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 of NIC MAP®, recently interviewed Omotayo Okusanya (“Tayo”), Managing Director in the Equity Research Department at Jefferies, and Senior Analyst responsible for coverage of Real Estate Investment Trusts (REITs).
NIC: Over the past few years, HCREITs have made significant acquisitions using the Taxable REIT Subsidiary/RIDEA structure. This structure allows REITs to participate in the underlying NOI/cash flow of assets through a third party manager to the REIT. While this structure provides flexibility and the potential for cash flow growth, it also comes with more risks. In particular, NOI streams and CAPEX spending become more important to monitor and predict. Thus far, how have the HCREITs, as a whole, been performing under this structure? Have there been any surprises to date and what risks warrant monitoring as we move forward, in your opinion?
Okusanya: The use of the RIDEA structure by HCREITs has been embraced by investors and companies, such as Ventas and Health Care REIT, that have increased exposure to RIDEA, and have seen their stocks experience multiple expansion. Given 1) expectations of an improving housing market, and 2) U.S population demographics, it is likely that demand for seniors housing grows over the next few years. This suggests seniors housing operators should be able to drive occupancy and rents. In such an environment, underlying NOI/cash flows can easily grow by 6 to 8% a year, which is much higher than the CPI based growth from the traditional triple-net lease business that HCREITs have traditionally based their business models on. It definitely is the right time in the business cycle to use RIDEA to participate in this expected earnings upside at the operating level. However, the challenge for the HCREITs will be when fundamentals in seniors housing begin to soften. Seniors housing operator stocks, such as Emeritus and Brookdale, typically take a beating under such scenarios. It is likely that the stocks of HCREITs with meaningful RIDEA operating platforms would underperform under such a scenario as well.
NIC: HCREITs have performed well thus far in 2012 and have seen superior returns compared to all REITs over the past 5 years. Can you describe the institutional investor’s mindset towards HCREITs right now?
Okusanya: While the performance of HCREITs has been exceptional over the past five years, you do have to note that the past five years has seen very little economic growth. HCREITs perform very well under such scenarios given the stability and defensiveness of their long-term triple net portfolios. The group has performed in line with the broader RMZ REIT index this year as 1) reimbursement rates for skilled nursing and hospitals for the upcoming fiscal year turned out better than expected and 2) Obamacare was ratified by the Supreme Court. Sabra Healthcare REIT, in fact, is the best performing REIT stock in 2012. Over the next 12 months, we believe investors will remain in heightened state regarding changes to Medicare as the government tackles the impending fiscal cliff. The Democratic win in the presidential election is a positive given it means Obamacare would not be at risk of getting repealed. The best scenario for HCREITs stocks would be a world where fiscal cliff issues are resolved with just a slight decline in US GDP growth, and without a meaningful cut to Medicare. Despite the risk of heightened volatility that may occur with these stocks next year, REIT dedicated investors, however, do need to stay invested in the group given how large the sector has become as part of the broader REIT market. Kudos have to been given to the management teams at all the public healthcare REITs and industry organizations, such as NIC, in regards to educating investors about the sector over the past few years.
NIC: HCREITs have moved from owning under 10% of the seniors housing and care inventory/units a few years ago to roughly 13% as of year-end 2012. This growth has been fueled by a comparably lower cost of capital, a more efficient means of accessing capital compared to other capital sources and more flexible ownership structures (RIDEA/JVs). Are these cyclical or structural advantages for HCREITs? Do you see this providing opportunity for further growth over the next 3-5 years for HCREITs?
Okusanya: Growth via acquisitions has always been a theme for the HCREITs, but the rate of acquisition growth has been nothing short of astounding. It feels like a new billion dollar plus deal is announced every quarter. The driver has definitely been lower cost of capital, a more efficient means of accessing capital compared to other capital sources and more flexible ownership structures (RIDEA/JVs). We believe these drivers are around to stay for the next few years, especially as the Fed seems focused on keeping interest rates low until at least the year 2015. Once interest rates and cap rates start to move up again, I would expect deal activity to slow somewhat. Until then, the larger HCREITs have a huge advantage in the current environment, and we expect to see them continue to gain share in the acquisition market over the next 2-3 years.
NIC MAP Portfolios subscribers will soon enjoy a major upgrade featuring interactive corporate- and property-level analyses. The enhanced functionality provides owners and operators with competitive intelligence tools for benchmarking their own performance alongside up to 25 competing properties. High-level corporate reports and in-depth property analyses can be used to inform important operational and strategic decisions – credible, unbiased research that subscribers can share with investors, lenders and other stakeholders.
There are several notable enhancements to the new MAP Portfolios Program:
- Interactive performance metrics that quickly highlight a portfolio’s potential risks and opportunities;
- Competitive insight down to the segment level, as well as property-based analyses that include market share evaluations and data at the unit level;
- Quarterly and annual growth perspectives for enhanced comparative analysis at the portfolio level;
- New bandwidth and index benchmarking features that instantly show where a subscriber’s properties are outperforming or underperforming the competition;
- Dynamic online competitive analyses on each property in a subscriber’s portfolio, offering segment-specific or aggregated, sector-level views that incorporate multiple segments
- Strategic data on recent transactions and ongoing construction within five to 10 miles of a subscriber’s property displayed on a map.
Thank you to all of our subscribers who provided valuable feedback and insights that contributed to the latest enhancements to the NIC MAP Portfolios Program.
Contact NIC MAP for more information.
During the third quarter of 2012, the seniors housing inventory in the top 31 metropolitan markets (i.e., MAP31) rose by 1,735 units, which is on par with the average pace of quarterly inventory growth since late 2009. During the next four quarters, inventory growth across MAP31 is forecast to average 1,800 units per quarter, continuing the trend of tempered inventory growth for the foreseeable future. This average quarterly growth equates to 1.4% growth as of the third quarter of 2013.
While inventory growth will likely remain tempered at the macro MAP31 level, based on scheduled completions, there is likely to be significant variation in inventory growth among the individual metropolitan markets. Through the third quarter of 2013, eight markets are scheduled to have inventory growth of at least 3.0%, while 15 markets are scheduled to have inventory growth of less than 1.0%. The metropolitan markets with the highest rates of scheduled growth are Denver, San Francisco, and Dallas – all of which have scheduled inventory growth of at least 4.0% through the third quarter of 2013.
NIC is introducing an Ambassador Program which is aimed at operators and operating companies who are new to NIC, specifically those attending their first or second NIC event. The objective of the program is to help the newcomers maximize their time effectively to access the various networking opportunities during the conference.
The Ambassador Program will launch at the upcoming 2013 NIC Regional Conference: A Skilled Nursing and Seniors Housing Investment Forum, March 5-7 in San Diego, CA. The Program was created as a result of the post conference feedback survey, in which new attendees indicated difficulties in connecting with the right people, and that the level of business and networking at NIC events can be overwhelming for first time attendees.
Ambassador Program Team
The NIC Ambassador team will consist of members from the Future Leaders Council and the 2013 NIC Regional Conference Planning Committee. Program kick-off will include:
- NIC Ambassador outreach to new operator attendees to discuss their objectives in attending the NIC Regional Conference;
- Ambassadors and newcomers introduction on March 5th at the Newcomers Reception;
- Ambassadors hosting tables at the luncheon session for newcomers to network with one another and NIC’s volunteer leadership.
This is just one of the many ways NIC is working to provide a better networking experience for all conference attendees. Check in again next month for more information on NIC’s new Online Community and how to use it to expand your networking before and after the conference.
The seniors housing occupancy rate continued its recovery in the third quarter of 2012, while year-over-year rent growth accelerated and overall construction activity slightly declined, according to NIC MAP data. Continued strong absorption drove occupancy for seniors housing up to 88.8% in the third quarter, an increase of 20 basis points from the second quarter. During the past 10 quarters, the seniors housing average occupancy rate has risen consistently and is now 180 basis points above its cyclical low of 87.0%.
The occupancy rate for both independent living properties and assisted living properties averaged 88.8% during the third quarter of 2012. Both independent living and assisted living showed improvement over the prior quarter, rising 10 and 20 basis points, respectively. The occupancy rate for nursing care properties averaged 88.0% in the third quarter, rising 10 basis points from the second quarter.
NIC MAP tracks market fundamentals on the 100 largest metro markets each quarter. For more information on your market, please visit our online store or contact.
Mather LifeWays recently launched a new website called InvestigAge. This website brings together the most current research findings and reports across a broad cross-section of categories of interest to our sector, senior living providers, professionals, researchers, investors, developers, and other key stakeholders in the industry. Many of you may know Mather LifeWays’ Aging in Action online website (https://aginginaction.com/ … currently over 12,000 subscribers). If so, you’ll have a sense of how InvestigAge is structured. Aging in Action is primarily consumer-focused in its content; InvestigAge incorporates much of the Aging in Action content but includes key topics related to finance, development, operations, etc. With less than two months of activity, the site has had over 2000 pageviews accessed from five countries!
InvestigAge is a free resource to the sector. The purpose of the site is to ensure that key research is available, world-wide, to all who are interested in growing and benefitting the aging services field. The editorial board of 12 includes NIC’s Charles Harry as well as industry professionals and academicians/researchers from universities around the country.
We encourage you to register by visiting www.investigage.com.