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Transparency in Seniors Housing Still a Work in Progress

The key to attracting more investors to the seniors housing industry is to become as transparent as the traditional commercial real estate asset classes and to develop a more compelling storyline to market the product, says economist and consultant Dr. Peter Linneman. While it remains a challenge to obtain capitalization rates, sale prices and other important transaction-based data on seniors housing properties, that information is readily available for all the other major property types, adds the professor from the Wharton School of Business.

“Make it easy for new entrants,” urged Linneman during a speech delivered to several hundred attendees of the 18th Annual National Investment Center for the Seniors Housing & Care Industry Conference in Chicago on Sept. 11. “Obviously, most of you have been in the business awhile. You have the problem that you understand the business. You forget that the money that’s coming in doesn’t necessarily understand it.”

The whole point of transparency is that clear, consistent and simple information is available to everybody,” says Linneman, who embraces the KISS principle: Keep It Simple Stupid. “For example, buyers and equity providers and operators should all have access to the same information. Everybody has to have access to the same information and be able to vet one another on it.”

The leadership team of NIC commissioned Linneman to conduct a transparency study. During the last year, he visited several seniors housing properties, reviewed company financial statements and interviewed a variety of investors. He also conducted extensive interviews with NIC officials.

The senior housing industry’s lack of sufficient information on financial returns earned it a “D” letter grade from Linneman. By comparison, the hotel and multifamily industries received letter grades of “B” and “B+” for their data on returns.

Why all the fuss over the quality and quantity of data? Increased transparency boosts the flow of capital into the industry while lowering the cost of capital. That’s because the premium risk is minimized, real estate experts say, when information is widely distributed.

The seniors housing industry is about 10 to 15 years behind the other property sectors on some reporting levels involving key data, says Linneman, but progress is evident. NIC, for example, does provide research through the NIC Market Profiles, which track the performance of properties in 31 major markets.

One savvy approach owners could take, Linneman emphasizes, would be to devise ways to boost the penetration rate in any given market or submarket and promote the industry as a provider of good health and care. Instead, he argues, the industry spends too much time focusing on demographics. “The thing that struck me is that the seniors housing industry chose as its story the idea that people are getting old, there are a lot of them, and someday they’ll need seniors housing. What a crappy story. That’s a horrible story,” remarked Linneman.

“Anybody who thinks about that story for 10 seconds says, ‘If I’m waiting for the baby boomers to retire and get old enough to use this product before this product works, I don’t want anything to do with you.’”

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