Senior housing CEOs have their share of challenges to navigate at the moment, from tight labor markets to oversupply to a rising interest rate environment.
However, the outlook today—though uncertain—is not nearly as bleak as it has been in the past, according to some veteran chief executives. Forward planning right now demands caution but also the willingness to be opportunistic, and knowing that senior housing has been historically resilient should give confidence to investors, they said Wednesday at two separate events in New York City.
There are pockets of oversupply, but the amount of new senior housing product coming online appears to be “plateauing,” according Debra Cafaro, CEO of Chicago-based real estate investment trust (REIT) Ventas Inc. (NYSE: VTR). Cafaro [pictured above] delivered remarks at the National Association of Real Estate Investment Trusts (NAREIT) REITWeek investor forum.
While the impacts of oversupply are real, with about 30% of Ventas’ senior housing operating portfolio exposed, this cycle of oversupply is not nearly as dire as the last, Cafaro emphasized. One reason is that the new supply as a percentage of existing inventory is much lower now compared with that last problem period, around 2001. “Let’s open a new senior living building every day” seemed to be the mantra then, she said.
Another contrast: Back then, the senior living industry as a whole was not as mature as it is today.
“The industry was in diapers, and they were building for a much younger demographic,” Cafaro said. “Now … we know who our customer is, [and] we know that we’re much closer to the explosion of that demographic.”
Ventas also has increased its liquidity position this year. This is in part because of a combination of highly uncertain macroeconomic conditions—with geopolitical risks and potential tax reform as two hovering questions marks—and a somewhat “lax” market, with stocks hitting an all-time high and cheap capital available, she explained.
“It remains to be seen what we do with [our liquidity], but I think it was a good decision by us to protect shareholders and enable opportunistic investments if risks dislocate the market,” she said.
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The REIT forecasts 0%-2% growth in its senior housing operating portfolio and 2.5%-3% growth in its triple-net portfolio, but Cafaro said the company would seize opportunities that present themselves.
For National Health Investors (NYSE: NHI), a Murfreesboro, Tennessee-based REIT, the ongoing labor shortage tops the list of industry issues to keep a close eye on.
“Senior living isn’t always sexy, and maybe working at a TGI Friday’s or a Target might be more appealing,” said CEO Eric Mendelsohn during the company’s REITWeek presentation. “Labor is a big issue, in my view, that often gets lost in the financial analysis that we do every day.”
Like Cafaro, another potential pitfall he singled out is oversupply, although that could create big opportunities in some markets, too. Savvy investors with their ear to the ground could swoop in and acquire struggling properties for an extremely fair price, for example.
“Those of us in the industry know who’s doing the oversupply,” Mendelsohn said. “Someone’s oversupply is tomorrow’s opportunity.”
As far as the REIT’s outlook is concerned, Mendelsohn predicted more slow, measured growth.
“We grow steadily each year,” he said. “Some would say it’s boring, but really, it’s exciting to our board, our officers and our employees who are incentivized to grow [conservatively].”
Capital Senior Living
Another looming uncertainty is the impact of expected interest rate increases. It’s not worrying Larry Cohen, CEO of Dallas-based Capital Senior Living (NYSE: CSU), one of the largest providers nationally.
“I’ve been in the industry about 31 years, so I have a pretty good perspective for a variety of economic cycles,” he said Wednesday at the Jefferies 2017 Healthcare Conference.
Senior living consumers live on a fixed income, so low interest rates hit them in them pocketbook and constrain providers’ ability to increase rents, Cohen said.
This is seen in the historical data he cited: Between roughly 1992 and 2008, he said, monthly rates grew in the neighborhood of 4% to 6% annually. Now—after a prolonged period of low interest rates following the economic recession and housing market collapse—monthly rates are projected to increase just 3% this year.
“A more normalized environment for interst rates is a good thing for residents and provides more pricing power to [operators],” he said.
On the financing side, Capital Senior Living has been able to benefit from the low rates over the last several years. However, even if interest rates were to increase a couple hundred basis points, Cohen said the company still will be in a position to make acquisitions.
Senior housing has had consistent access to financing for more than 20 years in a variety of market conditions, he emphasized.