investment case for seniors housing and assisted living properties anthony j. mullen, cpa, m.s....

Investment Case For Seniors Housing and Assisted Living Properties

Anthony J. Mullen, CPA, M.S.Director of Executive Development, Johns

Hopkins/NIC Seniors Housing & Care Program

Independent Living

91 90 91 88 88 88.5 90 88 89 89

0

20

40

60

80

100

Quarter Ending

Med

ian

Occ

upan

cy R

ate

(%)

Occupancy Rates: For Stabilized Properties (Those Open 24 Months or Longer)

© National Investment Center for the Seniors Housing & Care Industries

CCRCs92.5 92 91.5 91.5 91.5 90 90 89.5 90 89

0

1020

3040

50

6070

8090

100

Quarter Ending

Mea

n O

ccup

ancy

Rat

e (%

)Occupancy Rates: For Stabilized Properties

(Those Open 24 Months or Longer)


Assisted Living Properties

86 84 85 83.5 83 84 86 86 83 84

0102030405060708090

100

Quarter Ending

Med

ian

Occ

upan

cy R

ate

(%)

Occupancy Rates: For Stabilized Properties (Those Open 24 Months or Longer)


Independent Living

5

2.93.8

4.5

6.3

4

2.3

4.9

0

1

2

3

4

5

6

7

Quarter Ending

Net

# o

f U

nit

s/M

onth

Move-in Rates: For Properties Not Yet Stabilized (Those Open Less Than 24 Months)



3.1

1.61.9 1.9

3.3

2.2 2.4

3.8

0

1

2

3

4

5

6

7

09/30/2001 12/31/2001 03/31/2002 06/30/2002 09/30/2002 12/31/2002 03/31/2003 06/30/2003

Quarter Ending

Net

# o

f U

nits

/Mon

thMove-in Rates: For Properties Not Yet Stabilized

(Those Open Less Than 24 Months)


Independent Living

10.2 9.95 10.1 10.2 10.5 10.1 10.5 10.4 10 9.9

0

2

4

6

8

10

12

14

Quarter Ending

Mea

n C

ap R

ate

(%)

Capitalization Rates



11.2 10.75 10.9 11 11.2 11.1 11 11 10.9 11.4

0

2

4

6

8

10

12

14

Quarter Ending

Mea

n C

ap R

ate

(%)

Capitalization Rates


97.1 97.4 97.8 98 98 98.2 97.4

2.7 2.5 2 1.9 1.9 1.7 2.40.2 0.1 0.2 0.1 0.1 0.1 0.20

10

20

30

40

50

60

70

80

90

100

12/31/2001 03/31/2002 06/30/2002 09/30/2002 12/31/2002 03/31/2003 06/30/2003

Quarter Ending

Pro

port

ion

of O

utst

andi

ng I

nves

tmen

ts

Performing*

Non-Performing**

In Foreclosure

*Performing may include some loans not in compliance with non-payment financial covenants or on watch list.

**Non-performing includes loans 2 or more payments delinquent


Loan Performance for Permanent Debt

6028 6147

77328789

0

2000

4000

6000

8000

10000

SeniorsApartments

IndependentLiving

Assisted Living CCRCs

Total Units Under Construction by Property Type: 2003

Source: ASHA Seniors Housing Construction Report 2003

13042

31273

8789

3815

17749

61476028 7732

0

10000

20000

30000

40000

SeniorsApartments

IndependentLiving

AssistedLiving

CCRCs

1999

2003

Seniors Housing Construction: Total Units by Property Type 1999 & 2003

Source: ASHA Seniors Housing Construction Report 2003

2000-2005 2000-2015

Seniors Apartments 1.2% 1.8%

Independent 1.25% 1.6%

Assisted Living 1.9% 2.0%

Compare to:

Overall Population 0.9% 0.9%

Properly Weighted Seniors Population Growth Rates per Year

Note: Based upon actual 5-year cohort growth rates and age of residents at entrance.

Source: KMF Senior Housing Investors

The Powerful InvestmentBenefits of Operating Leverage

Due to the high expense to revenue ratio of IL, AL, and CCRC, there is a significant increase in NOI when expense increases can be held 1% to 2% (absolute) below revenue increases.

60% Expense / 40% NOI Margin 70% Expense / 30% NOI Margin

Revenue % 5% 4% 5% 4%

Expense% 4% 3% 4% 3%

NOI% 6.5% 5.5% 7.3% 6.3%

Assisted Living

Independent Living

CCRC

Lower Quartile

18.8% 24% 6.9%

Median 28.3% 33% 29.7%

Upper Quartile

34.3% 41.6% 34.1%

Margins Vary Significantly(after management fee and cap x)

•82% difference between lower and upper quartile in AL•73% difference between lower and upper quartile in IL•394% difference between lower and upper quartile in CCRCs

Source: ASHA The State of Seniors Housing 2003

Upper Quartile Current Returns on Investment(Unlevered)

•Independent Living 14.5%

•Assisted Living 16.0%

•CCRCs 24.0%


Assisted Living Independent Living

Lower Quartile $5,383 $6,019

Median $9,113 $8,684

Upper Quartile $11,695 $11,485

Margins Can Be Misleading

Net Operating Income, Per Unit After Management Fee and Cap X, is the Key Number

to Focus On


The Powerful InvestmentBenefits of Financial Leverage

Especially With a Large DifferenceBetween Cap Rate and Interest Rate

75% Debt / 25% Equity 70% Debt / 30% Equity

Cap Rate 10% 11% 10% 11%

Interest Rate 6.5% 6.5% 6.5% 6.5%

ROE 20.5% 24.5% 18% 21.5%

ROE w/25 year amortization*

16% 20% 14.5% 18%

* True ROE is about 1% (absolute) higher due to principal amortization, which is not accounted for in the return calculation.

CCRC** Independent** AL*

Extremely 5% 7% 32%

Very 6% 11% 30%

Somewhat 30% 31% 20%

Not 25% 26% 14%

Not at All 34% 25% 4%

Needs-Influenced vs. Needs-Driven Element of IL vs. ALProportion of Residents by Urgency of Move

** CCRC and Independent Data: ASHA Independent Living Report* AL Data: NIC National Survey of Adult Children

IN HOUSE STREET

2002 4% 5%

2001 4.5% 5%

2000 4% 5%

1999 4% 4%

1998 4% 4%

1997 3.5% 4%

1996 3.5% 4%

1995 4% 4%

1994 4% 4.5%

Yearly Median Increases in Resident Revenue

Independent Living


IN HOUSE STREET

2002 5% 5%

2001 5% 5.5%

2000 4% 4.5%

1999 3.5% 5%

1998 4% 5%

1997 3.5% 5%

1996 4% 5%

1995 4% 5%

1994 4% 4%

Yearly Median Increases in Resident Revenue

Assisted Living


9.7%

16.4%

23.7%

0%

5%

10%

15%

20%

25%

1997 1998 2000

Have You Ever Visited a Retirement Community to Consider It As a Place For You to Live?

Source: NIC National Housing Survey

23.4

30.8

10.612

18.2

8.2

17.918.2

0

10

20

30

40

No Move Thinking Plans Decided

Pe

rce

nt

by

Ca

teg

ory

Prefer Age-Qualified No Preference

Proportion of Prospects by Attitude TowardAge-Qualified Community


83.5 81.769.7

8.2 8.119.9

8.3 10.2 10.4

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1997 Wave 1998 Wave 2000 Wave

Pe

rce

nt

in C

ate

go

ryPrefer All-Ages No Preference Prefer Age-Qualified

Proportion Age 60+ Households by Preference for Age-Qualified Community by Wave of Survey



4.4

2.9

0.9

1.9

0.8

8.9

3.3

1.2

5.2

0

2

4

6

8

10

Thinking of Moving Move in Future Move Within 6Months

Pe

rce

nt

by

Ca

teg

ory

1997 Wave 1998 Wave 2000 Wave

Proportion of Age 60+ Households by Plans to Moveto a Retirement Community by Wave of Survey

14

15

22

37

35

37

61

45

0 10 20 30 40 50 60 70

Religious

Shopping

Day Trips

Recreation

Exercise

New Activities

New Friends

With Friends

Today – Here vs. Previous

More Frequently

Source: American Seniors Housing Association

13

29.1

45.7

11.1

1.30

5

10

15

20

25

30

35

40

45

50

StonglyAgree

Agree Neutral Disagree StonglyDisagree

I Am Healthier Today


Very Satisfied

50%Satisfied

44%

Neutral5%

Dissatisfied1%

Very Dissatisfied

0%

Satisfaction With Quality of Life in This Community?



45.4

0.6 0.3

6.7

46.9

0

10

20

30

40

50

StronglyAgree

Agree Neutral Disagree StonglyDisagree

Willing to Recommend to my Friends

Homeownership Rates

Source: U.S. Census Bureau

Distribution by Disability 1982 1984 1989 1994 1999

Nondisabled 73.8% 73.8% 75.6% 77.5% 80.3%

IADL only 5.7 6.2 4.8 4.4 3.2

1 or 2 ADLs 6.9 7.0 6.7 6.1 6.0

3 or 4 ADLs 3.0 3.1 3.7 3.4 3.5

5 or 6 ADLs 3.7 3.4 3.0 3.0 2.9

Institutional Residents 6.8 6.6 6.1 5.7 4.2

Population Distribution of Disabilities 1982 to 1999 Over-65 Year Old Population

Source: Manton and Gu. Proceeding of the National Academy of Sciences, 98(11), pp.6354-6359.

investment case for seniors housing and assisted living properties anthony j. mullen, cpa, m.s....

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