A Discussion with Lauralee Martin, President and CEO, HCP Lauralee Martin became the CEO and president of HCP in October 2013, and joined the ranks of healthcare REIT CEOs with growing investments in the seniors housing and care sector. HCP, the first healthcare REIT selected to the S&P 500, also invests in the post-acute, hospital, medical office and life science space. In addition to discussing her goals for HCP, Martin offered her thoughts on the company’s recent expansion into entry-fee CCRCs, opportunities and challenges in the healthcare sector, and HCP’s commitment to sustainability.
Lauralee Martin: Our strong operating portfolio, investment grade balance sheet and talented team enabled me to immediately focus on accretive investment opportunities and increased commitment to our operator relationships. We have accomplished a great deal in the short time frame since I stepped in as CEO, highlighted by several “win-win” transactions with our operating partners including Tenet Healthcare, Kindred Healthcare and Brookdale Senior Living. Longer-term, I have no doubt that the five healthcare asset classes we invest in will further benefit from favorable demographic trends. Our job is to continue to generate strong internal and external growth – balancing potential risk, reward and optionality to ultimately deliver superior, long-term value and returns for our shareholders.
NIC: HCP has a portfolio comprised of seniors housing (36%) and post-acute/skilled nursing care (29%). Do you anticipate growing the portfolio more in either property type, and will that growth be driven by acquisitions or new development?
Martin: We actively pursue new investments across all five sectors of healthcare real estate and benefit from our experience in using different structures to achieve the best risk-adjusted returns. While we do not have a pre-determined weighting or allocation for each sector, I anticipate the absolute size of our seniors housing and post-acute/skilled investments will grow substantially over time, through a combination of acquisitions, new developments and debt investments.
NIC: In light of the rapid transformation within the healthcare sector and changes that will occur or have occurred across the continuum of care, what do you view as some of the opportunities and challenges within seniors housing and care?
Martin: We have visited with many of our operators and discussed their operating strategies and capital needs in the backdrop of healthcare reform initiatives. Operators across the entire healthcare spectrum are being challenged to achieve an appropriate level of scale, to deliver quality care at more affordable prices, which has prompted them to reassess their strategic and capital investment priorities. As a result, there have been numerous strategic mergers and alliances amongst the operators as they adapt to create more efficient, integrated delivery models. The rapid changes and consolidations triggered by healthcare reform represent challenges, but at the same time will likely introduce significant growth opportunities for HCP as a leading real estate owner and capital partner to healthcare companies.
NIC: In April, HCP expanded its relationship with Brookdale Senior Living to create a $1.2 billion entry fee CCRC joint venture. Once the transaction is completed, HCP will have the largest CCRC platform in the healthcare REIT sector. What value does that bring to your company and what challenges might that present as well?
Martin: We are very excited about the pending $1.2 billion CCRC joint venture with Brookdale, which is projected to be immediately accretive to our FAD (funds available for distribution) with our 49% ownership interest. We view entry-fee CCRCs as an extension of the seniors housing asset class with a premium yield and high barriers to competitive entry. Combining our attractive cost of capital with Brookdale’s operating expertise, creates a powerful franchise to generate meaningful growth opportunities, both internally as we work together to increase occupancy above its current 80% level, and externally as we pursue additional acquisitions in this fragmented asset class to further grow the platform.
In terms of challenges, there is no transition or integration risk related to this transaction as Brookdale will continue to manage these CCRCs after closing. Also, our respective teams are very familiar with each other, having successfully operated an existing $800 million RIDEA joint venture since late 2011. Cash flows from entry fee CCRCs tend to exhibit greater volatility when compared to those from traditional rental seniors housing communities, but we are entering at the right time of the cycle to receive the upside benefits of the entry fees as occupancy increases. Going back to the risk / reward discussion mentioned earlier, we are projecting to achieve significant, attractive premium yields in return for any incremental volatility.
NIC: HCP prides itself on and has won several awards for its sustainability efforts. Tell us how those efforts translate into your seniors housing and post-acute care properties?
Martin: Commitment to sustainability has become an integral part of our culture over the past few years. We are proud of our efforts and achievements, and will continue earnestly to advance these initiatives. In addition to providing “green,” efficient live and work space to our residents and tenants, our strong commitment to sustainability has also prompted us to be a leader with respect to corporate governance practices and other charitable and volunteering activities. In our seniors housing and care portfolio, we have earned numerous ENERGY STAR and LEED certifications. In addition, our community outreach and charitable giving projects, including those supporting Alzheimer’s and cancer research, have resonated well with the residents at our seniors housing communities and their families.
NIC: Does HCP have plans to expand internationally? Can you comment on the status of the reported prospective $900 million mezzanine financing by HCP for Formation Capital’s acquisition of HC-One, a care home group based in the UK?
Martin: To date our acquisitions abroad consist of two debt investments in the UK, with care home operators Four Seasons in 2012 and Barchester last year. We have gained in-depth knowledge and a significant network of relationships in the UK as well as other developed markets such as France and Germany. While we do not comment on market reports of specific transactions, we continue to be active in the marketplace. Our key investment strategy, domestic or international, is to invest in quality real estate with attractive risk-adjusted returns, the right structure, operating partner and alignment for continued long-term success.
Members of the NIC MAP® Data team attended the ALFA Conference & Exposition in Phoenix, May 19-22. There was a high level of energy among conference attendees focused on the rapidly changing nature of the seniors housing industry. New property construction, the impact of new technology, and the continuing economic were just a few of the topics covered throughout the sessions and discussed in networking events and hallways.
Numerous operators from various geographic regions stopped by the NIC MAP booth to learn more about how NIC MAP® data can be utilized to access market intelligence.
In case you missed the 1Q14 quarterly data release, click here to download an abridged version of the full NIC 1Q14 Data Release presentation.
Economic Influences, Investor Interest and Cap Rates
While NIC forecasts that the seniors housing recovery will continue for the next four quarters, there are certain influences that are worth keeping a close eye on as demand and investor interest in the sector continues to grow.
Macroeconomic influences that help determine the demand for seniors housing include home sales volumes and prices, household confidence, the stock market and household net worth. All of these indicators are moving in the right direction to support future demand for seniors housing.
As current and long-term fundamentals appear promising, interest in seniors housing as an investment opportunity continues to increase. In the 2013 Kingsley Associates/IREI Annual Sponsor Survey, seniors housing was ranked as the most attractive property type for new investment. Investors find seniors housing compelling due to improving market fundamentals, promising demographics, rising penetration rates, strong cash attributes and strong relative returns. As a result, institutional transaction volumes remain strong and in the first quarter, $13.3 billion of trades occurred on a four-quarter moving average according to NIC/RCA surveys (Note that this includes skilled nursing properties).
Cap Rates and Risk Premiums
Despite solid historical performance, a significant risk premium exists for seniors housing investments. In the first quarter of 2014, transaction cap rates for seniors housing had a mean value of 8.0% on a four-quarter moving average, according to estimates provided by Real Capital Analytics and NIC. The range was quite wide, however, with the best assets commanding cap rates of 6.1% or lower (top decile) and less preferred assets garnering cap rates of 9.5% or higher (bottom decile).
Since the 10-year Treasury averaged 2.55% in the four quarters ending in the first quarter of 2014, the spread between the four-quarter moving average RCA-NIC cap rates and the risk-free rate ranges from 355 basis points for the very best assets to 700 basis points for the less preferred seniors housing properties. This compares with a 255 basis point spread for multifamily assets, if the 4-quarter moving average cap rate from NCREIF (5.11%) is used. Compared with the 4-quarter moving average cap rate from RCA-NIC of 8.0%, the difference in spreads between apartments and seniors housing is 290 basis points and compared with the implied NCREIF seniors housing cap rate of 6.6%, the difference in spreads is 150 basis points.
Given the solid operating and investment performance of seniors housing properties in recent years, especially their resiliency demonstrated during the GFC, as well as the potential portfolio diversification attributes that the sector can provide to investors, one could argue that the spread between seniors housing and multifamily properties should be narrower or should compress with time.
As always, I welcome your thoughts, comments and feedback.
Beth Mace, firstname.lastname@example.org
Registration is now open for the 24th NIC National Conference in Chicago, October 1-3 with an exciting lineup of speakers including former Board Chairman of the Federal Reserve System Dr. Ben Bernanke, and Dr. Thomas Lee, noted healthcare futurist and chief medical officer at Press Ganey Associates.
Dr. Bernanke completed his second term as chairman of the Federal Reserve System earlier this year and will speak about the current economic recovery and emerging macroeconomic trends that could impact the seniors housing and care sector.
Dr. Lee, known for his work on patient care and outcomes, will share his insights on the changes happening in healthcare payment and delivery systems and what they may mean for the delivery of care to seniors.
For detailed information on sessions and speakers and to register click here.
The Future Leaders Council Experience: An Interview with Michael T. Jones, CEO of Healthtique Group, LLC
Having been a part of the inaugural class of the Future Leaders Council (FLC) at NIC five years ago, Michael T. Jones is a pioneer. Jones joined the FLC in 2009 to connect with NIC executives and others on similar career paths within the seniors housing and care industry in a more meaningful way. At the time he joined the first FLC class, Jones was COO and minority owner of Formation Capital, LLC, a private equity firm specializing in seniors housing and related ancillary business investments. While his term on the council ended a couple of years ago, Jones, now principal and CEO of Healthtique Group, LLC, spoke with current FLC members, Amy Coppens of Senior Resource Group (SRG) and Melissa Owens of Elmcroft Senior Living, to reflect on his experience as a former member and chair while also discussing his career path within the industry.
FLC: What type of insights and exposure did you gain by being a member of the FLC that you might not have gotten otherwise?
Michael Jones: The FLC provided exposure to other areas of the seniors housing business that I either had no or limited exposure to in my professional role in the industry at that time. Some examples include agency financing and high-end private pay operators. This type of exposure allowed me to advance my global understanding of the seniors housing industry.
FLC: What were you hoping or expecting to gain when you first joined the FLC and how did that compare to the actual benefits you received or what you achieved?
Jones: I was hoping to meet like-minded young professionals and have the opportunity to gain further insight into the seniors housing business. I was part of the inaugural FLC class so there was no precedent to study. I am pleased with the progress the FLC has made in its short tenure. I believe it is a good addition to the NIC organization and I am proud to have made a small contribution to its success.
FLC: When you joined the FLC you were the COO at Formation Capital. Now you are the CEO and principal of Healthtique, an owner/operator in senior living. How do you feel your experience with the FLC influenced your decision or direction within the industry?
Jones: My three-year tenure on the FLC, including being a member of the inaugural class and one year as chairman, helped solidify my leadership style. It gave me confidence and clarity as a leader, industry contacts and further developed my “professional toolbox” to expand my career horizon.
FLC: Has your view of senior living changed since moving to the operator side of the industry?
Jones: Yes. Building a quality operating platform is challenging and complicated, particularly skilled nursing. Until you have delved into operations in a meaningful way, it is impossible to fully appreciate the fine line between success and failure. I have great respect for all staff providing care and services in the seniors housing industry. Many factors such as capital, operations, market conditions, physical plant and location contribute to a quality seniors housing project; however, the ultimate success of a project requires a good operating partner, no exceptions.
FLC: What do you see as the biggest trend impacting senior living today?
Jones: Fortunately capital markets have become more accommodating in the last twelve months, so accessing capital is less restrictive than in years past. Therefore, I believe aging physical plants, especially in CON restricted states, continued state budget restrictions and the lack of affordable housing options for seniors are challenges into the foreseeable future.
FLC: As a former chairman of the FLC, how would you envision your continued involvement with the FLC and NIC?
Jones: As long as I am in the seniors housing and care business I will be connected to NIC. I currently serve on the FLC oversight committee, the regional conference planning committee and occasionally participate as a moderator/panelist at the national and regional conferences. NIC is an important component of my continued development as an industry leader and CEO.
The cold winter clearly impacted the housing market as the year began. With the housing market potentially having a correlation with seniors housing, it’s important to take note of the market. Existing home sales and residential investment plummeted in January and remained weak throughout the first quarter of 2014. However, the latest report from the National Association of Realtors (NAR) showed the pace of existing home sales rose in April, suggesting the market may finally be shrugging off effects from this past winter. During April, existing home sales accelerated to an annual pace of 4.65 million, which was an increase of 1.3% from March. April’s improvement was the first improvement in sales activity since December.
Although the pace of sales activity remains 6.8% below a year ago, the composition of sales has been improving. The share of distressed sales continues to trickle down, accounting for 15% of April’s sales versus 18% from a year ago. This implies the pace of conventional sales is down only 3.4% from last year, which is less alarming than the headline reading.
Another positive signal in the report was the increase in the number of homes listed for sale (i.e. inventory). Although inventory remains historically low, the number of homes on the market rose 6.8% during April (after adjusting for seasonality). Inventory (seasonally adjusted) has been slowly rising during the past year and was at its highest level since mid-2012. Historically, inventory is correlated (on a lagged-basis) to home prices, as homeowners future expectations are formed from sustained price movements – homeowners are more willing to list their home and trade-up for a new one if they believe price increases will continue in the future.
As prices are expected to continue rising, albeit slower this year than last, inventory should continue to follow suit, which should eventually translate into a faster velocity of conventional sales.
|3-5||REITWeek: NAREIT’s Investor Forum|
|25-27||NCREIF Summer Meetings 2014 Landsdowne, VA|
|30-Oct. 2||PREA 24th Annual Investor Real Estate Conference, Los Angeles|
|1-3||24th NIC National Conference, Chicago, IL|
|1||ASHA Fall Meeting, Chicago, IL|
|5-8||ACHA/NCAL Annual Convention and Exposition, Washington, DC|
|19-22||LeadingAge Annual Meeting, Nashville, TN|
|28-30||NCREIF Fall Conference 2014 St. Pete Beach, FL|
|5-7||NAREIT’s REITWorld Conference, Atlanta, GA|