Senior Housing Not Yet Past Its Time

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Includes: BKD, CSU, ESC, HCN, HCP, PEBO, PHM, SKH, SUSQ
by: Judy Weil

A recent NY Times article spoke about the difficulties the elderly face now because they can’t sell their homes and move out to smaller houses or apartments, or into assisted or senior living developments. A brief look at the impact on active adult communities, senior and assisted-living care housing:

Pulte Homes said on their Q308 conference call: in late October that the active elderly segment of Pulte Homes’ (NYSE:PHM) business is down slightly:

The Del Webb buyer continues to be plagued with the inability to sell their existing home… We continue to see a little better out performance in the Del Webb business than we do on the traditional side… but still not healthy.

[Retirees] have lost equity in their home, they’ve lost buying power in the Del Webb community… They’re putting off the decision to buy, not necessarily eliminating the decision to buy.

Roughly 40 to 45% of our business has been focused on the active adult segment… Del Webb is a higher margin business.

REITs and assisted-living companies report mixed signals:

Brookdale Senior Living’s Q308 conference call: (NYSE:BKD)

Both retirement centers and assisted living had strong performances both ending September over 90%.

From Capital Senior Living Corp.’s Q308 conference call: (NYSE:CSU)

High margins:

Occupancies have improved since June... Every 1% of occupancy gains at our consolidated communities will generate approximately $2 million in additional revenues. A 5% increase in average monthly rents at our consolidated communities will generate approximately $8.5 million in additional annual consolidated revenues.

We are converting 213 independent living units in 7 communities to assisted living for dementia care.

We opened our newest community in Dayton, Ohio at the end of August… We have two other communities under development in a joint venture with Prudential Real Estate.

Excellent outlook:

New developments of seniors' housing continues to be severely constrained and construction activity is negligible in our markets. We expect building will continue to be restrained as the credit crises has worsen in already difficult environment to build new senior living communities. This decrease in development which may last for an extended period of time should leave this senior’s housing industry with favorable demographics and sounds fundamentals out of the current throw off to a robust period.

Assisted-living and dementia care provider Emeritus Corp. (NYSE:ESC) said on its Q308 conference call:

We are reiterating the guidance range and expect that at a minimum, we will achieve the lower end of that range… 93% of our portfolio is comprised of assisted living and Alzheimer’s units, and demand for these need-driven services remained stable.

Q: Some of your competitors obviously has been talking about pursuing kind of discounting strategies, it sounds like you’re not.

A: We just haven’t seen that we have had to do any discounting in any meaningful fashion so far.

We just recently closed the deal with Freddie Mac and KeyBanc, so there is still… money out there for attractive assets… The resellers are very interested in continuing to acquire assets at attractive prices, so we think there is a lot of opportunity in this market.

People’s Bancorp (NASDAQ:PEBO) said on its Q308 conference call on Nov. 2 that it sees no trouble on the horizon:

We do have a concentration in assisted living facilities… We've approved construction loans [for assisted-living] facilities in Ohio.

Healthcare REIT Healthcare Property Inc. (NYSE:HCP) said in Q2:

The CEO of every major concentration of senior housing real estate in last 30 days… are all experiencing some Q2 softness. But July has gone well and move-ins are actually tracking at all time highs…

On HCP’s Q308 conference call, after a successful quarter:

Plenty of funding:

In September, we placed $319 million of secured Fannie Mae debt on 16 of our senior housing assets with a blended rate of 6.39% a loan to value of 60% and a blended term of 6.7 years.

The composition of our portfolio reveals diversification across five substantial property segments led by senior housing, which is down from 60% of the portfolio two years ago to 39% today. HCP has been a significant net seller of senior housing real estate for the past two years.

They see favorable trends for the long term, specifically because benefitting from the credit crisis:

The aging baby-boomer continues to age with 13% of the US population now over 65 years old. Two, industry-wide senior housing occupancies are hovering around 90% today versus the low 70% plus metric of six year ago, and three, there is no discernible supply of purpose-built communities under development today versus the tidal wave of supply that existed six years ago.

Taken together, these investment considerations would suggest that 2009 may become an increasingly attractive inflection point allowing HCP to transition from a net seller to a net buyer in the senior housing sector.

Skilled Healthcare Group Inc. (NYSE:SKH) indicated on its Q308 conference call that the mid-level of the market is more affordable and doing better:

We are seeing really nice growth in our assisted model. We have – our assisted living model is a little bit smaller. It is the not the high-end $5,000 to $6,000 a month market. It is more the sweet spot of the 3,500-3,000 a month and we think it is an affordable model.

The company says it acquired seven assisted-living facilities in Kansas in Sept. 2008.

Not all is rosy on the horizon:

But Susquehanna Bancshares (NASDAQ:SUSQ) said on its Q308 conference call that it is seeing stress in the marketplace. The company recently received $300 million from the Fed's recapitalization program:

We saw a 19% increase in non-performing assets during the quarter which was primarily caused by an increase in non-accruals of $17.6 million. This was due to a weakening in the real estate market in the Baltimore-Washington MSA. The increase was centered in six residential real estate projects and two assisted living facilities... Due to the weakness that we have seen in the real estate market, the bank increased its provision for the quarter to $17.7 million after net charge-offs of $8.2 million, the reserve balance increased by 9.9% to $105.6 million.