Pricing for Seniors Housing and long term care assets remains nearly as strong as ever. There is little doubt that the senior living and skilled nursing sectors have been hit hard by the pandemic. Nevertheless, the long term trends and industry out- look remain solid as senior demographics are fundamentally strong. According to data from the National Council of Real Estate Investment Fiduciaries, senior housing returns have consistently outperformed other types of real estate over the past ten years. Developers like the solid yields and perceived lower risk (compared to other RE classes). Newer, well designed properties with stabilized occupancy and a stable operating history continue to increase in value. That’s not to say that we don’t have issues. We are dealing with significant labor issues including scarcity as well as rising costs. Wages are growing much faster than reimbursement and rental rates. And the universe of potential employees has gotten smaller for a variety of reasons. Occupancy levels plummeted across the senior care spectrum due in large part to the pandemic. Affordability continues to challenge us as well. And virtually all levels of the senior care spectrum are dealing with older, higher acuity residents.
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The good news is that compared to other real estate classes, seniors housing and care is seen as more need based. Baby boomers continue to age and people are living longer. While we will always deal with short term question marks, there remains a real need for assisted living communities and skilled nursing facilities in the post-pandemic world ahead. With hikes in lumber and other construction costs, as well as longer project completion rates, buying looks more attractive to potential purchasers. It is our rm belief that the rebounding merger and acquisition activity we have begun to see will continue to grow through 2022 and beyond and for many decades to come. 

Warren Buffett once offered two non-negotiable business rules. Rule #1 is to make money. Rule #2 is to remember Rule #1. As someone once said: “there is no mission without a margin.” 

There is virtually no one who has avoided being impacted by the seemingly never ending Covid Pandemic crisis. And if that weren’t enough in 2020, most of us also are feeling the effects of election fatigue! The economic fallout felt throughout the country has been significant. However, this is not the first crisis our industry has dealt with in this century. Let’s not forget the assisted living building boom of the early 2000’s. Or the Great Recession. Each and every time, the seniors housing and care M&A market has recovered. As a result, investor interest in the seniors housing and care sector continues to show its strength.

A number of factors are drawing interest from investors, not the least of which are the encouraging demographics. In fact, the 75 and over population will grow by close to an additional five million potential residents in the next five years alone. The sector also has consistently produced both strong income and strong appreciation returns for many years. And while this investor interest has grown, it has also lead to greater transaction velocity and liquidity relatively consistently. All while the sector has shown itself to be recession resistant as well. Rent growth has been stronger and less volatile than it has for other property types. In short, the Seniors Housing & Care market boasts solid market fundamentals. The current slowdown will ease and we expect continued strong asset acquisition activity in the long term.

ASK THE INVESTOR

Why is filling my beds, especially the last few, considered so important when I am considering listing my property for sale?

Above 75-80% occupancy, most of the added revenue isn’t required to cover added, incremental expenses related to the new residents. Instead MOST of the additional revenue drops right down to the bottom line as additional profit margin! Do the math. Take your average resident fee at an incremental profit margin of 70%. This is your new cash flow per additional resident per month. Multiply by twelve (months) and see how much your cash flow increases annually for each additional occupied bed. This could very well increase the value of your property/business significantly!

It is a good time to be a Seller of Seniors Housing. Capitalization Rates are excellent and generally steady. Capital is abundant both within the Senior Living eld as well as being successful in attracting outside investment capital (non-Seniors Housing investors) as well. Occupancies will always have some challenges but have been helped by the improving demo- graphics. Lenders have noticed that the Seniors Housing sector has been outperforming other commercial real estate asset classes and thus their willingness to aggressively seek opportunities has been obvious. In short, the Senior Living sector is solid and very sound going forward, even if some buyers may grumble at “paying up.”

The most obvious headwinds facing operators today are the following:

• Surging Labor Expenses
• Tight Labor Market (with historic low unemployment rates and fierce competition)
• Rising Building & Construction Costs (increasing costs of both materials AND labor)

All three trends above have impacted the Assisted Living market here. The labor issues are, together with inadequate Medicaid reimbursement rates, making it extremely difficult for skilled nursing homes to survive. This is especially apparent in smaller, rural facilities. In fact in Wisconsin alone, 17 nursing homes have closed their doors in 2019 alone. We expect to see more nursing home closings in 2020 as well.

So where are the best opportunities to grow by acquisition in 2020? You better be ready to pay up if you intend to acquire larger, newer and best in class stabilized facilities. For those looking for better returns albeit with slightly more risk, we speculate that the best return opportunities may shift in the coming months and years toward failed development projects or by repositioning older properties through updating and by other capital improvements. However the rising costs of construction and potentially borrowing costs may prove to be mitigating factors going forward. 

ASK THE INVESTOR
Are filling those last several units in my building all that important?
One could argue that those last units are incredibly important. For every additional occupied unit (say above 75-80% occupancy) one could impute that approximately 30% of the additional revenue would go for new, incre- mental expenses (because at relatively high existing occupancies, most operating costs already are incurred and paid). Thus approximately 70% of the additional revenue results in a VERY HIGH incremental pro t margin.... new cash that drops right to the bottom line! For a single facility operator with an average fee of $4000 per month, the 70% incremental pro t margin results in new cash ow of $2800 per month per additional unit lled. This ow yields an annual cash increase of $33,600 for EACH additional occupied unit. This could increase the value of your property/business by a SIGNIFICANT amount. Fill those last few beds! 

​ISSUES & THOUGHTS 
A recent Minneapolis Star Tribune article makes the case that tapping older workers is one of the keys to solving the shrinking workforce problem.

Governmental use restrictions such as zoning and private restrictions such as deed restrictions play a significant role in impacting a property’s market value. Knowing those property use restrictions is crucial to avoiding being over assessed on your property tax bill.

The interest rate drop has not only lowered the cost of capital for borrowers, but it has also helped offset higher operating costs at a critically important time. In late 2019, the 10 year Treasury yield stood at 1.75%, down about 125 basis points from the start of 2019.

The NY Times reports that more than 440 rural nursing homes have closed or merged in the past decade. Principal causes are inadequate Medicaid reimbursements and labor shortages.

More than 50% of federal spending will soon be dedicated to Seniors according to the latest Congressional Budget Office (CBO) estimates. The two main drivers of that spending are aging baby boomers and rising healthcare costs.

However, investor interest in Senior Living properties remains strong and will continue to outperform for the foreseeable future. An aging population of Baby Boomers will continue to transition into senior housing over the next several years. Fundamentals are strong. Well managed properties have done very well producing solid returns along with equally solid real estate appreciation. Cap Rates have been remarkably steady here in Wisconsin with SNF’s trending usually in the 12-13% range. Assisted Living Facilities can range into the 7-8% range or lower for larger, best-in-class portfolios while older assets that are struggling to compete with newer product will often sell in the 9-10% range or even higher depending on the specific challenges involved. While interest rates have risen gradually in 2018 and are expected to continue to do so in 2019, we may see some slight spikes in Cap Rates going forward. Nothing dramatic is expected however.
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It is hard to argue that all owners and operators shouldn’t have thought about having an exit strategy. It is also hard to argue that now isn’t a great time to start planning one if you haven’t already. Cap Rates are excellent, capital is abundant and while interest rates are creeping up – they are still low by historical standards. The run-up in prices since the Great Recession here in Wisconsin and throughout the country has been exhilarating. As such, we do not recommend waiting if you are considering a sale. Don’t wait until the market weakens or interest rates spike. “Market-Timers” rarely succeed as they often find themselves procrastinating with the fear that they may miss the top of the market, leaving small change on the table. ​

2018 should be another banner year for all property types including skilled nursing homes, despite some gloom and doom predictions. We have heard that because SNF’s are the most labor and operationally intensive; that it relies too much on governmental funding; that it is saddled with the highest level of governmental oversight and regulations; and that it is the type with the oldest average age of its real estate. Despite everything, operators have seen increased cash flows of late as they learn to adapt to new Medicare payment models. Buyer demand remains strong for skilled nursing facilities.

While labor costs continue to rise, there is even more pressure for senior living operators to seek out additional revenue streams, with ancillary services playing an ever expanding role. These additional amenities and clinical services include everything from massage therapy and salons to dermatology and X-rays, administered on site in an effort to serve residents as completely as possible while keeping revenues in-house.   
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Lenders are readily available and are competing for senior living business. There is no shortage of lenders ready to talk.  They have some concerns such as the potential of rising interest rates, pointing out that Cap Rates will follow. Lenders love certainty and have become more and more comfortable with Seniors Housing’s ability to generate solid profitability when managed well.

Last we predicted that 2015 would be another very solid year for all areas of Senior Living.  Expecting another solid year, we were not disappointed.  All facets of Seniors Housing continue to show positive indicators.  In fact, over the past decade we have seen investing in these property types go from the fringes to much more mainstream.  It has not gone unnoticed that the senior living business has shown considerable resilience in good times and in bad.  And fundamentals continue to show strength in all facets.  Best in class properties in primary markets have done exceedingly well producing solid returns as well as good appreciation.  Despite a recent uptick in new development, especially in Memory Care units and properties, overall new development has been generally limited since the Great Recession.  Continued strong demand is being driven by an aging population of Boomers, a much healthier residential housing market, and the attractive spread between borrowing rates and Capitalization rates…all of which leads us to being very confident of continued strong demand going into 2016 and beyond.

EBITDAR-What is it?
This is earnings before interest, taxes, depreciation, amortization and rent associated with your business.  It is often used for the valuation of properties through a market Cap rate (EBITDAR divided by price).

OTHER TRENDS    

• We expect to continue to see industry consolidations going forward for a variety of reasons including economies of scale.
• Continued uptick in development particularly in underserved markets AND in markets with older inventories.
• Independent living apartments will continue to become “assisted living light” much as ALF’s have experienced acuity creep over the past two decades.
• Nursing Home Cap rates continue to be very steady locally and nationally but have trended slightly lower (several hundred basis points) recently than the historical 13%.
• The reimbursement landscape has not shown significant uncertainty of late helping to foster the slightly lower Cap rates on Nursing Facilities.
• Generally all Seniors Housing Cap rates remain firm at historical lows and we expect that to persist at least until interest rates begin to climb in earnest.

YOUR ASSESSMENT – Is it fair?
Remember that assessors are not permitted to assign value to personal property-that is assessed separately.  They also must refrain from assessing intangible assets such as your business operations.  Profits may be subject to income taxes but not property tax.  They must tax only the fee simple interest of the real property, i.e. the “sticks and the bricks.”  You have the right to appeal your assessment.  We can direct you to an appropriate professional if you feel that your assessment may be unfair.  Or you can go to: www.revenue.wi.gov/pubs/slf/pb055.pdf online if you prefer.

Solicited by a Broker from Illinois or another state?
New Wisconsin statutes enacted early in 2015 prohibit Out of State Real Estate Licensees from practicing in Wisconsin in most circumstances including LISTING your property, conducting TOURS, and even INSPECTING your Wisconsin property.  Always ask to see their Wisconsin credentials before hiring someone based out of state as this is the LAW.

Senior Housing 2013 Forecast Report

By:  Robert LeClaire – Principal, LeClaire Commercial, LLC

Provided the federal government actions, with regards to the impending fiscal cliff does not cause the economy to fall back into a double-dip recession, the outlook for the senior housing market will remain strong going into 2013.  Newer properties in good locations will continue to be in demand.  Senior Housing continues to be a more stable asset class than other traditional forms of commercial real estate, especially in terms of operational fundamentals.  In fact Senior Housing is widely recognized as the only real estate class that did not experience declining rents during the recent recession.  Its occupancy has performed in step with other commercial real estate, dipping slightly in the 2007-2010 term.  It has slowly improved since then and is showing material recovery from its cyclical high in 2006. 

The Affordable Care Act will definitely impact Senior Housing going forward.  As many as 15,000,000 more American citizens will qualify for Medicaid in 2014, accelerating the fiscal difficulties of an already over-tapped system.  This does not bode well for the solvency of the Medicaid program.    Without significant changes it will go bankrupt.

Despite reimbursement challenges, Skilled Nursing Facilities continue to hold their own.  While not many are changing hands due in part to all the uncertainty, they typically trade in Cap Rates near 13%.  This has been remarkably stable over the years.  In states other than Wisconsin, we have seen some Nursing Homes trade for significantly higher than here.  However, these are newly built properties in major markets, and in very good Medicare and managed care markets.  Most operators here continue to be challenged by reduced Medicaid reimbursements. 

We expect that consolidation will continue to occur as it becomes increasingly difficult for the Moms & Pops to compete without the economies of scale that larger operators possess.  Occupancies should be fairly steady here.    


Assisted Living occupancies continue to inch up as do rents here in Wisconsin.  Costs are rising for most kinds of senior care, according to MetLife’s Mature Market Institute study.  The average rent at Assisted Living Facilities nationally shot up 17% to $3,486 per month over the past five years according to the study.  Their report indicates that the average cost of an Assisted Living Facility in Wisconsin is slightly lower at $3,329 per month.  Comparing contiguous states, only Michigan and Illinois average rates are higher.  Both Minnesota and Iowa have average costs below $3,000 per month.  With regards to investment trends, average Cap Rates for assisted living are often in the 9-10% range.  Premiums are being paid for facilities catering to dementia care with elevated revenue streams, newer properties, and those portfolios with economies of scale.  Older properties often trade in the double digit range.

All in all, we are in an industry that is recession resistant but not recession-proof.  Macro trends helping us include the over 85 age bracket, which is the fastest growing of all age categories.  This will continue to spur modest growth trends in both assisted living and skilled nursing facilities which in turn will continue to attract outside capital.  We expect seller-financed transactions to continue to be very popular in 2013 and beyond due to the fact that sellers can typically ask for more in these transactions because they are assuming more risk.  We are bullish for next year’s prospects as relates to all types of Senior Housing.