Senior Living News Wire

The seniors housing sector continues to see recovery, with positive rent growth trends and a slightly higher occupancy in fourth quarter of 2011, although construction activity continued to decline, according to NIC MAP, a data analysis service of the National Investment Center for the Seniors Housing & Care Industry (NIC).

The average occupancy rate for seniors housing properties in the last quarter rose to 88.2%, up 0.1% from the previous quarter, and a 0.7 percentage point increase from a year ago, the data analysis service reports.

For independent living properties, occupancy averaged 88%, 60 basis points beneath the average of 88.6% for assisted living properties. However, the independent living segment was the only one to show improvement from the prior quarter, posting a 0.2 percentage point increase from the third quarter.

Average occupancy for both independent and assisted living are both 1.2% above their respective cyclical lows, says NIC.

“With occupancy continuing to rise, it is clear the recovery is underway, however, independent living has been driving much of the occupancy gains in recent quarters,” Michael Hargrave, vice president of NIC MAP, said in a statement.

Source: NIC MAP

Year-over-year rent growth for seniors housing was boosted 0.1 percentage points to 1.7%, compared to 0.8% in the fourth quarter of 2010.

“While rent growth continues to slowly improve, it is important to note that current rent growth remains below the current level of inflation,” Chuck Harry, NIC’s director of research and analysis, said in a statement.

Annual absorption was at 2.0% in the fourth quarter, compared to 1.9% in the third quarter and 1.7% during the same period of the previous year. This marks the fifth consecutive quarter where annual absorption outpaces the annual inventory growth, which serves to pressure occupancy, Harry noted.

Seniors housing annual inventory growth rate was 1.2%, better than the previous quarter’s 1.0% but down from 1.5% in the 2010′s fourth quarter, NIC reports. Construction as a share of existing inventory for seniors housing was also down, at 1.5% compared to 1.6% in the third quarter.

Nursing care occupancy rate declined slightly to 88.2%, and NIC says that this segment’s occupancy has been “marginally declining” for several years now. Annual inventory posted negative growth of -0.4% in the quarter, “continuing the established trend of slightly declining inventory growth.”

However, private pay rents for the sector grew 3.4% year-over-year in the quarter, NIC says, keeping pace with third quarter results.

Click here to access the regional quarterly NIC MAP data.

Written by Alyssa Gerace

New construction starts remain significantly below peak 2007 levels, according to data from the National Investment Center for the Seniors Housing & Care Industry, and with financing largely unavailable for ground-up construction, is renovation or rehabilitation of senior care facilities a less-risky alternative for lenders?

With nursing homes across the nation an average of nearly four decades old, and providers seeking to meet shifting preferences for less institutional, more residential facilities, there’s an increasing need for facelifts and improvements.

As the population continues to age and demands for senior care evolve while financing remains elusive, some operators are forced to keep up by renovating old buildings.

“The question becomes, how much longer can you milk those assets, and how much longer will that particular kind of environment be acceptable to the consumer other than as a last resort?” says Phil Downey, principal of Senior Housing Analytics.

Nursing homes in the U.S. were built an average of 38 years ago, according to NIC data, and Downey says that while some facilities will end up falling out of service, there are still a “lot of quality assets in that age class that will probably sustain value and support renovation and rehab.”

That’s good, because it’s usually easier to get financing for renovating than for ground-up construction, according to Nick Gesue, Lancaster Pollard.

“From a credit perspective, it’s very difficult many times when there’s nothing but a field of grass, to sort of visualize and determine with good certainty whether building a senior housing project there is going to be well-received, especially in an environment when there weren’t continuous positive trends to get people to see that we were on an economic upswing,” Gesue says.

It’s riskier for lenders to do new development, he says. “When you have rehabs, it’s a lot easier because you have a facility first of all, you have residents in it, you can see clearly how it operates now.”

Rehabbing nursing facilities is a key way to attract target populations, says Jim Sherman, senior managing director of senior housing at Red Mortgage Capital, LLC.

“Rehabbing and renovating is fairly common [for skilled nursing facilities],” he says. “Nursing home providers are trying to build up the quality of their facilities to get more Medicare patients.”

Many operators are looking to improve their facilities and to make them more residential in nature, Sherman says, adding that in some cases they’ll expand to add more private rooms, or convert three-ward rooms into private quarters.

Financing for this is easier to obtain, he says, adding that operators often go back to whoever originally financed the building to refinance or get additional loans for renovations or expansions.

“Most of the deals where we (or our clients) have to go to the bank to get refinancing, or to get some type of financing for renovations—that is a two to three month project, compared to deals we’re trying to put together for acquisition,” said Stephanie Harris, Esq., CEO of Turnaround Solutions, LLC. “[For the] ones that couldn’t pay cash—if it fell through, or they want to refinance the existing building, including in that some type of line of credit or additional funds for renovations—we’ve gotten every single one of those deals done.”

Getting a Federal Housing Administration-insured loan for substantial rehabilitation isn’t much easier than new construction, however, according to HUD.

“In many cases, substantial rehabs, because of the complications of existing, older construction can be more risky,” HUD told SHN. “If it is a full rehab, the market risk is similar to new construction.”

In that sense, conventional funding is thin for both new construction and substantial rehab, and both conventional lenders and HUD are cautious with either type of project.

For fiscal year 2011, the agency issued 31 commitments to 58 applications for Section 232 New Construction/Substantial Rehabilitation loans. Compared to 2010, the number of applications went down (from 79), but the number of commitments increased significantly from just 18.

Assisted living facilities, on the other hand, are generally much “younger” than nursing homes with a median age of 14, according to NIC data. They’re not as much in a position as nursing homes to need renovations or substantial rehab, and although the sector is still facing the “headwind of low home prices” according to HUD, it may have an easier time getting financing.

Despite the risk, some regional banks are putting their toe in the water and doing some construction, according to Sherman, and although his company isn’t financing construction right now, it’s working with regional banks whenever it gets opportunities to refer deals.

“There’s a sense that there’s going to be a fair amount of construction of expansion that’s going to take place in the seniors housing sector,” Sherman says. “But it’s gonna be another year or so before you’re gonna see much. The lenders want to put money to work, and there aren’t a lot of good quality places to place capital. This is a sector that has very good characteristics, and I think more and more you’re gonna see the lenders loosen up.”

Written by Alyssa Gerace

The seniors housing and care industry was in recovery mode in 2011 as the construction pipeline leveled off and occupancy rates rose, and while this creates development opportunity going forward, industry analysts don’t expect to see substantial amounts of new construction in 2012.

The sector saw slight improvement in some fundamentals such as occupancy, revenue, and rent growth, says Nick Gesue, senior vice president at Lancaster Pollard, with the exception of skilled nursing, which has been hit by Medicare cuts.

“What we’re focused on in 2012 is the new development world,” says Gesue. “We’re now in a period where there have been significantly depressed new starts on projects, for three years now. We’re hitting a point where the lack of supply, coupled with the continued aging and frailty of the population, is going to create pockets where there’s going to be huge opportunity for new development.”

However, he adds that that new development isn’t going to be “wild” thanks to the continued difficulty banks have had in lending to this new construction space.

New projects are subject to underwriting requirements and the availability of capital, agrees Michael Hargrave, vice president of the National Investment Center for the Seniors Housing & Care Industry’s market area profiles data and analysis service (NIC MAP).

“In order to drive the pipeline up further, it’s going to require a more significant loosening of underwriting criteria and/or some larger sources of capital such as Wall Street or the REITs getting interested in development,” says Hargrave. “Once those sources are interested in development again, that’s the next period when you’ll see the construction to inventory pipeline rise above the 2% range again.”

Construction pipeline dwindles

In 2011, the overall construction pipeline fell 63% since the fourth quarter of 2007, when more than 21,000 units were under construction in NIC’s top 31 Metropolitan Statistical Areas (MSAs), according to NIC data. Now, there are about 7,000 units under construction, with about 1.5% of existing inventory in the largest metro areas.

“We saw the pipeline contract from 2008 to 2010, and it’s still slowly declining, but settling into a lower range,” says Hargrave, pointing toward a 1% inventory growth in the most recent quarter of 2011 compared to the middle of 2008, when the rate was growing annually at about 2.8%.

“What this means going forward is that this is setting the stage for some attractive supply-demand fundamentals that are emerging in the sector right now,” he says.

Demand for senior housing has been steadily building and is expected to continue to do so, resulting in a “year of anticipation” in 2011, according to Phil Downey, co-principal of Senior Housing Analytics.

“We still don’t see a lot of groundbreaking of new construction activity, but there’s been more mobilization and more interest in building pipelines for development over the next 3-5 years,” he says. “You can’t really point to hard numbers in terms of construction starts, but you can anticipate that will come to fruition over the next 24 months.”

Occupancy rising steadily

Dwindling inventory will increase demand, but growth will remain steady on a smaller scale, says Hargrave.

“In 2012, we are going to see this steady sort of [about] 1% of inventory growth; we’ll probably see the number of units under construction bounce between say 6,000 and 10,000 in 31 largest MSAs,” he said. “Given what we know now about the economy, consumer confidence, supply, etc., there will be continued upward pressure on occupancy rates throughout 2012. “

He pointed out that while occupancy rates have risen to 88% across the largest 31 MSAs, they are still significantly down from levels of nearly 92% that were reached at the end of 2006 through the beginning of 2007.

“It’s going to be some time before we get back to ninety-plus percent industry wide,” Hargrave says. “We need to see higher levels of absorption. My guess is, there will be continued modest increases throughout the year.”

Construction activity across various types of senior housing & care

Helped by its “needs-based” services, assisted living hasn’t seen as much of a slow down, says Hargrave.

“It’s no where near to the extent on the independent living side,” he says, adding that inventory is growing at 1.3%, compared to its high rate of 1.7% in the middle part of 2009.

Plus, there’s room for further development in this sector.

“There seems to be sustained interest in memory care-specialized facilities as a development model,” says Downey. “It’s a niche that hasn’t been fully exploited.”

Independent living, on the other hand, saw more of a contraction in its pipeline than assisted living. There was a more than 65% decrease in the number of units under construction between now and at the end of 2007, Hargrave says.

“The inventory right now is growing annually at a rate of 1%, and it’s going to slow further into 2012 because the pipeline isn’t sufficient to support inventory growth in excess of 1%,” he says. “It’s very attractive supply fundamentals.”

There’s not much supply left, Downey agreed, but independent living has seen more positive absorption year over year compared to the previous year.

As for continuing care retirement communities, Downey says there “seems to be a cloud over the entry fee model” especially with recent publicized defaults and bankruptcies.

“There’s uncertainty around the future viability of entry fee models, and concern over how they’ll bounce back,” he says.

Supply and demand factors in 2012

New or more construction will depend on the availability of financing, and some of that might come in the form of REITs (real estate investment trusts) since the Department of Housing and Urban Development isn’t always the best option.

“HUD as a construction lender is not a very efficient source of capital, given the timing delays and their very open concern over funding new development,” says Lancaster Pollard’s Gesue.

REITs will have more capital for next year, however, according to Downey. “They’ll be doing RIDEA structures, and they appear willing to channel more capital into growth—it’s a significant trend,” he says.

The past 12 months have been a year of anticipation with REIT consolidation and players lining up, he adds. This sentiment was echoed by Gesue, who says it’s possible that REITs could take a broader role in financing new development; heading into the new year, this could feature into building balance sheets.

“REITs can finance development. They can fund with cash the construction of new properties for their operator partners,” Gesue says, although this never been a dominant financing vehicle.

Although the senior housing and care industry is gearing up for what some have termed a “silver tsunami,” it’s not hitting yet, Downey and Hargrave agree. This means that absorption levels are likely to rise, pushing occupancy rates higher, before there’s a surge in new construction.

“We’ll know two years in advance of any sort of higher levels of construction activity” through seeing units getting started, construction starts picking up, and the pipeline filling and translating into inventory growth, Hargrave said. “Absorption (the pace at which people are moving into units) is growing around 1.9% right now, while the pace of inventory is growing at 1%. Barring more significant economic stress or things that hit consumer confidence, I don’t see factors that are going to lead toward demand or absorption being lower than supply right now.”

Written by Alyssa Gerace

There’s room in the senior housing industry for both REITs and lenders, a Capital One healthcare real estate executive told NIC Insider. And Capital One intends to take advantage of the opportunity.

“The market need for a bank with a strong balance sheet and capability to lend on a national level coupled with the significant healthcare expertise and contacts of our new team led to the growth of our group,” the bank’s Imran Javaid, managing director, health care real estate, commercial and specialty finance, told NIC Insider, a publication of the National Investment Center for the Seniors Housing & Care Industry. Capital One Finance hired 10 former Capital Source Inc. team members earlier this year to form a group for specialty finance. Its contacts and experience in healthcare should help lead to its growth, Javaid said.

Capital One will pursue deals between $5 million and $100 million in skilled nursing, assisted living, independent living and continuing care retirement facilities, he said. The bank’s strong balance sheet will enable it to pursue those transactions.

When it comes to market competition, especially the portion of the market occupied by REITs, Javaid said there is plenty of room for success for lenders.

“The overall market, despite the dominance of the REITs in recent transaction activity, is large enough for both REITs and lenders,” he said. “The lending institutions are not likely to make meaningful inroads in large multi-facility acquisitions where the operator is looking for close to one hundred percent financing (this market will continue to be dominated by REITs). On the flip side, the REITs probably won’t have an appetite for smaller portfolios with lower leverage since those transactions are not really meaningful to their bottom line.”

Read the full NIC Insider interview with Capital One’s Javaid.

Written by Elizabeth Ecker