With an increase in net asset value (NAV) for the fourth consecutive year, CNL Healthcare Properties is seeing the benefits today of its 2012 decision to focus exclusively on senior living and health care properties.
In June 2011, when the company’s predecessor, the public non-listed CNL Properties Trust REIT, opened to investors, its portfolio included a diverse range of properties including lodging and specialty assets, in addition to health care.
“We initially thought the REIT would be sort of a ‘best of CNL’ investments portfolio, but then we started recruiting key health care experts to CNL,” says Stephen Mauldin, president and CEO of CNL Healthcare Properties, referring to the range of previous investments made by its sponsor, CNL Financial Group.
Less than 10 months later, as key health care real estate experts joined the company, the REIT narrowed its focus to senior living and health care properties and changed its name to CNL Healthcare Trust (shortly thereafter adopting its current name).
“We started with 100 percent senior housing properties, focused tightly on private-pay senior housing and assisted-living and independent facilities,” Mauldin says.
Senior Focus
Reducing exposure to government reimbursement was a priority for the REIT, so the company avoided the skilled nursing business. For CNL Healthcare’s senior housing properties however, occupancy rates remain strong despite the headwind of oversupply in some markets.
“Senior housing will continue to be a good business going forward because the population of people age 82 and older is growing at a faster rate than any other part of the population,” says Jordan Sadler, an equity research analyst at Key-Banc Capital Markets.
Sadler adds that the leading edge of baby boomers is 72. “Demand for senior housing tends to occur around age 82, so demand is likely to be a lot higher in 2027 and 2028 than right now,” he says.
Sadler estimates that the zeal for development of senior housing in recent years has resulted in a 5 to 6 percent oversupply that will last for the next 18 months to two years.
“Occupancy rates for senior housing peaked in 2015 and have been gradually sliding to the high 80s,” Sadler says. “That makes it harder to push rents.”
Portfolio Tweaks
Beginning in 2013, Mauldin says CNL leadership began implementing its long-term plan to diversify into additional health care property types with the acquisition of its first medical office building (MOB). CNL focuses on high-quality MOBs on or adjacent to a hospital. Ninety percent of the REIT’s MOBs have a direct or strong affiliation with the leading health care provider in the surrounding area, Mauldin says.
“The MOB property sector is the ‘Steady Eddie’ investment because it has not shown much volatility,” Sadler says.
Today, CNL’s portfolio includes 72 senior housing communities, 54 medical office buildings, 12 post-acute care facilities, and five acute care hospitals. The portfolio is geographically diversified, with properties in 34 states.
“We shaped our portfolio (estimated value of approximately $3.5 billion) to be about 60 percent senior housing, 30 percent medical office buildings and 10 percent acute and post-acute facilities,” Mauldin says.
“In 2016 and 2017, we had 10 projects in ground-up development or needing large-scale improvements or additions, so we’ve finished or are finishing those up now,” he says.
However, Mauldin acknowledges that public non-listed REITs have a finite life cycle, often about seven to 10 years.
“We committed to study liquidity options for our shareholders in 2018 and expect to disclose plans later this year,” he says. “We look forward to continuing to do what we’re doing and to focus on running our business while we do a careful study of our options for providing liquidity.”