The Seniors Housing Capital Environment: A Discussion with Jerry Doctrow
In the latest in a series of dialogues with key players regarding the current capital environment in the seniors housing and care industry, Michael Hargrave, Vice President, NIC MAP, recently interviewed Jerry Doctrow, Senior Advisor, Investment Banking – Stifel, Nicolaus & Company, Incorporated.
Jerry, congratulations on a very successful run as an analyst covering publicly traded seniors housing and long term care operators and healthcare real estate investment trusts (REITs). I understand you are transitioning into a new role. Can you give us a glimpse of your plans?.
Mr. Doctrow: That’s correct, Mike. I have accepted a half time position as a senior advisor in Stifel Nicolaus Weisel’s investment banking group. Stifel is increasingly active in raising capital and providing M&A advice for seniors housing and healthcare real estate. Recent projects include advising the buyer of Erickson Retirement, raising private equity for a seniors housing operator/developer and advising and raising capital for a medical office building (MOB) developer/manager. My role will include: advising Stifel on the seniors housing and long term care industry, helping to educate industry participants to Stifel’s capabilities and advising select clients of the firm. I started my new role 3/1/2012. The other half of the time I plan on traveling, spending time with my family and getting in more golf..
How has the industry evolved during your career?.
Mr. Doctrow: Health care real estate has grown dramatically in terms of visibility and as an investment alternative for public market and institutional investors since I started as an analyst in 1997. When I started, the healthcare REITs were not a part of the NAREIT index and were not considered a core property type. That has changed dramatically and accelerated in just the past few years. Since 2005, the market cap of healthcare REITs has growth from $17.6 Billion to $57.4 Billion (as of mid-February, 2012). They comprised about 6% of the NAREIT index in 1997, whereas they are over 15% of the index today. It is safe to say that healthcare real estate, as an asset class, has come of age..
The publicly traded operators have been on more of a roller coaster over the years. While there has been tremendous growth in the private-pay seniors housing industry, periodic overbuilding, most recently in the mid-1990s has led to volatile and too often disappointing results for investors. Seniors housing really came into its own in the mid 1990’s. Back then there were 14 publicly traded operators, most of whom traded at high multiples and the message was grow, grow, grow. Then in 1999, people woke up to the fact that things were overbuilt and that the country was heading towards recession. Industry performance suffered until the new stock was absorbed which was several years later. Then there was an up cycle in the early to mid- 2000s that lasted until the partly-supply but mostly economic driven downturn in the 08-10 period..
How about your outlook for the sector?.
Mr. Doctrow: For the private pay seniors housing sector, keep in mind that it is a small industry with attractive fundamentals. I believe that we need to see some companies of scale in the market as the small market capitalizations of many of the current public companies do not attract major institutional investors. We have seen more big privatization transactions on the skilled nursing side versus the private pay seniors housing side and some of these companies with scale are likely to reenter the public market at some point. Longer term for seniors housing, it reminds me of the hotel sector in the 1950s – I believe it will consolidate with a number of major national providers and it will continue to evolve, with some companies owning their real estate and some leasing, and branding will evolve. I don’t think the seniors housing industry and hotel industry are exactly the same because of the importance of reservation systems in the hotel sector but I do believe there are many parallels and in a general way the hotel sector points to how seniors housing will evolve..
Right now there is a huge advantage in terms of public cost of capital vs. private cost of capital and this means that real estate held within a public REIT gains a premium over real estate held by the operator and I expect both real estate and operator consolidation in the private pay seniors housing space. I also see further consolidation happening in the SNF space but believe we need more clarity before volumes pick back up significantly and consolidation will both be focused on facilities and on related services like home health and hospice..
I think longer term that the industry will grow. It will be a different form of growth than we saw in 2000. Back then no one knew how much was being built. Now you have much more sophisticated operators and better data like NIC MAP. Transparency is much better in terms of public/private markets and is helping investors and is a major reason why more investors have and are becoming comfortable with the space. But having said this, construction in private pay seniors housing is still a risk going forward. When fundamentals are good, people like to develop, the industry is not large, returns are attractive, and the number of units to move from underbuilt to overbuild is not that great. Near term – that is the biggest risk from an investment perspective. In 1988 – we had too many tax credit IL, in 1998 – too much AL, and in 2006/7 – there were too many CCRCs – tax exempt. When the industry is doing well, money flows to it. The main question is how disciplined will the markets be going forward.
NIC Events Update (March 2012)
NIC is excited to be on the East Coast for the Skilled Nursing Investment Forum (SNIF) 2012 and the Seniors Housing Regional Symposium (SHRS) 2012. We have received a great response with over 1000 registered attendees! There is still time for you to register and make sure you are part of the action.
You may have noticed that, for the first time, SNIF and SHRS are happening both at the same time and at the same place. By holding these meetings concurrently, we are responding to your requests for less time out of the office but more time with all of the operators and capital providers with whom you want to meet.
When you join us in Boca Raton in the next week, be sure you check out these events:
- First-Time Attendee Breakfast – If this is your first NIC event, please join NIC leadership and fellow first time attendees for breakfast on Monday, March 26 at 7:30am to hear suggestions for how to make the most of your event experience.
- NIC Nightcap with MidCap – This late night event was such a success last year that we are bringing it back. Monday evening, 9:30pm – midnight, relax with attendees or participate in some friendly competition during a fun filled night of games such as Blackjack, Poker, Billiards, Foosball, and Shuffleboard.
- “Meet the Capital Providers” Reception – On Tuesday night, join your peers again for a chance to meet the industry’s top financiers. The capital providers will each have a table at our closing reception to make it easy for you to find the right match for your needs.
Finally, we would like to recognize and thank all participating State Executives, especially during such a busy legislative season. This year, we are pleased to welcome the State Executives from California, Florida, New York, Michigan, Utah, and Texas. In addition, a number of other State Executives participated in helping to plan the SNIF and promote the event to their members.
There is still time to register. Our overflow hotel, Boca Raton Marriott, is reasonably priced at $169 per night and we will accommodate those guests with complimentary transportation to the Boca Raton Resort.
Interest in Seniors Housing High Among Institutional Real Estate Investors
Seniors housing is among the most attractive property types for new investments by institutional investors according to the results of the 2012 Plan Sponsor Survey – the 16th annual survey conducted by Kingsley Associates and Institutional Real Estate, Inc. (IREI). The survey’s objective is to identify the real estate investment trends for the largest and most influential domestic tax-exempt investors, and its results were presented by Jim Woidat, Principal, Kingsley Associates, during a general session at IREI’s Visions, Insights & Perspectives (VIP) 2012 held January 30 through February 1, 2012 in Scottsdale, Arizona. (See accompanying article Seniors Housing Featured at Premier Institutional Real Estate Investment Conference.)
The survey’s respondents, which include both public and corporate pension funds as well as foundation and endowment funds, account for $1.76 trillion of total assets under management and approximately $152 billion of total value of real estate portfolios. While the respondents represent only 19% of the total assets listed in the Money Market Directory, they represent 48% of the total tax-exempt real estate listed in the Money Market Directory.
Among the survey’s respondents, 22.9 percent are currently invested in seniors housing as of 2012, and 13.3 percent plan to invest in seniors housing during 2012, which is up from 2011 when only 8.3 percent planned to invest in seniors housing.
As seen in the exhibit below, seniors housing has consistently remained among the respondents’ five most attractive property types for new investment. For 2012, seniors housing is the fourth most attractive property type, behind multifamily, industrial/R&D and medical office but ahead of hotel, retail, office and infrastructure. Finally, seniors housing’s relative attractiveness for new investment has been the most consistent among the property types during the past four years.
(Ratings: 1=least attractive, 5=most attractive)
Source: 2012 Plan Sponsor Survey; Kingsley Associates; Institutional Real Estate, Inc.
Seniors Housing Featured at Premier Institutional Real Estate Investment Conference
Seniors housing was the sole property type featured in a Sector Spotlight among the Executive Workshops at the Visions, Insights & Perspectives (VIP) 2012 of Institutional Real Estate, Inc. (IREI) held January 30 through February 1, 2012 in Scottsdale, Arizona. The seniors housing workshop was conducted by NIC through an invitation from IREI.
The annual VIP conference, for which registration is by invitation only, is among the premier events on the tax-exempt institutional real estate investment community’s calendar. The VIP 2012 attracted over 350 attendees, of which approximately one-quarter were investor representatives including those from plan sponsors, foundation and endowment funds. The other attendees were primarily representatives from investment managers, advisory and consulting firms..
As the feedback on the seniors housing workshop was so positive and with the steady high interest in seniors housing investments among institutional real estate investors (see accompanying article Interest in Seniors Housing High Among Institutional Real Estate Investors), Geoff Dorhmann, President and CEO, IREI, is committed to including seniors housing as a reoccurring workshop every other year for future VIP conferences..
The success of the 2012 seniors housing workshop is the result of its faculty, which was comprised of:.
- Bob Kramer, President, NIC, who moderated the workshop;
- Jerry Doctrow, Senior Advisor, Investment Banking – Stifel, Nicolaus & Company, Incorporated, who addressed public equity investment;
- Tim Fox, Executive Vice President, Senior Resource Group, who addressed operational opportunities and challenges;
- Mike Hargrave, Vice President – NIC MAP, NIC, who addressed trends in market fundamentals;
- Chuck Harry, Director of Research & Analysis, NIC, who presented the investment market overview;
- Beth Mace, Director – AEW Research, AEW Capital Management, LP, who addressed property acquisitions underwriting; and
- Kathy Sweeney, Principal, Great Point Investors, who addressed the role of seniors housing in the commercial real estate portfolio.
NIC MAP Update (March 2012)
Addressing Seniors Housing Market Trends Across the Southeast
Just a handful of seats remain available for the NIC MAP Southeast Market Briefing on Sunday, March 25 from 11:30 a.m. – 1:30 p.m. in Boca Raton, FL. If you’re involved in seniors housing and care in the Southeast, this is an event you don’t want to miss. Every region of the U.S. has its own unique set of opportunities, risks and data points. Learn about the Southeast and how you can use this information to improve your business. The discussion will concentrate on the Southeast regional markets through 4Q11 including Atlanta, Miami, Orlando and Tampa.
- Comparing Southeast Regional Occupancy and Rental Rates With Other Regions
- The Economic and Market Variables Driving the Southeast’s Recovery
- Performance and Outlook for Specific Southeast Markets
- Sales Transaction Trends Regarding Price, Cap Rates and Sales Volume
- National Outlook for 2012 Seniors Housing Occupancy
Registration includes attendance to the Briefing as well as lunch, networking opportunities and current performance data for the Southeast metropolitan markets. For more information, including guest speakers and discounts for current MAP subscribers, contact Amber Jacobs at 410.267.0504 or firstname.lastname@example.org.
NIC Research Insights Seniors Housing Construction Activity Continues to Slow
The number of units under construction as of 4Q11 in seniors housing properties declined from the previous quarter by 7% and has now declined by a cumlative 64% since reaching a cyclical high in 4Q07. The 4Q11 decline was equally distributed between independent and assisted living properties, with construction declining by 7% and 6%, respectively. Overall seniors housing construction activity now stands at 1.5% of existing inventory, which represents its cyclical low.
Although construction represents 1.5% of existing inventory nationally, individual metropolitan markets are experiencing a wide range of construction levels. As of 4Q11, the markets with the highest construction activity were: Minneapolis at 5.5%, St. Louis at 4.4%, and Chicago at 4.1%. To find where your market ranked and information on specific development projects, contact John Blumer.