Senior housing construction is on the rise, with most property types showing year-over-year increases indicating a recovery in new development is under way.
But for continuing care retirement communities (CCRCs), the landscape is quite different, with new construction down nearly 80% from its 2007 quarterly peak and still falling, according to National Investment Center for Seniors Housing & Care (NIC) data.
With heavy debt financing and larger properties overall, CCRCs face some challenges in terms of financing new construction post-recession. But those who finance the properties say that while slower to regain footing in the market, the fundamentals will remain the same, positioning the property type for a comeback.
“The financing environment for entrance fee CCRCs is not as favorable as for assisted living or independent living,” says Bill Sims, managing principal for H.J. Sims. “It’s never been as favorable because entrance fees CCRCs are hard to comprehend. They’re always going to be a little harder to finance.”
As of the second quarter, there were 2,037 freestanding CCRC units under construction nationwide, according to NIC, compared with 3,090 CCRC units under construction in the second quarter of 2012. In comparison, assisted living units under construction rose over the same time period from 5,625 units in the second quarter of 2012 to 7,743 in the second quarter of this year—trending upward.
“CCRCs are substantially larger than standard [properties],” says NIC’s Chris McGraw, of the difference. “They’re more difficult to get financed.”
The sector has seen a continued wave of consolidation in operations, with some properties bringing multiple communities under the same parent operator to make use of advantages including economies of scale, with that trend expected to continue following the housing downturn.
But while the model for CCRC financing has long been substantial leverage of up to 95% to 99%, some say that financing availability is likely to return, despite several headline cases that have brought to light the downside of CCRCs’ entry-fee models and highly-leveraged structures.
“Financing markets are requiring a greater amount of evidenced commitment, but agreements that provide liquidity in the event of a slower-than-expected fill are the tool being used,” says Dan Hermann, senior managing director and head of Investment Banking for Ziegler. “These have ranged in size from $2 million to $10 million depending on the size of the new CCRC.”
The entry-fee model for CCRCs has led the property type to a slower occupancy fill compared with other property types, as most CCRC residents rely on their home sale to pay for the upfront expense, contrary to independent living communities based on monthly rent.
“There has been an uptick in independent living, but that’s weighed down by CCRCs,” McGraw says. “If you strip CCRCs out, there has been a little uptick in [new construction for] independent living.”
But it’s not the financing structure that’s to blame for slow recovery, Hermann says, it’s other market factors, such as the lack of new location growth.
Currently, new location growth for non-profit CCRCs—which comprise 80% of the CCRC market—is roughly 20% to 25% of where it was at the peak, according to Ziegler.
“We believe this will change as not-for-profit CCRCs continue to fill,” Hermann says, stressing that as existing CCRC financial performance and occupancy continues to improve, new location growth will increase—and will be likely be financed in a similar fashion to the past.
Not-for-profit CCRCs can’t pay a return to the investor, so by definition they will always be highly leveraged, he says.
“It is very difficult for a not-for-profit organization to transfer a substantial amount of equity from their operating organization to a new development.”
For non-profit CCRCs, that structure is here to stay, Hermann says, with a comeback projected once the short-term market stresses subside.
“The historical method in all of CCRC finance, both not-for-profit and for-profit, is to reduce debt leverage by paying down a portion of debt (usually 20% to as much as 60%) with entrance fees as residents move in,” he says. “This model has essentially been used since day one of entrance fee CCRC finance. The model clearly came under stress during the financial crisis for those CCRCs that were in the midst of construction or fill-up.”
Lending may still be tighter than pre-recession, with the basis remaining.
“The financing structures have changed to some degree,” says Mark Landreville of H.J. Sims. “The fundamentals have not. The basic structure is still fairly similar to what it used to be, it’s just more conservative today.”
Written by Elizabeth Ecker