The Seniors Housing Capital Environment: A Discussion with Ryan Saul

Image of Ryan SaulIn 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 of NIC MAP®, recently interviewed Ryan Saul, managing director at Senior Living Investment Brokerage, Inc. in Glen Ellyn, Illinois.

NIC: Ryan, could you please provide us an overview of Senior Living Investment Brokerage as well as a review of 2011 and recent volume/activity for the firm?

Saul: Absolutely. Senior Living Investment Brokerage, Inc. is a leading brokerage firm dedicated to representing sellers in the confidential sale of long-term care and seniors housing facilities across the country. Our industry knowledge and team approach has led to over $1.8 billion in sales. Senior Living’s national network of buyers and sellers helps us to create a more liquid market for long-term care and seniors housing facilities yielding outstanding results for our clients.

Low cost of capital, stable occupancy and lenders looking to place debt contributed to the robust market last year. In 2011, Senior Living Investment Brokerage, Inc. represented 39 transactions that included 56 facilities. From our perspective, we have not seen a slow down this year and are expecting the market to remain active while sellers take advantage of the current capital gains environment and low cost of capital.

NIC: The first quarter of 2012 NIC/RCA Seniors Housing Transactions report shows great variation in cap rates (7.2 percent to 13.6 percent, bottom to top decile) and Price per Unit ($37,544 to $242,449). Some of the higher profile deals have centered in on the lower end of the cap rate and upper end of the Price per Unit (PPU) scales, reflecting a seller’s market. What about the not so well publicized deals? Can you describe that market for us including the sorts of opportunities and pricing metrics that exist?

Saul: The less publicized transactions that consist of single, middle-market facilities are also achieving historically low capitalization rates and record prices per unit. While these transactions don’t receive the same attention after closing, the buyer base and competition for these assets is significant. In fact, because there has been so much consolidation in the past few years, institutional capital and national buyers need to take a hard look at these opportunities due to the limited inventory available to purchase. One reason you are seeing aggressive pricing metrics is because there is a deep buyer pool chasing the relatively few products available.

When deciding what pricing metrics to apply to an opportunity, we consider a number of variables: the size of individual assets, portfolio vs. stand alone facility, age, condition and location. For standalone facilities, the average capitalization rate for seniors housing facilities is between 8.25 percent to 9.5 percent. This range depends on the location and condition of the assets. We typically see a 50 to 100 basis point premium for a portfolio. Another reason you see such a wide discrepancy in capitalization rates relates to occupancy. A buyer is willing to pay a sub 7 percent capitalization rate for a facility that has 80 percent occupancy. They know that with new management and increasing occupancy to 90 percent, the stabilized acquisition cap rises above 10 percent. In other words, a buyer is willing to pay for some upside if they know their stabilized value will be significantly higher than the market range for capitalization rates.

Transactions at the lower end of the spectrum on a PPU are typically turnaround opportunities. They are older buildings with struggling occupancy and profitability. A buyer is willing to pay a fraction of replacement cost because they know these facilities have the best return, if and when they are turned around. Sales at the higher end of the spectrum are cash flowing, newer stabilized properties. They are purchased based on the cash flow and return with less concern for the resulting PPU.

NIC: With mounting reimbursement and other business challenges facing the skilled nursing sector, it would stand to reason that an increasing number of smaller SNF chains or single-owned properties may be preparing to evaluate strategic options (possibly including a sale). Have you seen evidence of this trend?

Mr. Saul: Yes. Based on the number of proposals that Senior Living Investment Brokerage, Inc. has prepared over the last 6 months, it is evident that skilled nursing operators are strategically evaluating their holdings. In the skilled nursing sector, we are currently experiencing a disconnect between buyer and seller expectations. Buyers are looking at annualizing 2012 financial performance to account for recent Medicare and Medicaid cuts, while sellers are still hopeful to achieve pricing on 2011 performance. As pricing expectations come in line between buyers and sellers, I think we are going to experience a surge in skilled nursing transactions. Despite the reimbursement and business challenges, there is still significant demand for skilled nursing facilities and when priced right, these offerings are achieving top of the market pricing.

NIC: I am sure you are hearing the industry talk about a rising amount of new construction. Despite this, first quarter NIC MAP data shows that construction starts as well as the under construction to inventory pipeline have not yet begun to rise. Are you seeing increased construction activity? If so, what types of properties do you see developers targeting?

Mr. Saul: Senior Living specializes in selling existing, up and running facilities. However, we follow what is happening with development as new construction impacts value. We are seeing selective and smart construction. Many thought with occupancy getting stronger across the country and capital in the market, we might experience a boom in construction. Developers and operators are currently finding underserved markets with strong feasibility to develop new properties. We aren’t seeing groups develop just for the sake of developing. They aren’t building in markets to compete with other facilities serving a specific community or need. Senior Living Investment Brokerage, Inc. receives approximately two calls per week from an owner of a piece of ground that they believe would be ideal for seniors housing. Right now, there isn’t a market for those opportunities, but I predict that with the aging demographics, there will be demand in the future. The types of properties where we see the most development activity are in Alzheimer’s and assisted living. The independent living market is finally starting to stabilize, but I don’t think the market will be ready to absorb new units in the short term.

Housing Market Still Searching for a Bottom

Home prices continued to slide downward, establishing a new post-bubble low. In February, the 20-city Composite of the “S&P/Case-Shiller Home Price Index” declined 0.8 percent from the prior month and 3.5 percent from a year ago. While the data continues to signal modest declines in prices, many economists are suggesting home prices are in the process of reaching bottom. While prices at the national level may be nearing a bottom, there continues to be a great degree of variability across metropolitan markets.

In the past year, only five metropolitan markets (Phoenix, Detroit, Miami, Denver and Minneapolis) experienced home-price appreciation. Phoenix experienced the highest appreciation during the past year at 3.3 percent, although this may be the result of a subtle bounce-back effect, as home prices declined more than 50 percent from 2006 to 2011. Most metropolitan markets are still experiencing moderate declines in home prices. In the past year, Atlanta experienced the greatest depreciation at 17.3 percent—870 basis points below Las Vegas, the second worse performing metropolitan market.

Editor’s Note: The Case-Shiller is the definitive measure of movement in home values. The following is an excerpt from the index factsheet, “The repeat sales methodology measures the movement in the price of single-family homes by collecting data on actual sale prices of single-family homes in their specific regions. When a home is resold, months or years later, the new sale price is matched to its first sale price. These two data points are called a “sale pair.” The difference in the sale pair is measured and recorded. All the sales pairs in a region are, then, aggregated into one index. Sales pairs are carefully screened for any data points that would distort the index, such as non arms-length transactions.” This is more rigorous than other indices that report changes in prices at different points in time, as those measures are highly influenced by the mix of homes sold and not reflective of repeat sales.

Seniors Housing Occupancy Continues Recovery in First Quarter

The seniors housing occupancy rate continued its modest recovery in the first quarter of 2012, while construction activity and year-over-year rent growth slowed, according to NIC MAP® data. Overall, in the first quarter of this year, the average occupancy rate for seniors housing properties was 88.4 percent. The occupancy rate hit a cyclical low of 87.1 percent in the first quarter of 2010. Since then occupancy rates have risen, increasing 20 basis points in the first quarter of 2012 compared to the fourth quarter of 2011, resulting in a total increase of 130 basis points since the first quarter of 2010.

The occupancy rate for independent living properties in the first quarter of 2012 averaged 88.3 percent, and the occupancy rate for assisted living properties averaged 88.6 percent. Both independent living and assisted living showed improvement over the previous quarter, increasing 0.3 percentage and 0.2 percentage points, respectively. The average occupancy rate for independent living is now 1.5 percentage points above its cyclical low, while occupancy in assisted living is 1.3 percentage points above its respective cyclical low.

“With occupancy continuing to rise, it appears the pace of the recovery remains slow but steady,” says Michael Hargrave, vice president of NIC MAP®.

Occupancy (%) by Property Type; MAP31

For a snapshot of current industry performance for the first quarter of 2012, visit the NIC MAP® Key Metrics. To see how your market performed in the first quarter of 2012, purchase NIC MAP® Metro Market Report. Reports for the 100 largest metro areas provide quarterly benchmarks for occupancy, inventory, and construction and rent growth.

Register for the 22nd NIC National Conference

22nd NIC National Conference Banner

Did you know that 78 percent of survey respondents from last year’s NIC National Conference said they expected to do a deal as a result of attending the conference? As the industry’s signature deal-making event, the 22nd NIC National Conference will again create extraordinary networking access for owners and operators of seniors housing and nursing care properties to network and meet with debt and equity capital providers interested in the sector.

Whether you are a capital provider, developer, seniors housing or skilled nursing operator, NIC’s outstanding lineup of educational breakout sessions addresses relevant, real-time information influencing the sector.

Join the lively discussion led by industry experts and leave with applicable strategies that keep you one-step ahead of the competition. Watch for a copy of the Preliminary Program in June and for more details online.

Registration is now OPEN for the 22nd NIC National Conference, September 19–21, 2012 at the Sheraton Chicago Hotel & Towers in Chicago. Register by August 1 to receive the Early Bird discount.

Access all past Insiders