This document was presented during the 2013 NCREIF Fall Conference.
The author(s) take full responsibility for all content.
This posting is for informational purposes only; neither NCREIF nor its Board express any opinion of the content presented herein.
THE COMING OF AGE FOR
SENIORS HOUSING
By: Zach Bowyer, MAI
November 14, 2013
PREPARED FOR
This document was presented during the 2013 NCREIF Fall Conference.
The author(s) take full responsibility for all content.
This posting is for informational purposes only; neither NCREIF nor its Board express any opinion of the content presented herein.
PRESENTATION OVERVIEW
The Coming of Age for Seniors Housing
 What Drives Pricing
 What Drives Value
 Case Studies
 CBRE Insights & Outlook
Objective: As seniors housing marks its place as a core
property type within institutional portfolios, a greater
understanding of the sector and more sophisticated
approach to operating these assets will allow investors
to further diversify their portfolios to achieve higher
risk adjusted returns in a changing economic
environment.
2
NCREIF | THE COMING OF AGE FOR SENIORS HOUSING | ZACH BOWYER, MAI
This document was presented during the 2013 NCREIF Fall Conference.
The author(s) take full responsibility for all content.
This posting is for informational purposes only; neither NCREIF nor its Board express any opinion of the content presented herein.
CBRE: THE GLOBAL MARKET LEADER
GLOBAL LEADERSHIP
WITH BROAD CAPABILITIES
SCALE
AND DIVERSITY
3
NCREIF | THE COMING OF AGE FOR SENIORS HOUSING | ZACH BOWYER, MAI
This document was presented during the 2013 NCREIF Fall Conference.
The author(s) take full responsibility for all content.
This posting is for informational purposes only; neither NCREIF nor its Board express any opinion of the content presented herein.
CBRE: THE GLOBAL MARKET LEADER
GLOBAL LEADERSHIP
WITH BROAD CAPABILITIES
SCALE
AND DIVERSITY
VALUATION & ADVISORY SERVICES
•
118,400 Assignments World Wide (2012)
60+ Offices in the US and Canada
•
•
40,000+ US Assignments (2012)
•
400+ US Professionals
•
130+ MAIs in US
4
NCREIF | THE COMING OF AGE FOR SENIORS HOUSING | ZACH BOWYER, MAI
This document was presented during the 2013 NCREIF Fall Conference.
The author(s) take full responsibility for all content.
This posting is for informational purposes only; neither NCREIF nor its Board express any opinion of the content presented herein.
CBRE: SENIORS HOUSING SERVICES
HEALTHCARE & SENIORS HOUSING NETWORK
VAS SENIORS HOUSING PLATFORM
Seniors Housing Specialty Office
General VAS Office
Seniors Housing Network
VAS Seniors Housing Platform
•
Seniors Housing Debt & Equity Finance ($2 billion)
•
Specialized Core Seniors Housing Group in US & Canada
•
Seniors Housing Investment Brokerage ($8 billion)
•
Operating Exclusivity Throughout CBRE VAS
•
Healthcare Capital Markets ($3.0 billion)
•
Specialized Templates and State-of-the-Art Database
•
Investment Banking
•
Access to all CBRE Business Lines
•
Asset Services
•
Affiliate Coverage in UK, New Zealand, Asia, & India
•
Financial & Tax Reporting
•
Best in Class Local Market Knowledge
5
NCREIF | THE COMING OF AGE FOR SENIORS HOUSING | ZACH BOWYER, MAI
This document was presented during the 2013 NCREIF Fall Conference.
The author(s) take full responsibility for all content.
This posting is for informational purposes only; neither NCREIF nor its Board express any opinion of the content presented herein.
WHAT DRIVES PRICING
Inputs for Real Estate Values
To paraphrase Buzz McCoy, real estate valuations are based on the following components:
Property
Markets
Capital
Markets
Interest
Rates
Economy
As an appraiser, our world revolves around property markets which include property level operations
and local market supply and demand fundamentals.
6
NCREIF | THE COMING OF AGE FOR SENIORS HOUSING | ZACH BOWYER, MAI
This document was presented during the 2013 NCREIF Fall Conference.
The author(s) take full responsibility for all content.
This posting is for informational purposes only; neither NCREIF nor its Board express any opinion of the content presented herein.
WHAT DRIVES PRICING
Cap Rate Trends vs. Apartment Caps & 10-Year Treasury
Irrational
Exuberance
Demographic
Influence
Rational Market
Over
Correction
REIT
Impact
Back to Rational Market
14%
12%
NC
10%
AL
IL
8%
Apartment
10Y - T
6%
4%
2%
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
0%
Source: NIC MAP & CBRE Econometric Advisors
7
NCREIF | THE COMING OF AGE FOR SENIORS HOUSING | ZACH BOWYER, MAI
This document was presented during the 2013 NCREIF Fall Conference.
The author(s) take full responsibility for all content.
This posting is for informational purposes only; neither NCREIF nor its Board express any opinion of the content presented herein.
WHAT DRIVES VALUES
Summary of Operating Metrics
Seniors housing is primarily valued based on the fee simple interest of the going concern (the operating business).
IL
AL
NC (CA Only)
89.4%
89.1%
87.6%
29.2 Months
21.7 Months
3.2 Months
Total Revenues PRD
$78.24
$145.07
$268.93
Operating Expenses PRD
$38.81
$100.45
$232.23
Operating Margin
41.1%
32.9%
13.6%
Average FTE/ Resident
0.26
0.66
0.98
Debt Coverage Ratios
1.5
1.8
---
6.5%
9.7%
14.8%
29.37%
31.6%
---
Occupancy (3Q)
Average Length of Stay
ROI (Unleveraged)
Change in OM (1994-2011)
Per Resident Day (PRD) is the most accurate unit of measure when under writing a seniors housing property type.
Expense ratio, profit margin, and per unit indicators are all used as secondary measures.
Source: NIC MAP, American Seniors Housing Assoc., & Irving Levin Assoc., CBRE Healthcare Investor Survey
8
NCREIF | THE COMING OF AGE FOR SENIORS HOUSING | ZACH BOWYER, MAI
This document was presented during the 2013 NCREIF Fall Conference.
The author(s) take full responsibility for all content.
This posting is for informational purposes only; neither NCREIF nor its Board express any opinion of the content presented herein.
CASE STUDY I
Operational Value Add Senior Living Investment
Nursing Home
 120-bed, purpose built skilled nursing facility, developed in 1973, second
generation family owned and operated.
 Good quality property in average condition. Excellent bones and design.
 Buyer was regional owner-operator with properties MA, NY, NJ, and PA
and looking to expand their presence in New England.
 Buyer contacted the seller directly. No broker on deal.
 Above market operating expenses. Did not use part time staff - paid
overtime to full employees.
 Below market occupancy and quality mix- recognized by seller.
Property Summary
 Below market private pay rates – recognized by buyer.
Year Built
1973
 Not maximizing Medicare utilization.
Beds
120
Care Level
SNF
 Favorable rated market by NIC MAP in high barrier to entry location in
close proximity to a number of hospitals.
Purchased
$6,000,000
 Seller executed with buyer due to comfort level and trust.
Date
June 2013
2012 NOI
$273,006
 Buyer’s short term goal to increase operating efficiencies. Invest an
additional $3mm and offer more sub acute rehab services.
Buyer Y2 NOI
$2,623,908
 Seller’s goal - retire.
9
NCREIF | THE COMING OF AGE FOR SENIORS HOUSING | ZACH BOWYER, MAI
This document was presented during the 2013 NCREIF Fall Conference.
The author(s) take full responsibility for all content.
This posting is for informational purposes only; neither NCREIF nor its Board express any opinion of the content presented herein.
CASE STUDY I
OPERATING SUMMARY
2012 Actual (Seller)
Reporting Period
Tota l
Beds
Occ.
AMR
120
76%
Total
Year 1 (Buyer)
Res Days
Beds
Occ.
AMR
$6,111
33,384
120
87%
% EGI
$/ Unit
$/ RD
Total
Year 2 Stabilized (Buyer)
Res Days
Beds
Occ.
AMR
$7,489
37,979
120
92%
$8,074
Res Days
40,150
% EGI
$/ Unit
$/ RD
Total
% EGI
$/ Unit
$/ RD
$43.64
Income
Skilled Nursing Private Pay
$1,245,924
14.1%
10,383
$37.32
$1,635,200
15.0%
13,627
$43.06
$1,752,000
14.9%
14,600
Skilled Nursing Medicaid
4,094,967
46.4%
34,125
122.66
4,578,034
42.0%
38,150
120.54
4,439,147
37.8%
36,993
110.56
Skilled Nursing Medicare
2,960,407
33.5%
24,670
88.68
3,749,280
34.4%
31,244
98.72
4,407,375
37.5%
36,728
109.77
497,965
5.6%
4,150
14.92
822,256
7.5%
6,852
21.65
1,027,694
8.7%
8,564
25.60
32,436
0.4%
270
0.97
124,885
1.1%
1,041
3.29
124,885
1.1%
1,041
$73,597
$264.55
$90,914
$287.25
Skilled Nursing Insurance
Ancillary Charges
Effective Gross Income
Expenses
Real Estate Taxes
$8,831,699 100.0%
$10,909,655 100.0%
$11,751,102 100.0% $97,926
3.11
$292.68
$131,274
1.5%
1,094
$3.93
$137,822
1.3%
1,149
$3.63
$137,822
1.2%
1,149
13,712
0.2%
114
0.41
13,772
0.1%
115
0.36
13,772
0.1%
115
0.34
Utilities
237,055
2.7%
1,975
7.10
283,330
2.6%
2,361
7.46
283,330
2.4%
2,361
7.06
Administrative & General
848,181
12.1%
11,858
35.44
1.0%
1,000
2.99
30.8%
30,113
90.00
14.94
Property Insurance
$3.43
9.6%
7,068
25.41
1,330,361
12.2%
11,086
35.03
1,422,942
0.0%
0
0.00
120,000
1.1%
1,000
3.16
120,000
4,141,173
46.9%
34,510
124.05
3,416,400
31.3%
28,470
89.95
3,613,500
Ancillary Services
518,596
5.9%
4,322
15.53
550,000
5.0%
4,583
14.48
600,000
5.1%
5,000
Culinary Services
719,014
8.1%
5,992
21.54
607,360
5.6%
5,061
15.99
642,400
5.5%
5,353
16.00
Laundry & Housekeeping
516,977
5.9%
4,308
15.49
379,600
3.5%
3,163
9.99
401,500
3.4%
3,346
10.00
3.74
Advertising & Leasing
Resident Care
-
Repairs & Maintenance
138,760
1.6%
1,156
4.16
140,000
1.3%
1,167
3.69
150,000
1.3%
1,250
Program & Recreation
123,616
1.4%
1,030
3.70
140,000
1.3%
1,167
3.69
140,000
1.2%
1,167
3.49
Payroll Taxes & Benefits
780,541
8.8%
6,505
23.38
580,000
5.3%
4,833
15.27
625,000
5.3%
5,208
15.57
Other
Operating Expenses
N et Opera ting I ncome
Management Fee ¹
347,794
3.9%
2,898
10.42
350,000
3.2%
2,917
9.22
350,000
3.0%
2,917
8.72
$8,516,693
96.4%
70,972
$255.11
$8,048,645
73.8%
$67,072
211.92
$8,500,266
72.3%
70,836
211.71
3.6%
2,625
$9.44
$2,861,010
26.2%
23,842
$75.33
$3,250,835
27.7%
27,090
$80.97
$14.57
$315,006
-
0.0%
-
$0.00
545,483
5.0%
4,545.69
$14.36
584,928
5.0%
4,874
42,000
0.5%
350.00
1.26
42,000
0.4%
350.00
1.11
42,000
0.4%
350.00
1.05
Adjusted Opera ting Expenses
8,558,693
96.9%
71,322 $256.37
8,636,128
79.2%
71,968
$227.39
9,127,194
77.7%
76,060
$227.33
Adjusted N et Opera ting I ncome
$273,006
3.1%
$2,273,527
20.8%
$59.86
$2,623,908
21,866
$65.35
Reserves for Replacement
2,275
$8.18
18,946
22.3%
Source: Property operating statements & buyer proforma
10
NCREIF | THE COMING OF AGE FOR SENIORS HOUSING | ZACH BOWYER, MAI
This document was presented during the 2013 NCREIF Fall Conference.
The author(s) take full responsibility for all content.
This posting is for informational purposes only; neither NCREIF nor its Board express any opinion of the content presented herein.
CASE STUDY I
Revenue Projections
Occupancy
Census Mix
Subject
100%
76.00%
Comps
NIC Metro
60%
90.10%
NIC 31
91.40%
Buyer
60%
8%
21%
19%
22%
14%
11%
13%
13%
Other
Medicare
Private
61%
60%
59%
57%
Subject
Comps
Buyer
Current
Medicaid
0%
80%
100%
Daily Private Pay Rates
Subject
9%
20%
85.00%
40%
8%
40%
92.00%
Current
20%
80%
91.00%
8%
17%
Effective Gross Income Per Resident Day
$300
$265
Comps
$363
NIC Metro
$250
$375
NIC 31
$200
$278
Buyer
$265
$320
Current
$296
$262
$273
$293
$293
Buyer
Current
$150
$270
$100
$100
$150
$200
$250
$300
$350
Subject
$400
Comp Min. Comp Max.Comp Avg.
“Subject “data points represent the seller’s 2012 Actual. “Current” represents the buyer’s October 2013 Actual
11
NCREIF | THE COMING OF AGE FOR SENIORS HOUSING | ZACH BOWYER, MAI
This document was presented during the 2013 NCREIF Fall Conference.
The author(s) take full responsibility for all content.
This posting is for informational purposes only; neither NCREIF nor its Board express any opinion of the content presented herein.
CASE STUDY I
Expense Projections and The Bottom Line
Operating Costs Per Resident Day (PRD)
Subject
Expense Ratio (Before Mgt Fee & Reserves)
100%
$255.51
Comp Min.
80%
$204.39
Comp Max.
60%
$240.32
Comp Avg.
$228.06
Buyer
40%
$211.92
Current
97%
78%
81%
83%
72%
84%
20%
$253.12
0%
$100
$150
$200
$250
$300
Subject
$350
Profit Margin (Before Mgt Fee & Reserves)
Subject
Comp Min. Comp Max.Comp Avg.
Buyer
Current
NOI PRD (Before Mgt Fee & Reserves)
$70
3.60%
$60
Comp Avg.
17.80%
Comp Max.
$50
22.40%
Comp Min.
$40
$30
8.60%
Buyer
$20
27.70%
Current
$0
0%
5%
10%
15%
20%
$32
$10
16.00%
25%
30%
$40
$36
$8
Subject
35%
$60
$59
Comp Min. Comp Max.Comp Avg.
Buyer
Current
“Subject “data points represent the seller’s 2012 Actual. “Current” represents the buyer’s October 2013 Actual
12
NCREIF | THE COMING OF AGE FOR SENIORS HOUSING | ZACH BOWYER, MAI
This document was presented during the 2013 NCREIF Fall Conference.
The author(s) take full responsibility for all content.
This posting is for informational purposes only; neither NCREIF nor its Board express any opinion of the content presented herein.
CASE STUDY I
Results
At Purchase
(June 2013)
Current
(Oct 2013 Ann.)
Buyer’s Stabilized
$273,006
$1,108,218
$2,623,908
$6,000,000
$6,000,000
$6,000,000
CapEx & Cary
---
---
$3,000,000
Total Cost
---
$6,000,000
$9,000,000
N/A
$50,000/ Bed
$8,500,000
$71,000/ bed
$20,200,000
$168k/ bed
4.55%
18.47%
29.15%
NOI
Purchase Price
Indicated Value @ NIC
Average Cap Rate
Return on Cost
The “current” data points detailed in the comparable tables represent four months of property operations by
the buyer.
13
NCREIF | THE COMING OF AGE FOR SENIORS HOUSING | ZACH BOWYER, MAI
This document was presented during the 2013 NCREIF Fall Conference.
The author(s) take full responsibility for all content.
This posting is for informational purposes only; neither NCREIF nor its Board express any opinion of the content presented herein.
CASE STUDY II
Cradle to Grave Value Add Senior Living Investment
Senior Living Property by Lincoln Street Capital
 130-unit, purpose built seniors property, developed in 1984, and operated
as a “seniors apartment building” by a large, public REIT on a 3rd party
management contract basis.
 ADL (activity of daily living) services were provided a la carte through a
3rd party healthcare provider due to HUD regulations.
 57-units subsidized by Project Based Section 8, with remaining 73-units
not income restricted (but rents were regulated by HUD).
Property Summary
Year Built
1984
Units
130
Care Level Independent Living
Purchased $5,250,000
Cap/ Carry $6,000,000
Sold
$19,000,000
Return
20% IRR/ 37% Leverage
 Deed was encumbered by a Land Use Restriction Agreement governed
by HUD restricting all rents and fees charged for meals and services to
be approved by HUD.
 Property was acquired with free and clear title, LURA was terminated,
Project Based S8 was Noticed for Termination.
 2007 NOI: $267,000 with Weighted Average Revenues/Occupied
Unit/Month: $1,501 (Market Comps: $3,000+).
 Located in high barrier market, top NIC MAP rated, with competitive
market occupancy averaging 98%.
 Rents were concluded to be 80-100% below market on an improved
basis. HUD had not approved a rent increase since 1984.
14
NCREIF | THE COMING OF AGE FOR SENIORS HOUSING | ZACH BOWYER, MAI
This document was presented during the 2013 NCREIF Fall Conference.
The author(s) take full responsibility for all content.
This posting is for informational purposes only; neither NCREIF nor its Board express any opinion of the content presented herein.
CASE STUDY II
Results
Acquisition
March 2008
Reposition Program
2008 - 2013
Sale
October 2013
Reposition Program
2014 (Per OM) -
$5.25mm ($40k/ Unit)
$6mm in CapEx/ Carry
$19mm ($146k/ Unit)
$2mm – 3mm CapEx
•
68% Occupied
•
New Management
•
Carlyle Group
•
Add AL and MC
•
$267,000 NOI
•
Replaced Management
•
79% Occupied
•
Reduce to 128 Units
•
Rent Restricted
•
Stalled Housing Market
•
$1.23mm NOI
•
Replace Mgt.
•
$1,501 AMR
•
Great Recession
•
73% Market Rent
•
+$1.8mm Stabilized NOI
•
Average Condition
•
$2,508 AMR
•
3rd Party Management
•
20% IRR/ 37% Leverage
•
ROC 11%
“
Post-Closing: The Operator has far greater influence over
the outcome of the investment than the Investor believes or
market supports.
”
Christopher Arruda, Lincoln Street Capital, Managing Member
15
NCREIF | THE COMING OF AGE FOR SENIORS HOUSING | ZACH BOWYER, MAI
This document was presented during the 2013 NCREIF Fall Conference.
The author(s) take full responsibility for all content.
This posting is for informational purposes only; neither NCREIF nor its Board express any opinion of the content presented herein.
WHAT DRIVES PRICING
Major Single Asset Transactions
Transaction Description
The Arbors of Bedford in Bedford, NH
• 50 units and 83 beds MC, constructed in 1998
• $35,808,136 or $431k per bed
• Closed March 2013 to LCB Senior Living, LLC
• 97% occupied with in place NOI of $33,900/ bed yielding a 7.73% cap rate
Arbor Terrace at Crabapple in Alpharetta, GA
• 93 units, AL with MC, constructed in 2009
• $32,700,000 or $352k per unit
• Closed June 2013 to Prudential Real Estate Investors
• 93% occupied with in place NOI of $21,519/ unit yielding a 6.12% cap rate
Forge Hill and Inn at Robbins Brook – 2 Assets in MA
• 193 units, AL with MC, constructed 1999 and 2002
• $63,500,000 or $329k per unit
• Closed November 2013 to Benchmark Senior Living JV with Health Care REIT
• 93% occupied with in place NOI of $20,234 unit yielding a 6.15% cap rate
• Purchased by seller 2010 at $222k per unit, 8.00% cap, NOI of $17,844/ unit (4.5% YoY)
16
NCREIF | THE COMING OF AGE FOR SENIORS HOUSING | ZACH BOWYER, MAI
This document was presented during the 2013 NCREIF Fall Conference.
The author(s) take full responsibility for all content.
This posting is for informational purposes only; neither NCREIF nor its Board express any opinion of the content presented herein.
WHAT DRIVES PRICING
Major Portfolio Transactions
Transaction Description
Bristol Portfolio – Five Properties Located on Long Island, NY
• 640 AL and MC units, constructed between 2000 and 2006
• $290,000,000 or $453k per unit
• Closed Feb. 2013 to Engel Burman/ Harrison Street by Chartwell & Ingenia Communities
• 95% occupied with in place NOI of $31,220/ unit yielding a 6.89% cap rate
• Portfolio (totaled 7 properties) was purchased from Engel Burman in 2007 for $290.5mm
Health Care REIT (NYSE: HCN) – 120 Properties, UK, US, Canada
• 10,000 IL, AL, MC units, average age 8 years
• Closed July 2013
• $4.3 billion or $430k per unit, unlevered NOI Yield of 4% to 5% (long term)
• Retain Management
• Stabilized at purchase, average rent 100% above industry average
CNL Healthcare Portfolio – 12 Properties, 5 States, in Pacific Northwest
• 2,186 IL, AL, MC units
• Closed October 2013
• $457.3mm or $210k per unit
• Replace management
• Not stabilized at purchase
17
NCREIF | THE COMING OF AGE FOR SENIORS HOUSING | ZACH BOWYER, MAI
This document was presented during the 2013 NCREIF Fall Conference.
The author(s) take full responsibility for all content.
This posting is for informational purposes only; neither NCREIF nor its Board express any opinion of the content presented herein.
CBRE OUTLOOK
Cap Rate Trends vs. Apartment Caps & 10-Year Treasury
Irrational
Exuberance
Demographic
Influence
Rational Market
Over
Correction
REIT
Impact
Back to Rational Market
14%
12%
NC
10%
AL
IL
8%
Apartment
10Y - T
6%
4%
2%
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
0%
Source: NIC MAP & CBRE Econometric Advisors
18
NCREIF | THE COMING OF AGE FOR SENIORS HOUSING | ZACH BOWYER, MAI
This document was presented during the 2013 NCREIF Fall Conference.
The author(s) take full responsibility for all content.
This posting is for informational purposes only; neither NCREIF nor its Board express any opinion of the content presented herein.
CBRE INSIGHT
•
Understand the property specific operations and understand the market; hire a local
or regional operator with scale, experience and relationships in the local market
and deeply vest them into the property’s underwritten success.
•
Understand where your property fits in the market; current property trend lines may
not be telling the whole story.
•
Even the strongest market opportunities with the best market capitalizations will fall
below expectations if the operator isn’t a good fit or fails to understand the asset
strategy and market dynamic.
•
Capitalize the opportunity to age your resident base in place throughout their acuity
progression.
•
Replacing senior living operators mid-stream is far more challenging and costly
than the other four property types: office, industrial, retail, and multifamily.
•
Expect cap rate compression between AL and IL, and AL and Apts to continue. The
increase in capital flow, operational and market understanding, and growth in
product demand will continue to mitigate investors’ perceived risk when pricing this
property type.
19
NCREIF | THE COMING OF AGE FOR SENIORS HOUSING | ZACH BOWYER, MAI
This document was presented during the 2013 NCREIF Fall Conference.
The author(s) take full responsibility for all content.
This posting is for informational purposes only; neither NCREIF nor its Board express any opinion of the content presented herein.
For more information regarding this presentation please contact:
Zach Bowyer, MAI
Managing Director & Seniors Housing Practice Leader
T +1 617 912 6878
zach.bowyer@cbre.com
www.cbre.com