is memory care focused? Skilled Nursing The skilled nursing market is the most stable of the sectors, rarely seeing significant fluctuations in occupancy. The sector ended at 88.0%, and has been near that level for several years. The supply of nursing beds is on a slow steady decline, as the 50s, 60s, and 70s vintage homes are being closed, and often replaced with smaller rehab focused facilities with fewer beds. Occupancy Levels - Primary Markets 92% 91% 90% 89% 88% 87% 86% 85% 84% 83% 82% Independent Living Assisted Living Nursing Memory Care Source: NIC Map Sector Trends 2015 Integra Realty Resources - DFW 6 IRR Seniors Housing & Health Care Specialty Practice

7 SECTOR TRENDS New Construction NATIONALLY High levels of new construction are being cited as a potential issue by more and more industry observers. There are concerns that the available data is not capturing all the new construction, and further concerns of a possible bulge in starts in 2015 based upon the significant levels of pipeline activity. In nearly every market, there are projects going through the entitlement process, and new developers are entering the space weekly. Independent Living Starts continued to accelerate modestly, now representing 3.7% of existing inventory as of the fourth quarter. Builders added 4,263 independent living units within the past year, expanding independent living stock by 2.2% nationally. Another 7,257 independent living units are currently under construction as part of more than 53 different building projects, 18 of which are expansions. Assisted Living Construction continues to hover above 5% of existing inventory as of the fourth quarter. New development remains active, with 2,127 units starting construction in the quarter. Another 16,161 assisted living units are currently under construction as part of more than 184 different building projects, 32 of which are expansions. Memory Care Construction in the memory care sector has been significant, with supply under construction at just over 9.0% of existing inventory as of the fourth quarter. Much of the new supply has been in free-standing memory care only facilities. Skilled Nursing Construction as of fourth quarter included just over 3,600 beds. Many are replacement facilities and/or rehab focused post acute care. Certificates of need remain a barrier to new development in many states. Units Under Construction- Primary Markets 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Independent Living Assisted Living Memory Care Nursing Care Source: NIC Map Sector Trends 2015 Integra Realty Resources - DFW The 2015 Seniors Housing Industry Outlook 7

8 12.40% 12.40% 12.10% 12.20% 12.40% 12.30% 12.10% 11.50% CAPITAL MARKETS FINANCING 14.00% Financing continues to be readily available to experienced developers and operators. HUD, Freddie Mac, and Fannie Mae all had active years in and. Data recently released by the U.S. Department of Housing and Urban Development (HUD) shows that its LEAN mortgage insurance program to finance seniors housing properties finished the fiscal year ending September 30, with $4.21 billion of loan volume, a reduction of 27.8% as compared to the previous year s record of $5.82 billion. The HUD process has become increasingly streamlined, and more and more borrowers have taken advantage of this program. Fannie Mae and Freddie Mac combined completed about $2.7 billion in seniors housing loans in calendar year. One big difference is that HUD lends on skilled nursing but not independent living, whereas Average Cap Rates Fannie and Freddie will lend on independent living and assisted living but only do skilled nursing beds when they are a small component of a larger project. A significant amount of the HUD 232 volume was in the skilled nursing sector, where HUD remains one of the few active lenders. Banks continue to be active as well, providing construction loans, bridge to agency loans, and revolvers for larger operators. Other sources of funding are starting to enter the market as well, including life insurance companies. ACQUISITIONS Acquisitions saw the highest number of transactions since 2008 with a total of 533 compared to 445 in. Total transaction including seniors housing and nursing care for registered $17.4 billion which is up 17.5% from $14.8 billion in and the highest volume since which registered just over $27 billion. Seniors Housing acquisitions continued to dominate over nursing care transactions for and % 10.00% 11.10% 11.10% 10.90% 11.50% 11.70% 11.30% 11.50% 11.30% 10.40% 10.50% 10.80% 10.20% 8.00% 6.00% 9.00% 8.80% 8.30% 8.20% 7.80% 7.90% 8.10% 8.00% 8.20% 8.10% 7.90% 7.80% 7.80% 7.50% 7.80% 7.60% 7.60% 7.80% 7.70% 7.90% 4.00% 2.00% 0.00% Skilled Nursing Seniors Housing 8 IRR Seniors Housing & Health Care Specialty Practice Source: NIC Map 2015 Integra Realty Resources - DFW

9 CAPITAL MARKETS BUYERS UNIT PRICING Publicly traded companies accounted for 56% of the volume of transactions for both and. The privately held REITS account for 31% of volume in and 30% of volume for and the institutionally buyers accounted for 10% in and 11% in. The average price per unit for seniors housing properties as of year end was $149,000 per unit which is down 8.6% from $157,400 per unit for the prior year. Nursing care beds sold at an average of $71,000 per bed, this is up 5.9% from the prior year price of $67,100 per bed. Portfolio price per unit was $165,000 per unit vs. $129,500 per unit for single property acquisition which implies a 27% portfolio premium. $180,000 TRANSACTION HIGHLIGHTS Average Sales Prices, 2000 to Average Sales Prices, 2000 to Brookdale Senior Living acquisition of Emeritus Senior Living, with the real estate component of that deal estimated at $2.8 billion involving 186 properties. Griffin American HC REIT acquired the Northstar deal for $1.4 billion within the US. The entire transaction totaled $3.4 billion which included assets in the UK. Brookdale the $1.2 billion Brookdale/ Healthcare Property Investors, Inc 14-property continuing care retirement community portfolio joint venture. Also crossing the $500 million threshold was Sabra Health Care REIT s acquisition of 21 Holiday Retirement properties from Fortress which totaled $555 million. All told, there were 123 transactions, with 10 transactions involving at least $100 million. Average Sales Price Per Unit/Bed $160,000 $140,000 $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $- IL/AL Nursing Source: Irving Levin Associates - Senior Care Acquisition Report Integra Realty Resources - DFW The acquisition market for 2015 is expected to remain active and could potentially exceed levels. REIT s should continue to remain active and aggressive buyers dominating the market through 2016 as long as interest rates remain low and the presence of a strong source of capital remains available in the market. - Brian L. Chandler, MAI, CRE, FRICS The 2015 Seniors Housing Industry Outlook 9

10 FORECAST 2015 SENIORS HOUSING The stars appear to be well aligned for 2015 to be another banner year for the seniors housing sector (assisted and independent living). The sector will benefit from low interest rates, growing demand, and strong investor appetite to invest in seniors housing. Absent an unexpected downturn in the national economy, industry operating fundamentals should remain strong, and strong capital markets should provide plenty of debt and equity to those wishing to purchase, renovate or develop. Further compression in capitalization rates may occur, at least until the feds begin to raise interest rates. This is simple supply and demand there is currently more money chasing product than there are deals to be bought. While some believe that a small interest rate increase may already be baked into pricing, that is difficult to believe seeing how aggressive capitalization rates have become. Buyers having to model exits in 3 to 7 years are increasingly worried about how rising interest rates may impact their exit values. This may give longer term holders (REITs for example), an advantage in winning deals this year. But are there storm clouds on the horizon? A growing number of industry veterans have expressed concern about the growing number of new entrants into the sector, and the seemingly endless construction pipeline in some markets. Areas such as Dallas/Fort Worth, Houston, Denver, Chicago, and Atlanta are seeing significant levels of new construction. In some of these markets deliveries are already outpacing demand, such as in Houston where memory care occupancy levels have been falling for several years due to a more than doubling of the supply of units. 10 IRR Seniors Housing & Health Care Specialty Practice

11 FORECAST 2015 If construction does indeed begin to outpace demand, the losers are likely to be the existing assets which lack the amenities and appeal of the newly delivered product. We have already seen this occurring in select markets across the US. One recent market we worked in had seen two new projects delivered. Both leased up well, achieving absorption and rental rates near budgeted levels. But this was at the expense of an existing asset in the market which saw its occupancy level fall into the 70s after having consistently been 90%+ for a decade. But the issue of excessive new construction is not consistent across the US many markets remain where unmet demand is present, and new product is needed. However, developers will need to dig a little harder and deeper to find those markets, and many have barriers to entry. Our advice make hay while the sun is shining, but keep some dry powder in reserve for the distress buying opportunities may to begin to emerge in NURSING HOMES The nursing market continues to bifurcate into two sub-segments Medicaid based long term care; and short term rehabilitation care funded primarily by Medicare, insurance, and private pay payment sources. This later type of care is increasingly being lumped into the post acute care category, and such facilities may compete not only against other nursing homes, but also with Long Term Acute Care Hospitals (LTACHs) and Inpatient Rehabilitation Facilities (IRFs). Overall, the supply of nursing home beds in the US is contracting, and this trend is likely to continue as many of the older facilities across the US reach the end of their useful lives. The new generation of nursing homes bears little resemblance to the nursing homes of the past. Newer homes have features such as all private resident rooms, large expansive therapy areas, bistros, swimming pools, etc. As the market is bifurcating, it is also becoming increasingly complex. Operators are continuing to respond to changes mandated by the Affordable Care Act, and many are seeking affiliations with Accountable Care Organizations to maximize referral sources. For 2015, we expect to see minimal new development in the nursing home sector, with the development that does occur focused in the post acute segment. State and federal government coffers are under a bit less stress, so Medicaid and Medicare rates are likely to increase. While the sector was out of favor for several years, investors are now paying more attention to nursing homes, and increased competition has created some decreases in capitalization rates. Premier facilities may now sell at capitalization rates below 12%, and a few sales have cracked the $100,000 per bed barrier. As capital continues to flow into this sector, we are likely to see continued compression in capitalization rates for nursing homes. The 2015 Seniors Housing Industry Outlook 11

12 Charles A. Bissell, MAI, ASA, CRE Executive Director/National Practice Leader Direct: x102 Mobile: Brian L. Chandler, MAI, CRE, FRICS Managing Director Direct: x103 Mobile: Kenneth E. Gill Senior Director Direct: Mobile: Lauri Johnson Director of Business Development Direct: x139 Mobile: IRR - Seniors Housing & Health Care 700 E. Campbell Road, Suite 265, Richardson, TX Office: Fax: