Seniors Housing and Self-Directed Investors

Seniors Housing and Self-Directed Investors
Strong Market Potential with Years of Growth to Come

With the New Year soon to be upon us, there are two words that are dominating trends in the seniors housing market: integration and innovation.

Today's baby-boomers are different than those of the past: They have a certain level of expectation for quality in all aspects of their care and they know what they want. In recent years, seniors housing has been moving away from a "one-size-fits-all" approach to focus more on the individual. This has led to a demand for increasingly customized care and housing.

In 2020, the trend will continue and go even further as developers and operators deliver more "aging-in-place" communities in an effort to break down the typical trends associated with senior support and achieve a more integrated and personalized balance when it comes to accessibility, care, location and unit design.

As 2019 comes to a close, investor confidence in the senior-housing market continues to drive interest in the sector. Capital is flooding the market. Deals like the Apollo Global Management of $428 million for HCP's Brookdale Senior Living portfolio, Greystone's $300 million collateralized loan obligation (CLO), and We Strategic Development Corporation's $196M portfolio of Class A communities in San Diego and Los Angeles counties symbolize that confidence.

Market Sentiment: Exciting Times for Senior Living

This is an exciting time for senior living, especially for companies that can weather the challenges and seize opportunities while the competition struggles. One thing is certain: Leaders across the sector will be busy reading the tea leaves this year as they try to gain insight into where the industry is heading. Major shifts will take hold in terms of payment, technology, consumer expectations and in other areas.

Since 2016, there has been a clear trend in the mix of investors in the seniors housing and care transaction market. During this period, private equity buyers including dedicated senior housing funds, opportunity funds, and commingled funds with core plus and value-add investment objectives, have become increasingly active in the marketplace. That represented more than half (52 percent) of Q1 2019 investment volume, up from 42 percent in 2018. REIT investors were the second most active with 29 percent of overall volume.

Independent living and assisted living tied for the most preferred segments, and interest in the active-adult segment continued to rise. We believe the active adult sector could eventually disrupt traditional senior housing investment models.

Investors did have some concerns about investments in this sector, however. Investors' top concerns were property level operating costs, construction costs and supply and demand of new assets. With new supply beginning to taper, operators will leverage rent growth to help offset rising operating costs and maintain a healthy bottom line.

Numbers to Know About Seniors Housing

There are approximately 28,900 professionally managed seniors housing and nursing care communities with 25 or more beds representing 3.04 million residents in the United States. This also represents a $420 billion market cap based on values reported in NIC MAP's 5th Edition Investment Guide.

Total return for senior housing for Q2 2019 was 2.41 percent, which includes a 1.07 percent income return and a 1.34 percent capital appreciation return. Over the past four quarters, seniors housing returned 8.36 percent (4.46 percent income and 3.91 percent appreciation). The five year total return of 12.68 percent is 340 basis points higher than the NPI return (all asset classes) of 9.27 percent and 391 basis points higher than the multifamily total return of 8.76 percent.

Average monthly rent in senior housing communities for 2019 was $4,165 in the primary markets and $3,776 in the secondary markets according to CBRE Seniors Housing Market Insight Report Q2 2019. Those numbers exclude additional services such as transportation, skilled nursing, medication management, therapies and other independent costs. The pace of inventory growth rose in Q2 2019 compared to previous quarters. Despite a slight decrease in stabilized occupancies across the primary and secondary market areas, absorption levels indicate that new inventory will continue to be absorbed at a rapid pace.

With an annualized 2019 year-over-year growth rate of 2.4 percent, inventory growth has fallen to near 30-year lows, far below the average annual growth rate of 4.1 percent. The senior housing pipeline (construction versus inventory) averaged 6.6 percent during the first two quarters of 2019. There were approximately 6,159 units/beds of new construction starts in the second quarter of 2019.

What Does All This Mean for Self-Directed Investors?

Acquisitions in this sector are likely to provide income-yield advantage and high potential appreciation to investors. According to the National Investment Center (NIC) for Senior Housing & Care, market fundamentals for seniors housing are benefiting from the expanding national economy, rising household net worth, and the ongoing housing market recovery.

Occupancy levels are above recession lows and rent growth is positive. In the first quarter of 2015, occupancy levels for seniors housing were above 90 percent, up sharply from the low point of 86.9% reached in early 2010. In 2016, occupancy levels were also 90 percent, with an annual rent growth of 3 percent. 2019 reports project 86.4 percent occupancy due to new supply on the way.

What Should You Consider When Investing in Seniors Housing?

As with all investment opportunities, self-directed IRA investors need to consider opportunities carefully. Weigh the pros and cons before making any investment decision. It is up to you and your advisor – not your self-directed IRA custodian – to evaluate an investment's merits and suitability.

Seniors housing real estate investing is subject to the same risks as investing in any other type of real estate, so factors such as location can have an impact on the performance of the investment. Investors should also consider:

     -- Zoning laws
     -- Cost of property development and renovations
     -- Care and operations costs
     -- General accessibility to the facility

According to Bloomberg, peak demand for seniors housing across the United States may still be 15 to 20 years away, but there are numerous ways that self-directed investors can invest now in seniors housing using a self-directed retirement account. For example, a self-directed IRA can purchase an investment property and lease it to an assisted living facility operator. The IRA can own and operate the assisted living facility and lease the real estate. IRA investors can form an LLC to invest in real estate, or they can use their self-directed IRA dollars to invest in public or private REITs that are focused on senior housing. Of course, you should work directly with your financial advisor and real estate attorney to make sure these strategies work within the constraints of your particular account.

Additionally, investors may consider seniors housing from a broader business perspective. Seniors housing facilities are generally located in areas that are in relatively close proximity to medical office facilities and hospitals. If you employ demographic trends and forecasts as a method of identifying property for investment purchases, then you may wish to acquire properties that fit such geographic requirements.

Our Experience with Seniors Housing

During the last four years, We Strategic Development Corp. a subsidiary of Strategic Legacy investment Group, Inc. and its investors have parked about $35 million into developing innovative and sustainable business model for seniors housing communities across Southern California.

With more projects undergoing review, we feel the market for this asset class is strong and there will be strong growth potential for years to come. With a steady value appreciation leveraging California's land and real estate values along with cash flow from the care business, this market niche has become a major holding in our portfolio.

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by Hooman Nosratifar

Hooman Nosratifar is a senior investor relations executive with Strategic Legacy Investor Group, LLC. Learn more by emailing Karla Silva at [email protected]

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