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I have limited experience with senior housing and haven't looked into the asset class for a while, but:
I think it's an asset class that's ripe for acquisitions. The caps rates tend to be substantially higher than market rate MF. Since senior housing assets are operationally intense...a savvy operator could easily increase yield by implementing operating efficiencies and maximizing occupancy.
Also...in some states...there's built-in market protection. That is...some states restrict the amount of new units (beds) that can be developed through a certificate of need (CON) process.
As a value add play...you could look to target existing assets with land for expansion...and then construct new independent living units.
I think development activity needs to correct because surging construction costs combined with unfeasible pro forma rents are destroying the spread. The value-add acquisition space is very active but it is hard to lift rents in many markets and replacing one third party manager with another with no skin in the game may not fix anything. Owners with in-house management companies if they are well run should have a big advantage.
I think core and core+ senior housing is a great place to be right now particularly if rents are near the area mean and the building was built and maintained well.
Anyone with seniors experience have a view on the optimal total units and acuity mix for a senior deal?
From the deals that I see...80 units tends to be the min. for a mix of assisted living and memory care units. Then you can get to 110-140 units when adding in independent living units. The largest deal I have seen was 210 units...which certainly is not the norm.
For 55+ active adult developments...you need to hit at least 130 units if including meal service...and 150 units without meal service. Those figures are generally the min. in order to achieve appropriate operating efficiency.
Pretty much agree with above. For assisted living/memory care it seems like the sweet spot is ~80-100 units with ~75% of units being assisted living and the rest being memory care. Standalone memory care facilities, which is tricky operationally and definitely more of a niche product, tend to be smaller (~50-70 units). Have less experience with independent living but agree that those facilities need to be bigger to maximize operating efficiencies.
Seniors housing has seen some of the largest cap rate compression compared to other asset classes. We regularly see cap rates for core and core plus deals on IL/AL/MC communities hit the low 6s or even high 5s. For an older building you'll be in the 7s. These are the same assets that were trading at 10+ caps about 10 years ago.
There's been a ton of new capital inflows as investors dig for more yield and it's lead to a market imbalance. In the long term I think seniors housing is a great play but right now there are serious concerns regarding market demand and sustainably of pro forma rental rates and rate growth.
On top of that a shortage in the labor market for qualified nursing staff has hit NOI margins across the board and that trend is expected to continue as the amount of seniors grows faster than the growth of the labor market. Automation is going to play a large role in the future as staffing becomes increasingly difficult and that transition is going to bankrupt operators that can't keep up or don't have adequate amount of capital reserves.
There's going to be a lot of pitfalls in seniors housing in the future but if you can navigate them then it will pay off handsomely.
Down to pay anyone who can run an NICS report for me.. trying to get a list of the seniors inventory in my market... pm me
Are you sure NIC has coverage in that market? They are somewhat limited in the markets they cover. In terms of just searching inventory...you can pull a list in most instances from the given state regulator for free.
I've actually tried calling the governing body... apparently they don't maintain a record of new senior housing communities and have not for a while. I asked about permitting info and oddly they don't distinguish it from residential. NIC does cover this market but in order to get a list you need have to sign up for a 12 month subscription... their a la carte reports only shows metro totals
You can get all securitized senior housing properties from intex
what's ur mkt
Looking for the NIC markets that make up CT excluding Fairfield County (New Haven, CT - Hartford, CT - Norwich, CT - Worcester, MA)
Don't know the asset class well enough to get into the details the way that some of the folks above did.
That said, my macro view on this is that people are chasing yield without understanding the product class. The same way every operator decided sometime around 2013 that they wanted to be in the student housing game and that it was "basically multifamily." A lot of them have learned/are learning the painful way that it is way more management intensive than multifamily could ever be and that the right to house 850 students at State U for a 4.75 cap is a stupid fucking idea.
My guess is that senior living will trend that way, but worse. There are way more things at stake and many larger societal factors (such as access to healthcare/Medicare & Medicaid changes/if the national program would pay and for how much in a single-payer scenario) that will shape this asset class over the coming years. I can't remember an asset class with so much potential political risk being so under-weighted/basically not thought of.
I'd disagree that they aren't accounted for - there's a reason that skilled nursing assets trade so differently than seniors housing (independent living, assisted living, etc.) and it's mostly due to the higher degree of operational risk at skilled nursing assets as well as the exposure to public payor sources and everything that comes with that (basically what you describe above). Some assisted living facilities will participate in "Medicaid Waiver" programs where the resident pays a portion of rent and state pays a portion, but the majority of seniors housing assets are 100% private pay. Seniors housing cap rates are typically in the 6-8 range that someone mentioned above, but skilled nursing facilities generally trade in the low to mid teens (call it 11%-14%). Your points are valid, especially that there are a lot of new entrants that don't understand the space, I'd just argue that the risks you mentioned are accounted for through cap rates that can be twice as a high as a traditional seniors housing asset. People not as familiar with the space sometimes lump seniors housing and skilled nursing together (which I understand), but it's really two distinctly different asset classes within the same vertical that price very differently due at least in part to those political risk factors.
Clearly you understand this space much better than I do.
Anecdotally, however, I've seen in some instances that the spread between skilled nursing assets and traditional senior housing assets is greatly diminished. At some point, I'd say that it can no longer be truly pricing the increased risk in. Are you continuing to see these things trade in the 12%+ cap range? If so, at what kind of median check size are we talking on these deals?
Thanks for the primer. Very informative for noobs.
I think what can cause a little confusion is that real estate buyers (like a REIT or PE firm) will report their lease yield (rent/price) as opposed to the true effective cap rate (NOI/price), and in seniors housing/skilled nursing those figures can be materially different. Not 100% sure how it works in other asset classes, but in this space the real estate buyer will derive its lease payment off of NOI using two levers, lease yield (described above) and lease coverage (NOI/Lease Payment), which is just the amount of cash flow in excess of lease payment. Seniors housing lease yields are typically a little lower than the cap rates I described above (call it 100bps lower so 5%-7%) with lease coverage ratios of 1.15x-1.20x, whereas skilled nursing yields are usually 8.50%-9.50% with coverage ratios of 1.40x-1.50x. The way the math works is if you multiply your lease yield by the coverage, you get your typical cap rate that translates to NOI/Price, so if you did the math on the ranges I laid out above you'd get in the same 6-8 range for seniors and 11-14 for skilled that i noted in previous comment. So my guess is you're seeing real estate buyers report their skilled lease yields in the 8s and 9s, but there is considerable NOI cushion to account for the operational risk. On the surface you're right that those yields are a little tighter than the cap rate ranges I quoted, but I'd revert back to the point that the operational/political risk is still being accounted for via a larger cash flow cushion through the underwritten coverage ratio. I've been in the space for ~4 years and cap rates for skilled nursing facilities have been extremely consistent, while seniors housing cap rates have ticked down a little bit because of the influx of institutional capital into that sub-sector (a lot of institutional players still will not touch skilled). Deal size obviously has a pretty wide range, but on the whole deals tend to be on the smaller side. Would guess that median transaction is somewhere between 15 and 30 mill, probably 70%-80% debt and 20%-30% equity,
I would say the risk is built in...just consider the difference in cap rates between market rate MF and senior. We underwrite around a 2 point difference between the two product types.
You would be foolish investor to undertake senior housing acquisitions without understanding the operational side. I'm on the development side and I can say that the underwriting process for senior deals is substantially more involved than market rate MF. This includes obtaining wage comps for every different employee type within that local market...and running various sensitivity models based on fluctuations in operational expenses.
I just took a look...and on a recent underwriting package...a local market had sale transactions that ranged between $18MM and $143MM. I think this highlights another aspect of senior housing...the developments are all over the place in terms of size and quality. I believe that we are now just getting into a time when the product is becoming more standardized and institutionally focused. Therefore...cap rates are likely to stabilize and become more accurate relative to risk within the next couple years.
I totally agree with you on the seniors side. Senior housing operationally is wayyy more intense and difficult than student. The wage pressures in the senior space are enormous, I don't know how they manage to fill caretaker roles at $11-13 per hour considering the work involved. Experienced Executive Directors are in short supply, nurses are in short supply or pay is increasing, etc... Third party operators are overburdened and if they have no skin in the game have no incentive to care.
Inflating EGI and OpEx on acquisitions is going to completely kill pro formas going forwards, try 2% and 4% (at least) if you want to be real and watch what this does to IRR.
It's a big issue that many operators across the nation are facing. Almost every executive director I talk to says their biggest challenge is staffing. For the same pay, you can either go work in retail, or you can work in a SNF or ALF changing diapers. Clearly, retail work is much more desirable and operators are having to increase entry-level pay to recruit and retain staff. I've also seen an increase in agency staffing being used to bridge the gap, but this isn't as desirable from a quality perspective.
I've run into several small regional operators that are starting up their own CNA schools and covering the cost of training for those graduates that agree to work for them for a specified time-frame.
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