By Deidre Darsa
Today there are 35 million American seniors, many of them enjoying the comforts of senior housing communities that provide activities, security, assisted-living and health care. Developed to meet the needs of this generation, these facilities are increasingly designed to fit the requirements of active seniors in an aging population that is expected to reach
70 million in twenty years. A person born in 1950, who grew up with the Beatles, came of age with the Vietnam War and
Watergate, and is now in the most productive twenty years of
his or her life, will reach age seventy in 2020. These seniors are expected to be healthier, on average, and more active than today's seniors who are already the most dynamic seniors in history.
Building and operating communities for this growing,
influential and vigorous population offers real estate owners
and investors significant potential for financial rewards.
"The demographics become compelling for this industry in 2020," says David Schless, president, American Seniors
Housing Association (ASHA), Washington, DC. "Ultimately, it's a very solid business."
Because senior housing takes on different phases—active living, congregate, assisted-living and continuing care retirement (see sidebar) it is often misunderstood and miscategorized by investors. Recently, organizations like ASHA and the National Investment Conference for the Senior Living and Long Term Care Industries, as well as those in the real estate industry, have sought to clarify the levels of senior housing.
Briefly, active adult retirement communities are a 55-plus product that often include golf courses, swimming pools and other physical fitness venues that may or may not offer supportive care services; congregate seniors housing are designed for seniors who desire services that include building security, activities, meals, scheduled transportation, housekeeping, laundry, 14-hour staff presence and an on-call nurse or physician; assisted-living residences offer seniors assistance with activities of daily living, administration of medicine, first-aid and medical care for minor ailments and round-the-clock protective oversight; and continuing care retirement communities (CCRC) provide seniors with the level of care they need from congregate care to assisted-living.
The Del Webb Corporation, Phoenix, AZ, is the developer of Sun City active adult senior living single family residences, where the average age for residents is 62. With 130,000 residents living in their communities, the developer continues to plan new homes. By June 30, 2000 it closed on 17,103 homes, and has plans to build an additional 62,439 before year's end.
"Our communities are geared toward those individuals who are very active," states Paula Jennings, spokesperson for Del Webb. "In response to the marketplace we have enhanced our amenities. Our research shows that these last several generations, and now the baby boomers, are demanding a more active lifestyle. They're healthier, wealthier and better educated, and they use the Internet to shop and conduct business."
Del Webb communities are putting a new face on retirement. "We have some communities where parents and their 55-plus children are living. Bob Lilly, former Dallas Cowboy and NFL Hall of Famer, and his mother live in the Texas Sun City community, each with their own home."
Outlook Couldn't Be Better…
Currently, there are 32.8 million people between age 55 to 69. That number is expected to increase to 39.7 million by the year 2005; 47.5 million by 2010; and 55.2 million by 2015, according to the National Association of Home Builders Council on Senior Housing.
After considering the growth of that segment, Del Webb conducted a survey of 400 Baby Boomers aged 48 to 52 and 400 seniors aged 65 or older and found that Boomers' attitude about work, leisure and social responsibilities may change the face of retirement.
For instance, 62 percent of Boomers polled expect to work at least 20 hours a week during retirement. Overall, 80 percent feel they will be healthier during their retirement than their parents are/were and 91 percent think they will be happy during retirement. And, 43 percent of Boomers expect to move from their current homes during retirement.
"The demographics are just incredible," says Sandy Graves, vice president senior living communities, Crestline Capital, Bethesda, MD. "Del Webb is most successful in early elderly. We build mostly a congregate product primarily for someone who is really senior."
…But We're Not There Yet
Crestline Capital, a CCRC with 31 senior living communities in 13 states, owns 7,500 units that, in 1999, were 89.7 percent occupied. Its market, age 85-plus, is expected to reach 6.96 percent by 2020, according to the U.S. Census Bureau. In 1999, revenues increased by $5.1 million, or 2.1 percent, to $246 million due to the addition of 317 expansion units in 1998 and 1999. And, while its senior living operating costs and expenses increased one percent, profits increased 7.8 percent to $40.2 million in 1999.
Although the numbers look good, Crestline is not growing its senior living portfolio. Instead, the firm is choosing to wait for the market, which was overbuilt in the 1990s, to catch-up to demographic trends. "It was like any real estate cycle," explains Graves. "Money sees an opportunity, chases it, overbuilds and then goes somewhere else for awhile. That's what happened to senior living and it will take a little longer for the market to absorb it. But, I think trends are improving."
Residents at Crestline communities often enter as active seniors and age in place getting more assistance with daily living as they need it. "Moving is very difficult for seniors, and when they make that move they want to make it the last one," says Graves.
Most of Crestline residents are independent living with an average age of 82 to 84, but when they require assisted-living services they need only to ask. At Crestline properties, those services are provided by Marriott International's Marriott Senior Living Services.
"With the aging of the population comes new opportunities for providing senior housing and both hospital and health care services," explains Mike Giacopelli, senior vice president of Marriott Senior Living Services, Bethesda, MD. "It is synergistic with Marriott's development and hospitality expertise."
Already a leader in hospitality services, Marriott International acquired health care expertise through the acquisition of Forum retirement communities. "We have a large constituency of residents that we are now serving. As they age, services become more important to seniors. We feel we add value on the services side of the business," says Giacopelli. "There's a continuum of care that is provided in almost all of our properties, so as a person moves from independent living to assisted-living to skilled-nursing they are moved to separate sections of the buildings where they receive the care they need."
Tough Sledding
In early 2000, Integrated Health Services and Mariner Post Acute filed Chapter 11 bankruptcy, leaving their landlord, Seniors Housing Properties Trust, with a big problem.
"When these companies filed bankruptcy it unfortunately represented 50 percent of our portfolio, so we had no option but to reduce our dividend," reveals David Hegarty, president of the Newton, MA, REIT. "Now we've decided to take a different course of action than what other health care REITs are doing. We established a management company and decided we were not going to wait the two years it takes to go through a bankruptcy process and be at the mercy of the tenant and bankruptcy court. We became proactive and negotiated settlements with Mariner and Integrated and took back almost all of our properties. We're managing them ourselves through Five Star Quality Care, Inc."
The REIT owns 86 properties, of which it manages 58, while 14 are leased to Marriott International Senior Living Communities, and others lease the remaining properties.
"Our thinking is that we're trying to make lemonade out of lemons," he says.
Spun-off from HRPT Properties Trust in October of 1999, the REIT was able to re-capitalize and maintain a $150 million line of credit, which left it in solid financial shape to take back properties.
"Since we have very low leverage we have the financial capability to grow once we've stabilized these 58 nursing homes we took back. I guess ideally we'd love to be investing more in the independent living sector or, alternatively, we'd like to be a player when [nursing home companies] come out of bankruptcy. Hopefully, we'll be able to participate in some of those mergers and acquisitions."
With only six out of 13 health care REITs doing okay, according to Hegarty, taking control of their 58 properties was the best strategy to control their destiny. "Our feeling is if we're going to get maximum value out of these properties, take control," he says.
So, on July 1, 2000, Five Star took control of the 58 facilities where morale was poor and supplies limited. Now, with an average occupancy of 85 percent, the future looks brighter.
"Our approach is different," describes Hegarty. "We have money and we tell people we want to spruce these places up and fix the things that are wrong with them. Morale has very much turned around and the [staff] doesn't have to worry about tomorrow. We're not going to file for bankruptcy."
Investors See Opportunity
Investors are starting to notice the shift in attitude, too. The National Investment Conference released its 2000 lender survey of 115 participating lenders active in senior housing.
"It showed that the financial condition of the industry wasn't nearly as dismal as some think," says Robert Kramer, executive director. "Lenders were projecting $8 billion in financing in 2000, 36 percent of that for new construction. This is contrary to the picture you get when reading The Wall Street Journal where all you read about is the very publicized Chapter 11 of a large nursing home."
Overall, the survey showed that 29 percent of that $8 billion was for acquisition and that 35 percent was for refinancing. While it remains to be seen whether all that projected financing will be completed in 2000, senior housing is definitely not a moribund sector, according to Kramer.
The survey also noted a shift among lenders from skilled-nursing and assisted-living to congregate care and seniors apartments. The investment community's perspective is not how fast you can develop, but how well you can you operate, according to Kramer. "The emphasis is prove to me you have a track record of filling communities before I lend you more money."
And while the nursing home bankruptcies have slowed public investment, Kramer noted that 16 opportunity funds attended the NIC conference. "They see the opportunity," he says. "Pension funds and other large institutional investors have long-term perspectives and they realize the fundamentals of this industry are strong. CalPers has committed $200 million for this year. Another major institutional investor increasing its commitment is Prudential Real Estate. There are new funds being put together now by Kensington Realty Advisors with a focus on senior housing. It's a mixed picture for the opportunist investor who understands the risk. It's a great time to get in because you don't have an inflated sense of optimism."
Robert Hess, vice president, Prudential Real Estate Investors, Parsippany, NJ, is the co-author Seniors Housing: An Institutional Investor's Perspective, in September 2000. In it, he noted that improved research and reporting may help investors become more comfortable with the market.
"From the perspective of investors, they are most comfortable when they see a market that's orderly and responsive to changing conditions," he says. "There are so many different market niches here that investors could easily become overwhelmed in trying to figure out the way to look at the supply/ demand segment. That's a circumstance that's going to solve itself over time as the industry defines the real market segments. It will get easier for investors to see what they're investing in as the segments get finely honed.
"If the market's information is well-developed and the understanding of how the market works is well-developed, it's likely we'll see the flow of capital more closely match the need for capital."
"There's very much a turnaround in process," declares Jerry L. Doctrow, principal analyst, Legg Mason Wood Walker, Inc., Baltimore, MD. "And I think for investors, broadly speaking, there's further upside opportunities and they come in two categories: first, there are people who, particularly in this turbulent market, can buy better quality REIT names and get yields north of 10 percent and see the potential for additional price appreciation as the perceived risk in the health care sector declines. The other opportunity is to bet on rebounding performance among some of the operating companies and some of the REITs that are more directly exposed to some of the troubled nursing homes that are trading at very low levels."
As investors become aware of opportunities the senior housing market presents, they are viewing these companies in a different light. "The basis for investment decisions has to be grown in confidence that the operating entity really has a full grasp on how to run these properties," says Schless. "There's enormous growth opportunity now and for the foreseeable future. This is a business that requires patient capital. There are probably a limited number of capital sources that have the patience and will take the time to understand the dynamics of the business and they'll be rewarded for it."
Deidra Darsa is a freelance writer from Rockville, MD.
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