When Columbus set sail for America, he did not know what was beyond the horizon line. Some thought he would fall off the edge for it was unknown what lay beyond the horizon. For those attending NIC’s Skilled Nursing Investment Forum and Senior Housing Symposium, the feeling of not knowing what lies beyond the horizon might have been felt as well.
With the Supreme Court reviewing the Affordable Care Act during the conference, the future of Obamacare, Medicare and Medicaid was at the forefront of many of the attendees’ minds. Former Health and Human Services Secretary Tommy Thompson painted a scary, complicated political picture of the Washington landscape looking ahead to 2013. While his perspective outlined many challenges and moving parts, Thompson felt optimistic that changes and action would need to be mandated by the American voters.
The near-term future is bright with capital starting to flow for good properties and projects. Many entrepreneurs attending the conference were seeking both debt and equity capital for their projects. It appears there is no shortage of development opportunities or ideas.
As Robert White, Jr., found and president of Real Capital Analytics, said during the NIC conference, “This should be a room full of happy people—no part of the market did better than the seniors housing sector last year.”
With a lot of capital on the sidelines, participants are looking for more activity from institutional investors during 2012 and 2013. As market participants grow comfortable with the state of the economy, those seeking greater yields will seek to deploy their capital in the senior living industry.
It was well regarded that it was a sellers market at this time in the cycle based upon conversations with business development professionals and real estate brokers. For larger players, the war for market share continues to wage on driving prices up in a variety of local markets.
Others voiced concern that there is a strong movement towards development opportunities for dementia care. Will there be too many people rushing for the same exit? At some point, the need for memory care becomes a non-discretionary decision that will force the continued development of those types of communities.
Lenders were specific to point out that they’re looking for specific operating strategies tailored to that market other than just providing a facility to warehouse people. According to one banker at the conference, if your business plan looks like a sensitive version of Alcatraz Island, forget about it.
Other lenders spoke of more multifamily developers looking at the senior housing sector with plenty of excitement and enthusiasm but little knowledge or skill how to get into the business. Some lenders spoke more highly about operators and owners looking for capital to expand or remodel their communities rather than exploring new, inexperienced developers.
With capital deployment returning to the marketplace, now there’s a question of if there are enough experienced developers and operators to keep up with the development demand.
Lenders are explicitly seeking to deploy capital, but only to those that have adequate experience. For those with little to none, those developers either need to find an experienced partner or move on. Other lenders spoke about needing not only capital as skin in the game but a strong sense of purpose, integrity and emotional investment—also known as character. For those with well defined business plans with the right partners, there are many lenders who want to start a relationship…..slowly and prudently.
Many lenders stated that they are seeing more activity in the central parts of the country such as Texas, Colorado, Arizona and even an uptick in interest in the south Florida market.
It appears from spending two days at the conference that seniors housing has experienced an accelerated recovery. Interest in the sector is up. More market studies are in process. In fact, some capital providers are now referring to the past two years as a “pause” rather than a decline….somewhat akin to an engine stalling for a brief time and then firing back up.
Many lenders are confident that they have a good grasp on the forecast for the near-term. However, the forecast beyond the horizon line in the medium- to long-term is relatively unknown. Will the market change dramatically in the next 12-24 months? Probably not but the possibility for radical changes to the economic model for assisted living and skilled nursing are well within the realm of possibility.
Operators have been able to weather the storm in cuts for many years which begs the question or whether cuts are now just part of the “new normal” for participants in the long-term care industry.
There is certainty that the need and demand for seniors housing is there today (and will continue to increase) and that capital will be available to deploy, but only to those captains with strong ships and an experienced crew that can handle what lies beyond the horizon line. Captains, like entrepreneurs in the senior living industry, eagerly await what happens on the horizon line and for the adventure of the open seas.
Written by George Yedinak