Investing in senior housing might give two pension funds warm feelings because of the social benefit, but there is evidence it also might generate cold cash.
The Massachusetts Carpenters' Pension Fund, Wilmington, and the Retirement Systems of Alabama, Montgomery, made recent investments in senior housing, and representatives from both funds admit the social aspect was important to the decision.
Massachusetts Carpenters' $20 million loan commitment to develop senior housing complexes in the Boston suburbs of Chelmsford and Framingham will provide union jobs and affordable housing for elderly union members, said Gary Schwandt, president of AMRESCO Advisors Inc., which is overseeing the $750 million pension fund's investment.
But he also expects the deal to make money. "We can earn an attractive risk-adjusted yield of 12% total," said Mr. Schwandt.
Alabama's loan commitment, which ranges between $16 million and $20 million, will be used to fill a void within Alabama, according to David Bronner, chief investment officer of the $15.5 billion plan. The convertible loan will generate 8.75% for seven years before rising, said Mr. Bronner.
"There is a crying need (for senior housing), particularly in the South," said Mr. Bronner.
It is that need, said senior housing proponents, that will generate sound risk-adjusted returns for investors. Two Big Six accounting firms recently did studies that concluded there is a great demand for senior housing and that pension funds are a logical source of capital.
Also, a pension fund real estate money manager has a track record in the area that suggests money can be made in senior housing.
The National Investment Conference for the Senior Living and Long Term Care Industries, a trade group representing lenders and builders of senior housing, determined the senior care and long-term care industry will require $400 billion of capital over the next 35 years.
According to the NIC-sponsored research, conducted by Price Waterhouse L.L.P., the aging U.S. population and a decline in the likelihood of parents living with adult children foreshadow a strong demand for senior housing during the next several decades.
The senior housing market is expected to grow in linear fashion through 2010, then exponentially through 2030, the study forecasts. "A current estimate of effective demand is 1.78 million people, doubling to over 3.7 million people by 2030," according to the NIC study.
The second Big Six study, done by Coopers & Lybrand L.L.P., concluded the median unleveraged return on 252 senior housing communities in 1995 ranged from 11.1% to 14.6%, depending on the property type.
Allegis Realty Investors L.L.C., Hartford, Conn., is liquidating a fund that invested in congregate care housing, a segment within senior housing.
The Congregate Care fund returned 12.3% for the eight years ended March 31, according to information provided by Allegis. The fund returned 24.8% for the one-year period ended March 31.
"It's been the best performing closed-end fund in the Frank Russell universe," said Allegis President James O'Keefe.
Yet Allegis has no plans to immediately raise another congregate care fund, even as demographics suggest there is opportunity in financing homes for the elderly.
"There is nice steady growth in senior housing demand for 10 years," said Mr. O'Keefe. "It is when the baby boomers retire in 25 years where you get the massive growth."
Adam Berger, a principal with Chatham Capital Partners L.L.C., a Boston real estate money manager, said America's demographics are not as gray as generally believed.
"The (investment) opportunity is not quite there yet," said Mr. Berger, who did senior housing deals while a director with Boston-based AEW Capital Management Inc. Chatham will also do senior housing investments, said Mr. Berger.
"It appears there will be tremendous demographic demand, but it is probably the hardest of any income-producing property type to research," he said. "No one can really predict with much accuracy just how many 80-year-olds will leave their homes to go live in senior housing."
In spite of its can't-lose appearance, there are pitfalls within the senior housing property segment.
There is a concern that a disproportionate amount of money for development will be used to finance housing for affluent seniors. Also, a number of health care real estate investment trusts flush with cash will lend money to senior housing operators who are lacking in the fundamentals of the property type, resulting in overdevelopment.
"Currently, most of the attention in the industry is focused on the assisted-living segment, whose primary census is the 80-plus age cohorts," said William Donohue, a manager in Coopers & Lybrand's real estate advisory group and leader of his firm's study. "Since the first wave of baby boomers will not reach this age until well into the next century, and it is difficult to fully anticipate when demand will be satisfied, the industry must resist the temptation of easy money and not overbuild."
Healthcare REITs that successfully raised money in public offerings are ready to begin lending, said John P. Sawyer Jr., president of Leggatt McCall Retirement Properties L.L.C., a developer. "A lot of rookies will jump in."
Senior housing did not escape the overbuilding of the mid-1980s and the subsequent property crash. Much of it was financed by savings and loan associations, and supply exceeded demand for a portion of the market, according to L. Robin DuBrin, managing director of Seattle-based Columbia DuBrin Realty Advisors L.L.C. Columbia DuBrin focuses on investment, financing and market analysis for the senior housing industry.
Mistakes in the '80s
Senior housing developers of the 1980s expected seniors as young as 65 to move into senior housing complexes, so they built large and "grandiose" developments, said Ms. DuBrin. In truth, seniors aged 75 and older, a smaller and more thrifty group, favored smaller, more moderately priced housing, said Ms. DuBrin.
According to the NIC study, there are six major senior housing property types: active adult communities, senior apartments, congregate care facilities, independent living units, assisted-living residences/assisted-living facilities and skilled nursing facilities.
The distinguishing criteria are the level of services provided to the residents.
Active adult communities and senior apartments typically don't provide services and attract the youngest segment of the senior population. The units may be owned or rented.
Congregate care facilities and independent living units provide services such as meals, transportation and housekeeping. The services may be contracted independently or purchased with the housing.
Assisted-living residences/assisted-living facilities provide residents with services known as "activities of daily living" or "instrumental activities of daily living," a broad category that includes getting out of bed, bathing, dressing, eating, medication reminders, handling of finances and shopping.
Skilled nursing units include the activities of daily living as well as medical care.
Assisted living appears to be the segment that has attracted the attention of the pension funds. Mr. Sawyer said assisted-living properties are attractive because they are affordable, the residents retain their independence and the property segment is positioned to capture the trend of moving people to appropriate levels of care.
On the supply side, the complexes are relatively small, usually 60 to 100 units, and inexpensive to build, costing $4 million to $8 million.
Massachusetts Carpenters is a lender to Leggatt McCall, which is using the money to build assisted-living complexes.
There is pressure from state governments and insurance companies to move people from hospitals to nursing homes and from nursing homes to assisted-living facilities, said Mr. Sawyer.
"The assisted-living business is stepping into the market created by people moving out of nursing homes," Mr. Sawyer said. "Seniors don't like nursing homes. There is no independence.
"If you are 83 years old and recovering from a broken hip, there is no place to go," said Mr. Roberts. "Adult-living communities are for active 60- to 70-year-olds. And, no one wants to go to a nursing home."
Specialty investment
New England, the region in which Legatt McCall and Massachusetts Carpenters will concentrate their efforts, has the densest population of middle-class elderly in the country, said Mr. Schwandt.
"The demand won't support 200 units," said Mr. Schwandt, whose two projects will each have 80 units. "You can't build 200 units in suburban neighborhood.
"The properties also don't have much re-adaptive use," said Mr. Schwandt. "You can't turn them into yuppie housing, so that is the reason you have to be correct in your due diligence. This is specialty, not general purpose real estate," he said.
Alabama is working with Daniel Corp., a Birmingham, Ala., developer, said Mr. Bronner.
Two complexes are proposed: one in Sanford, a Birmingham suburb, and another in Huntsville. The Sanford ground-breaking will be in September; an August ground-breaking is scheduled for the Huntsville site, said Kent Graeve, senior vice president with Daniel Corp. Each complex will have multiple residential property types, according to Mr. Graeve.
The Sanford complex will have 120 independent apartments, 120 assisted-living units and 50 homes, which will be sold. There also will be a 16,000 square-foot common building at the complex.
Huntsville will have a similar configuration, but the property-type ratio will be 90, 48 and 54. The common building is slightly smaller, with 13,000 square feet, said Mr. Graeve.
