The seniors housing space experienced a very interesting year in 2018. While some product types within the asset class experienced some growing pains, the overall long-term outlook is very bullish. Seniors housing is divided into three major market segments: independent living (IL), skilled nursing facilities (SNF), and assisted living facilities (ALF). We will focus on licensed healthcare facilities, SNF and ALF, in this analysis.
Across the country in the first half of the year, SNF assets experienced decade-low occupancy rates, although occupancy did begin to stabilize in the third quarter. As a result, we saw a considerable number of distressed SNF dispositions, particularly from the industry’s REITs. For stable-performing SNF assets, however, the capitalization rates held consistent between 10 percent and 13 percent, but the average price per bed dropped due to the disproportionate number of distressed assets sold. The consensus is that SNFs will likely enjoy a stable 2019. With occupancies leveling off, operators should be able to budget appropriately for the year. In budgeting, keep in mind that there will be a new payment system employed by CMS in October 2019, the Patient-Driven Payment Model (PDPM). Many operators are welcoming this change; the only negative response appears to come from therapy companies that may see decreased income under the new system.
The ALF sector of the industry also faced unique challenges, including a new international presence. Major oversupply issues vexed some markets, as their robust construction cycle was based upon a “gray wave” that will not actually hit at the asset level until 2025. Because of this, some markets are struggling with absorption rates, but they should reach equilibrium as demand levels off supply.
Two international transactions were announced in 2018 that may have significant impact. Singapore-based Keppel Capital arranged to acquire a 50 percent stake in the operating platform of Watermark Retirement Communities, Inc. Additionally, Sino-Ocean, a Chinese real estate development company, acquired a 40 percent stake in Meridian Senior Living’s operating platform. It should be noted that these two transactions point to a genuine need for this type of care in China and other Asian countries.
JCH anticipates that some ALF markets will experience a turbulent 2019 as new product is absorbed—or potentially not absorbed—at a rate acceptable for investors. Cap rates for stable ALF assets experienced some downward pressure in 2018, which was illustrated in the MBK and West Living transaction, reportedly near a 5.2 percent blended cap rate at closing in July 2018. Overall the valuations and operations in the segment will remain strong throughout 2019 even with anticipated interest rate increases. We believe quality operators with cash on the books to acquire assets in 2019 will have a very fruitful, opportunistic year ahead.
Overall, 2019 will be a very exciting year for seniors housing. Despite changes coming to the SNF market and some potential turbulence in the ALF market, we expect decent transaction volume with a wide range of assets types available to the marketplace. The takeaway? Operators need to stay diligent in their marketing and operations as new product is absorbed and remain focused on employee retention as labor shortages continue to have an impact in the space.
Nick Stahler is senior vice president of JCH Senior Housing Investment Brokerage. He has 13 years of experience in the seniors housing investment industry, with over $1 billion in closed sales.