Archive for the ‘Finance’ Category

Background

I have been pessimistic about maintaining occupancy and pricing and the risk of overbuilding in private-pay seniors housing.   I shared these concerns, along with lessons learned from the last industry downturn, with the NIC Future Leaders Council at the annual conference of the National Investment Center for Seniors Housing and Care (NIC) in early October and will express similar views when I speak at the Senior Living 100 Conference in March.

Since I am more pessimistic about the risk of overbuilding than NIC MAP® Data Service and many industry professionals, I recently reviewed my assessment by examining the most recent census population projections to estimate demand and updated 3Q15 NIC-MAP information on supply. This blog summarizes the results of that review.

NIC MAP Assessment

NIC MAP data indicates a total supply of U.S. institutional quality private-pay seniors housing units (independent living, assisted living and memory care) as 1,404,000 units as of 4Q14.   It shows construction as a share of inventory for the top 99 markets as of the 3Q15 of 3.3% of existing majority IL supply and 7.9% of majority AL including memory care. If I apply these same shares to the inventory of seniors housing for the nation (1.404 million units), then I estimate that there may be 72,838 units under construction as of 3Q15.

NIC staff estimates that these 72,838 units will be delivered over a two-year period for average annual construction of approximately 36,400 units. This compares to peak construction levels of approximately 45,000 units in the late 1990s when the last significant overbuilding occurred.

NIC MAP’s statistics on demand and supply focus on two key items, % growth in the supply of private-pay seniors housing and the percent of the 75+ household population, or penetration rate, required to fill anticipated construction.  Comparing NIC MAP 4Q14 supply in the top 99 markets to the most recent U.S. Census 2015 population forecast for the entire U.S. 75 + population, NIC-MAP data shows a penetration rate for occupied private-pay seniors housing of 6.25% of the 75+ population in 2015 at a 90.05% occupancy level.  The 75+ population is projected to grow at a compound annual rate of 2.9% between 2016 and 2020 while the seniors housing supply is projected to increase by about 2.6% in 2016 if we assume that half of the units NIC MAP estimates are under construction as of 3Q15 are completed in each of the next two years.

The absolute growth in the entire U.S. 75+ population at a 2.9% annual rate is expected be nearly 626,000 annually.   At a 6.25% occupied penetration rate, this equates to demand for 39,125 new seniors housing units annually between 2016 and 2020 compared to annual unit growth from new construction according to NIC staff of 36,419 (72,838/2).   The market’s ability to absorb projected levels of new construction would appear even better on a net basis if obsolete units being removed from the market were to be deducted from the estimated growth in supply based solely on units under construction.   Using NIC MAP estimated supply growth rate (without any assumed demolition) the 75+ occupied penetration rate could actually decrease to 6.1% in 2020 while still keeping private-pay senior housing occupancy at the 90.1% level as of 3Q15 and filling projected development at its current rate to this same level of occupancy.

The key takeaways from this analysis of Census and NIC MAP data are:

  • Private-pay seniors housing construction levels in the US are elevated compared to recent years but below late 1990s peaks.
  • Demand is sufficient to accommodate current levels of construction because the 75+ population is growing at 2.9% annually between 2016 and 2020 vs. supply growth of about 2.6%.
  • Growth in the 75+ population between 2016 and 2020 will produce sufficient absolute growth in demand at a 6.25% penetration rate (39,125 units annually) to absorb projected seniors housing supply growth (36,125 units annually).
  • With the exception of some select markets, NIC MAP data indicates occupancy can be maintained without an increase, and even with a small decrease, in the 75+ occupied penetration rate of private-pay seniors housing.
  • Some older obsolete units will be removed from the market, further brightening the prospects for private pay seniors housing compared with estimates of supply growth based solely on units under construction.
  • Many industry leaders report little evidence of overbuilding in their markets.

Why I Am Concerned

I don’t dispute the NIC-MAP data factually or the view of many industry leaders but I believe they overlook three key items: (1) the increasing age of entry of new residents into private-pay seniors housing, (2) near-term growth in the senior population is concentrated in the “younger” 75 – 79 age group and (3) high turnover means newly constructed seniors housing is very competitive with the existing supply. These are the items that make me pessimistic about the near-term performance of private-pay seniors housing.

Increasing Age Of Entry – Different studies report different numbers for average age of senior housing residents and average entry age, but it is fair to say that in 2008/09 studies the average age of residents ranged from 82 in majority IL properties to 84 in majority AL properties and has moved higher.   Estimated entry ages for IL and AL are now closer to the mid-80s according to many operators.   This is important because much of the growth in the supply of private-pay seniors housing is in AL and Memory Care units that appeal to seniors over age 85, while much of the growth in the 75+ population will occur in the younger end of this age cohort.

Growth75+

Near-Term Growth Concentrated in Seniors Less Than 80 – The chart above shows projected population growth from the most recent projections of the US Census Bureau for the 75-79, 80-84 and 85+ age groups for the periods 2016–2020, 2021–2025 and 2026-2030.   Focusing on the 2016–2020 period you can see that growth is highest for the 75-79 age group, while much lower for seniors 80 and above.   As a result, when NIC MAP and others use a 75+ penetration rate it may overstate demand for private-pay seniors housing because residents are not moving in on average until 82 – 84 and perhaps 85 or higher for AL.

The chart below further refines population growth for seniors between age 80 and 87 to illustrate how dramatically growth is skewed toward seniors less that 85 between 2016 and 2020.

Growth 80 - 87

Near-Term Outlook Looks Worse On 80+ Penetration Rate – If we look at private-pay seniors housing penetration rates for the 80+ rather than 75+, the 4Q14 penetration rate for occupied units is 10.1% at the national level.   Annual projected demand between 2016 and 2020 for the entire 80+ population at this penetration rate is only 23,123 units, compared to current construction levels of 36,400 units per year and the 80+ penetration rate would have to rise to 10.8% in order to maintain senior housing occupancy and accommodate unit growth at current levels to 2020. (This analysis assumes that the rate of construction as a share of inventory exhibited currently for the 99 markets is the same for the non-99 markets as well.)   Slow growth in the 80 – 87 age group most likely to move into private-pay seniors housing (particularly in the 85+ age group) and the need for a significant increase in the 80+ penetration rate in order to maintain current occupancy levels raise concern about the industry’s ability to maintain private-pay seniors housing occupancy and rate and accommodate new unit growth near term, even if we assume some reduction in the supply as obsolete units are removed from the market.

Turnover – Data for YE2014 as reported in ASHA’s The State of Seniors Housing 2015 shows turnover rates of 26.2% for majority IL properties and 51.6% for majority AL properties for a weighted average of 36.5%.   With a total private-pay seniors housing supply of 1.404 million units and a 90.05% occupancy level, this means that 462,000 units need to be filled annually just to maintain current occupancy.    These relatively high rates of turnover, particularly for AL properties, mean that the existing stock of private-pay seniors housing is constantly competing with any newly constructed units and any degree of overbuilding is likely to quickly put pressure on occupancy and pricing in the existing stock, in my view.

When Will Supply Demand Improve – In order to assess when demand/supply conditions for private-pay seniors housing will improve, in the chart below I project growth in the supply of seniors housing into the future assuming the same rate of annual growth in supply seen in 3Q15.   This rate of growth (5.24% weighted average) is applied to the supply at the beginning of each five year period and held constant over each five-year period.  Once we pass 2020, as the chart indicates, the future of private-pay seniors housing is increasingly bright, with higher demand driven by increased longevity and, after 2026, the long-touted and final arrival of the baby boomers to an age when they might actually consider seniors housing.

Supply Demand

However, when you look closely at the above numbers, you see that 80+ demand begins to exceed the growth in supply only slightly in the 2021-2025 and really strong demand from 80+ seniors relative to the level of supply growth does not begin to appear until after 2026, when the Baby Boomers (1946 to 1964) begin turning 80.

Reasons For Near-Term Pessimism – While not every seniors housing market will get overbuilt and many high-barrier-to-entry markets may avoid the adverse impact of additional private-pay seniors housing development, I believe the data above supports my pessimistic view on private-pay seniors housing occupancy, rate and the risk of overbuilding over the next 3 – 5 years. If we keep building at current levels as a percent of supply and we focus on demand from 80+ seniors, it appears that the seniors housing industry will substantially overbuild the market over the next five years. In the period from 2021-2025, the amount by which projected 80+ demand will exceed projected supply growth should be sufficient to help absorb some of the excess supply created in 2016-2020 but may not be high enough to support a significant increase in occupancy or rate or a true senior housing boom.   The golden age in terms of demand is really a post-2026 event assuming supply growth continues at today’s rate, the health of baby boomers at 80 is about the same as today’s 80 year olds and boomers will find seniors housing as it is currently being designed and built attractive.

Keys To Success In A More Competitive Environment And Future Arrival Of The Boomers

In order to outperform in the more competitive environment for private-pay seniors housing that I see over the next 3-5 years, I believe operators should:

  • Limit new development near term
  • Focus on high barrier to entry markets
  • Try to reduce turnover
  • Design/Redesign/Market properties to attract under-80 or early 80s seniors by focusing on IL rather than AL and rethinking locations and amenities to appeal to “younger” seniors
  • Increase their equity cushion and line up capital in order to be able to bid for more attractively priced acquisitions if occupancy and rates fall and some new product cannot be filled as anticipated

In future blogs, I will discuss some of the cutting edge product that I believe will appeal to Under-80 seniors and look at the housing alternatives to private-pay seniors housing for this age group such as staying in their homes or choosing mixed age condos and apartments, using support services where necessary.

Technical Notes

I want to acknowledge the help of my friends at NIC in preparing this blog, even though it takes a more negative view on the near-term outlook for the industry.   I particularly want to acknowledge the help of Robert Kramer, Beth Burnham Mace and Chris McGraw.   Dave Schless at ASHA also reviewed an early draft and gave me his feedback.

I do not intend to malign NIC MAP data in this blog post. The advent and growth of NIC MAP data is a great tool for the industry and one that should help us avoid the rampant overbuilding seen in private-pay seniors housing in the late 1990s.   NIC MAP makes no statement about the appropriateness of the 75 plus penetration rate and demand, per se. NIC MAP adopted the 75 plus household cohort a number of years ago because it has been traditionally been used in the sector by feasibility analysts and others.

I also want to acknowledge two industry reports that cover some of the same material noted here but reach somewhat different conclusions. These are: Beth Mace’s Demographic Update Commentary, circulated by NIC in July, 2015 and Phil Downey’s and Larry Rouvelas’ A Projection of Demand for Market Rate U.S. Seniors Housing 2010 – 2030 published by American Seniors Housing Association Winter 2013.

NIC defines institutional quality private-pay seniors housing as properties with 20 or more units. NIC normally calculates penetration based by comparing the total supply of private-pay seniors housing in the top 99 markets to the total U.S. 75+ household cohort (not the entire household and institutional 75+ population).

In this analysis, I compare the total number of estimated occupied private-pay senior housing units in the U.S. to the total U.S. population of 75 and over and 80 and over seniors.   I believe use of a penetration rate based on actual occupancy rather than including vacant units is more accurate but use of either an occupied or total supply penetration rate would produce essentially the same result as indicated above.

While households are the standard unit of demand for housing of all types, NIC, other researchers and I also use population to measure future demand because the Census Bureau does detailed population projections by age but not projections of households.   Various commercial data services do project households by age.   One other cautionary note when thinking about demand projections for seniors housing is that male longevity has been improving, meaning more very old two person households and potentially less unit demand for private-pay seniors housing than population projections alone may indicate.

There are also some limitations in how I project supply growth.   I use NIC MAP construction estimates as of 3Q15 for the top 99 markets, make the assumption that these units will be delivered evenly over two years and that this same rate of growth is occurring in the rest of the country outside the top 99 markets and will continue in the future.

While I believe the assumptions used in this assessment are reasonable and have reviewed them with NIC staff, I believe it would be very helpful for the industry for NIC, ASHA or an independent academic researcher to undertake a demand / supply analysis using household projections by age, seniors housing supply and construction data for just the top 99 markets and include in this an updated survey of the actual entry ages for seniors housing today.   Such a study would allow us to better select an aged-based penetration rate at 75, 80 or 85 and would eliminate some of the uncertainty created by mixing population and supply data for the entire U.S. with occupancy and construction stats for the top 99 markets.

I welcome your comments on this blog post.

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Planning For Long-Lasting Retirement Income

After spending 15 years as a stock analyst evaluating healthcare REITs, senior housing and post-acute care companies, I decided to focus my blog on broader senior housing and care issues for individuals and companies, rather than recommending stocks or investment products. I intend to stick with this approach but want to make readers of my blog aware of a recently released white paper from Stifel Nicolaus’s Equity Compass Strategies funds management group. The white paper is entitled Rethinking Traditional Retirement Income and I found it to be a concise, well-written discussion of the tradeoffs between using the traditional 4% withdrawal rate for retirement planning and a 60%/40% equity to fixed income investment split for retirement savings. I have no financial relationship to the Equity Compass Strategies group at Stifel.  You can access the white paper at

http://www.equitycompass.com/pdf/Equity%20Compass%20Whitepaper_FINAL.pdf

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Observations from NIC 25th National Conference

The National Investment Center for Seniors Housing and Care (NIC) http://www.nic.org held its 25th National Conference this week at the Gaylord National Harbor, just south of Washington.   I attended the first NIC Conference, which was a much smaller affair at a hotel in Crystal City, also just south of Washington but on the Virginia side of the Potomac.    Having spent much of my career in seniors housing and care as a real estate analyst, stock analyst, investment banker and now occasional consultant, it was very gratifying to see how much the industry has grown and matured in 25 years.

My only official role at the conference was to address the Future Leader’s Council (FLC), which is a carefully selected group that goes through three years of NIC leadership development activities before “graduating”, with a third of the group rotating each year.    I was impressed with the FLC members with whom I interacted and with the thoughtful way NIC is helping talented professionals grow into leadership roles at their organizations and in the industry.

My address to the FLC group was entitled “Back To The Future” and focused on lessons learned about the impacts of overbuilding and higher interest rates in the severe 1999/2000 industry downturn.   Most FLC members were still in primary or secondary school when this downturned occurred.

I would say the overall atmosphere of the industry at NIC’s 25th National Conference was “nervous optimism”.

The nervousness comes from:

  • generally unsettled economic conditions in the U.S. and around the world that could lead to higher interest rates and growing wage pressures on an industry for which labor is 50% or more of costs,
  • recent softness in private-pay senior housing occupancy,
  • a increase in the number of units being developed (particularly assisted living and memory care) and signs of overbuilding in select markets,
  • integration stumbles at the largest and largest publicly traded senior housing operator, Brookdale Senior Living (BKD),
  • some signs of a plateau in senior housing property capitalization rates and pricing,
  • a late summer sell off in healthcare REITs and generally unsettled conditions in the equity and debt markets, which appear to be driving the pause or potentially a backup in cap rate compression.

The optimism comes from:

  • a 15 year rebound in fundamentals from the last major industry downturn,
  • generally outperforming other real estate sectors through the Great Recession,
  • still strong consumer acceptance of newly open properties, particularly in high barrier to entry markets,
  • plentiful availability and still growing interest in the industry from both debt and equity capital providers, if perhaps at higher prices that were seen a year ago,
  • knowing that the industry continues to get closer to the holy grail of  75M + Baby Boomers becoming seniors housing and care customers (although still 10 – 15 years away).

Unless you are concerned about substantial overbuilding in private-pay seniors housing, which most thoughtful insiders are not (there will be some), the recent pullback in both healthcare REIT and operator pricing is making me more interested in investing in publicly traded healthcare REITs and private pay operators but there are few publicly traded operators to buy.    On the care side of seniors housing and care, there has also been a pull back that makes skilled nursing and post acute care company stocks attractive from a valuation standpoint.    Here, however, the slow evolution of a more integrated healthcare delivery system and new value-base purchasing and an uncertain political situation through the next Presidential election may keep a lid on valuations for another year or two.    Either way, it feels like a time to be considering investments in seniors housing and care for the long term investor.   I will leave it to those still working as equity analysts in the space to recommend specific stocks.

There are also signs at the conference that innovations in technology, property location and design are alive and well.  At least two efforts are underway to develop new senior housing properties in Manhattan.   The most interesting new building model I saw at the conference is a mid-rise product located in an urban main street location that looks more like an upscale yuppie rental project or W hotel, with services delivered on demand by the likes of Uber, Amazon Fresh and online home health providers.     This project is being developed by Smart Living 360 and Federal Realty Trust (FRT) in Rockville, MD and is scheduled to open in the Spring of 2016.   See website http://www.thestories.com/ for more information.

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Managing Your Investment Portfolio

As a former stock analyst, I often get questions about what stocks to buy or how to manage an investment portfolio. I am not going to recommend specific stocks in this blog because I believe there is already an overwhelming amount of financial advice on the web and because I no longer follow individual companies closely enough to make recommendations with conviction. But I do have some suggestions on how to manage your investment portfolio.

  1. Know what you own – Older adults with upper middle incomes or higher have typically amassed a portfolio pre or post retirement that includes cash, stocks and bonds. But the portfolio is often spread across a variety of bank and brokerage accounts, certificated of deposit (CDs), investment retirement accounts (IRAs), 401k’s and other investment vehicles. In my experience it is not unusual for individuals or couples to view each of these investments as discrete investments, perhaps focusing on the one or two largest account, rather than taking a complete inventory of their total investment portfolio at least once or twice a year.
  2. Limit the number of accounts in which you hold assets – While shopping on line for the best CD rates and using an online brokerage account to trade stocks, while maintaining other accounts for IRAs and 401ks, may save you fees, I have found the complexity multiple accounts adds to managing a portfolio often leads to less well informed decisions on your overall portfolio and often represents false economy. If you insist on using multiple accounts, and particularly if you have six or more, it is essential that you keep a financial inventory where all accounts and passwords are kept, regularly update it and share it with others. It is also essential that you brief your spouse and heirs on where this information is located and be sure they can readily access it in the event of your death or disability.
  3. Decide on an asset allocation that works for you – Even though I made my living for many years recommending stocks to institutional investors, I was generally prevented from owning any of the stocks that I followed as an analyst. The primary way I managed my own portfolio was to focus on an overall asset allocation – the percentage of stocks, bonds and cash I wanted to hold. Then within the stock portion of the portfolio I considered the percentage of large, small and mid cap and international stocks I wanted to hold and whether I wanted to own individual stocks, managed funds, or exchange traded or index funds. In the bond portion of the portfolio I considered the maturities I wish to hold and again how I wished to gain exposure to bonds. There are many suggested asset allocations by age online, as well as asset allocation tools that allow you to enter your age and other information before recommending an allocation for you. One traditional rule of thumb is that the amount of bonds in your portfolio should equal your age but with increased longevity and current low interest rates many advisors consider “Percentage of Bond = Age” be too conservative. The conservative end of the T. Rowe Price asset allocation model, to use one example, suggests 60% stocks/30% bonds and 10% short-term investments (cash or cash equivalents) for an investor in his or her 50s, 50% stock, 35% bonds and 15% short-term investments for an investor in his or her 60s and 20% stock, 50% bonds and 30% cash for an investor in his or her 70s. But even within the T. Rowe Price model the mix of bonds and stocks can vary a good deal dependent on your risk tolerance and your life expectancy and I am more aggressive in my personal allocation to stocks than the conservative end of the T. Rowe model suggests. Asset allocations can also address the mix of large cap, small/mid cap and international stocks in a portfolio but an in depth discussion of stock allocations is too long for this blog post. The best way to get a sense of the asset allocation that is right for you is to review a number of different allocation models and think about how your own personal circumstances and risk tolerance fit with one or more of these. Discussing asset allocation with a broker or financial advisor in which you have confidence can also be very helpful.
  4. Use asset allocation to reallocate your portfolio at least once a year –I highly recommend using asset allocation as a tool to rebalance your portfolio on a regular basis.   This forces you to avoid the pitfall of most investors, which is an unwillingness to buy when valuations are low and sell when valuations are high.  There are three steps in using asset allocation to rebalance your portfolio.  The first is to determine the mix of stocks, bonds and cash or cash equivalents in your existing portfolio.    This is not as easy as you may think because many mutual funds may combine both stocks and bonds within an single account and may also hold a portion of cash at any given time.    Getting the details on each account can sometimes get difficult, particularly if you want to do a more refined asset allocation, separating out large cap from small, mid-cap and international funds and perhaps separating out real estate investment like REITs from other types of stocks.    This is one of the reasons I prefer fewer accounts and it is something a full-service broker can do for you.    The second step is to compare your actual asset allocation to the allocation that you believe works for you and the third step is buying or selling stock or bonds to move your allocation back toward the model allocation you selected.    Shifting the allocation does not have to be done all at once but you should have the discipline to implement it over a relatively short period of time if you want to use  asset allocation to manage your portfolio.
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