I just attended the 24th Annual NIC (National Investment Center for Senior Housing & Healthcare Industry) National Conference in Chicago. It was an intimate gathering of more than two thousand attendees interested in transactions involving sales, development, construction, and financing of skilled nursing facilities, assisted living and independent senior housing. There were lenders, operators, lawyers, intermediary and vendors present. Below are reflections and observations:
- Press the Flesh – It is hard to believe that in this 24/7 connected digital age in which we live in front of our desktop monitors and handheld cell phones, in which business transacted via email and data rooms, that people still feel the urge to meet in person to source and to advance opportunities and deals. This is a compelling testament to the fact that transactions are a relationship and social experience. It is all about networking. There is simply no substitute yet for shaking hands, sharing a drink and greeting and meeting in the physical confines of the conference. The great thing is while most attendees have a full schedule of meetings, serendipitous nonstop business conducted nonstop in elevators, at the receptions or in the hallways. This was the most well-attended conference ever and a veritable senior housing and healthcare Woodstock without the mud and drugs. Nonetheless, this was all about business, making connections, planting seeds and moving deals forward. This conference alone has a tremendous impact on shaping the direction of the post-acute healthcare and senior housing industry. Oh, there were also educational seminars to attend, but they seem to be a pretext for the meetings and the networking.
- It was 20 Years Ago Today, Sargent Pepper Taught the Band to Play -Twenty plus years ago, these NIC conferences were sparsely attended. Twenty years ago there was a plenty of doubt in the banking world whether this was a good asset class for loans and capital infusions. There were concerns about regulations, reimbursement and overbuilding. The joke in those days was the conference was an opportunity to meet the lender. One lender, that is, HUD. Today, the Meet the Lenders reception was populated by wall-to-wall capital sources. For sure, the data shows persuasively that this industry is among the best to lend to with the lowest level of default. Accordingly, NIC was awash in capital as there were tons of lenders of all types, REITs, both public and private and equity sources. The industry is no longer up and coming. We have made it and thus capital is readily attracted to it.
- Big Ideas - Post-conference, I reflected on the broad trends and drivers affecting the senior care and housing industry. Three factors could sum them up: 1 Historically low cost of capital and the abundant availability of this capital, 2. Although it is well-recognized and even platitudinous to recite again, the underlying demographics and demand continue to be compelling and robust; with the aging baby boomers the demand will continue to rise absorbing supply increases, and 3. The availability of government subsidies, i.e., ongoing reimbursement for nursing home care or HUD or other agency loans for acquisition (via bridge to HUD lenders) or refinancing. Over the last twenty years in the industry in satisfying the market need, a vast amount of private wealth has been garnered. In a sense, the entrepreneurs in this industry have slid uphill with the wind behind their backs without much resistance. I expect these trends to continue.
- More Buyers Than Sellers – There are more buyers of skilled nursing facilities, assisted living and independent living facilities than sellers. This includes consolidation from the top-down from mega-REITs and national chains and from the bottom-up from aggressive operators trying to acquire their first facilities. As a result of the seller’s market conditions, selling prices are high and CAP rates are low and this is further exaggerated for stabilized newly-constructed properties. After listening to attendees, including several lenders, I learned that the market valuation of a new SNF or ALF at stabilized occupancy is high. I now think the Cap Rate premium for new SNF construction at stabilized occupancy is at least 200 basis points or 2% lower, that is, say, a 10% Cap Rate, but I hear that for the AL properties, the Cap Rate premium is as low as 300 basis points or 3% lower. So, as a rule of thumb on the SNF-side, a 10% Cap Rate on the new stabilized occupancy is obtainable and an 8% to 9% Cap Rate is the asking price. For the AL, I would set a 5% Cap Rate for an asking price for new stabilized occupancy properties, which I hear is being realized.
- New Blood – One phenomenon that was interesting to observe is the large number of young people present. Many are new to the industry working their way up the line. But there also many young hungry entrepreneurs with some operating experience, full of “piss and vinegar” in search of skilled nursing facilities or assisted living facilities to buy were in large supply. With the availability of low-cost capital, they have a chance to make this work. Essentially the next generation has entered the industry and is staking their claims. They definitively have the desire to own and operate at a younger age than many of today’s leaders of the industry, who worked their way up and went on their own after fifteen to twenty years of progressive industry experience. We trail blazed the way to riches and the young folks are impatient for their piece of the pie and want to short-circuit the learning process. This is kind of millennial thing and I hope it does not lead to failures because of arrogance, lack of knowledge and inexperience. When the consumers’ health and well-being is at stake, the risks of disaster are serious and potentially lethal. Hopefully, lenders and investors are still looking at operating capabilities as a major criterion for lending and setting that bar high. That is good for the industry and for end-users.