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NIC study makes strong case for seniors investing

ANNAPOLIS, Md. - Did you know the entire seniors housing industry generated more annual revenue than the apartment and hotel industries in 1997? Or that net operating income per occupied unit for seniors was on a par with apartments and hotels?

In the first major study of its kind, the National Investment Center for the Seniors Housing and Care Industries (NIC), based in Annapolis, Md., has just released a creative new report: Size, Scope and Performance of the Seniors Housing & Care Industry: A Comparative Study with the Multifamily and Lodging Sectors.

Here at NREI, we have long believed in the many similarities between different property segments, each having much to learn from the others. That is why we aren't just an apartment magazine, or a retail magazine, or... you get the picture. Each segment is cyclical by nature, with its own supply and demand scenarios. But one of the more unique synergies exists between the multifamily, hotel and seniors housing industries.

That is one reason this NIC study is so important. It explores just how seniors housing stacks up against two property sectors with which it has the most in common. In a way, it seems a natural comparison, since the seniors housing industry encompasses so many of the hospitality and service-oriented characteristics of hotels and is most often developed in multi-unit clusters similar to apartments. And the study certainly is in keeping with NIC's overall mission - to encourage efficient capital formation for the seniors housing and long-term care industries through research, networking, and providing business and financial information.

Despite the recent knocks taken by the publicly traded assisted living industry on Wall Street, for capital providers who may not be as familiar with the seniors industry, this study provides many solid, eye-opening comparisons.

The report represents a first attempt to thoroughly describe how the seniors housing industry and its many components (congregate residences, board and care/assisted living facilities; nursing homes; and continuing care retirement communities, which consist of both independent living and skilled-nursing beds, often with assisted living also included) relate to two other major property components. It is useful not only to capital providers, but also to developers and owner/operators who are interested in the industry's dynamics.

Here are a few highlights from the study: 1. Seniors housing and care, by some counts, represents as many or more properties and units as the lodging industry. Although the existing pool of multifamily units and properties dominates the other two industries, almost as many hotels and senior care facilities (taken together) have recently been started as apartment starts.

2. Occupancy rates and rents are comparable or higher for senior care than the other two industries, leading to more total industry revenue than for either multifamily or lodging.

3. Total senior care industry net operating income (NOI) is three-quarters that of lodging, though only half that of multifamily; rates of current return on investment for seniors housing and care are comparable to or higher than the other sectors;and the total industry market value (based on capitalized income) is more than two-thirds that of lodging and more than one-third the size of multifamily (in spite of having far fewer numbers of properties and units).

Many of the verbatim comments in the study speak for themselves:

* "The results of this study clearly show that growth (especially in the 1990s) in the seniors housing and care industry has propelled it to size and market capitalization levels that warrant the attention of even large institutional investors and lenders. This remains true even when taking into account the market sell-off in 1998-1999 of some of the large, publicly traded nursing-home operating companies, which had aggressively grown their revenues from Medicare reimbursement funding sources."

* "Why is this study important to investors? Investment allocations to seniors housing may well produce higher returns - without disproportionate risk - than allocations to other real estate-based assets or to other asset classes. This monograph and other studies cited provide evidence of high returns with what many investors consider to be reasonable risks."

Surprisingly, by size measures, the seniors industry is less than 100,000 units shy of the hotel industry, which is only a 3% difference. Despite fewer units, there are 56% more seniors housing and care properties than lodging properties, indicating smaller numbers of seniors units per property than hotel properties (about 65 for seniors housing versus 105 for lodging).

Both the lodging and seniors housing industries have grown tremendously over the past few years. Today, the seniors housing and lodging industries are each almost half the size of the multifamily industry based on bids/starts, which is a "current investment" industry size criterion, while they are each only one-fifth the size of the multifamily market's existing units.

According to the study, "Though some investors have been wary of possible overbuilding activity in certain geographic markets in some seniors housing sectors - such as assisted living - the overall pace of demand indicates that the recent building pace has not been a concern to most investors. In fact, a slowing of capital flows to the industry may have served the purpose of regulating potential overbuilding before profits and each flow were damaged on a large-scale basis."

Here's another interesting tidbit to know - the total market valuation of the seniors housing and care industry is pegged at about $206 billion, which compares closely to the lodging sector ($293 billion) and the multifamily industry ($546 billion). And, current market valuations for seniors housing are more than double the size of asset valuations estimated two years ago.

Moving forward, the facts are these: The market capitalization of the seniors housing and care industry is expected to double from 1996 to 2010. This is an industry with 50,000 properties with 3.5 million units, comparable to or greater than the lodging industry. Almost $12 billion of construction has been recently bid or started, almost half that of investment-grade apartments. Total industry revenues are estimated at more than $100 billion, which is more than either the multifamily or lodging industry. Total industry earnings (NOI) is almost $23 billion, almost three-fourths that of the lodging industry and almost one-half that of multifamily.

NIC produced the study in partnership with PricewaterhouseCoopers. Major contributions were made by PWC partners and staff, including Michael French, Manus McHugh, Warren Marr, Aran Ryan, Patrick Leardo and David Watkins. Also contributing were David Schless of the American Seniors Housing Association; John Goodman of the National Multi Housing Council; Charles W. Lynch of Shroders; and Don Manson of the Multifamily Housing Institute.

Principal author of the study is Steven Laposa, PricewaterhouseCoopers' national director of real estate research, who also penned NIC's breakthrough 1998 study, The Investment Case for Senior Living and Long Term Care Properties in an Institutional Real Estate Portfolio. Co-author of the report is Harvey Singer, who has been NIC's research director for many years.

For a copy of the study, contact NIC directly at (410) 267-0504 or write them at 705 Melvin Avenue, Suite 201, Annapolis, MD 21401.

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