the investment case for senior housing: it’s much more than just demographics - uli fall meeting -...
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The Investment Case for Seniors Housing:It is much more than demographicsULI 2011 Fall MeetingLos Angeles, California
Panel and Key Learning ObjectivesPanelistsMercedes Kerr, Senior Vice President, Health Care REIT (HCN)Bill Pettit , President, Merrill GardensChris Kazantis, Director, AEW Capital Management, L.P.
Key Learning Objectives• Industry definition and comparison to other RE sectors• Challenges facing the sector and our responses• Characteristics of innovative projects and investment models• Capital availability and underwriting standards• Commonly held fallacies about senior housing
Today’s seniors housing is not your grandparents’ nursing homes.Today’s seniors housing is a mix of real estate, hospitality and care.
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Seniors Housing Continuum
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Rents Vary by Care Segment
Source: NIC MAP Data & Analysis Service
Average Monthly Rent by Care Segment as of 2Q2011
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Housing, Laundry,Meals, Socialization
Key Industry Attributes• Seniors housing and care’s market value is $260 billion and growing. • Seniors housing private and public investment returns outperformed other commercial real estate property investments during the past five years.• Three of the 10 largest REITs are now health care REITs.• Seniors housing was a resilient real estate sector during the economic recession.• Strong outlook for seniors housing market fundamentals.
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Market Values by Property Type
Source: National Multifamily Housing Council, Mortgage Bankers Association, REIS, Smith Travel Research, American Hotel and Lodging Association, NIC Research
Estimated Market Values ($B) as of 2010Q4
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Size of the Senior Housing Market
Source: NIC Research
Estimated National Counts as of 2010Q4
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• Strengthening demographics• Rising penetration rates and product acceptance• Improving health care and longer life expectancy• Higher education levels• Fewer informal family care givers available
Demand Drivers for Seniors Housing
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Strong Demographic Growth
Source: U.S. Census Bureau
Population Growth (%), 2011-2020
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2011-2020 CAGR (%):
75+ Cohort: 1.8
25-34 Cohort: 0.9
U.S. Population 0.8
Pace of New Supply is Now Tempered
Source: NIC MAP Data & Analysis Service
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Seniors Housing Rents Less Volatile
Source: NIC MAP Data & Analysis Service; MBAA; REIS; STR
Year-over-Year Asking Rent Growth Trends (%)
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Seniors Housing Occupancy Held Up Well
Source: NIC MAP Data & Analysis Service; MBAA; REIS; STR
Year-over-Year Occupancy Trends (Basis Points)
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Seniors Housing Total Returns Outpaced NPI*
Source: NCREIF; AEW Research
Annualized Total Returns (%)1-, 3-, 5- and 7-year PeriodsJune 30, 2011
*NCREIF Property Index (NPI)
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Health Care REITs Outperform
Source: NCREIF; AEW Research
Annualized Total Returns (%)1-, 3-, 5- and 7-year PeriodsJune 30, 2011
*NCREIF Property Index (NPI)
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Conclusions• Near term headwinds from housing market downturn and economic uncertainty• Strong long term outlook for market fundamentals • Solid and relatively stable investment returns• Increasing presence of institutional investors• Variety of avenues for investment available• Experienced, quality operator is key to mitigating risks and achieving success through various cycles
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Urban Land Institute ConferenceMercedes Kerr, Senior Vice President - MarketingOctober 27, 2011
• 878 properties
• $13.7 billion* investment balance
• $7.4 billion in investments 2010-to-date
• Focus on key relationship partners
• Diversity across the acuity spectrum
Health Care REIT’s Portfolio
18* Based on HCN 2011 investment guidance
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Health Care REIT’s Portfolio Diversification
• Collaboration across the health care continuum
• Treatment of acuity in lowest cost setting
• Increased focus on socialization and wellness
• Focus on energy management and sustainability
Evolving Seniors Housing Industry
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• Physical Asset
Buildings that serve changing care models
• Operation & Clinical Quality
Operator-centric success
• Market & Location
Geographic clusters in strategic markets
Barriers to entry
The Asset Quality Equation
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• Why RIDEA?› Management team› Financial performance› Portfolio quality› Infrastructure› Alignment of interests
RIDEA Transaction Structure
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• Focused geographic presence in east and west coast markets
• Potential referral relationships between Health Care REIT’s portfolio partners
• Exploration of synergies between partners
• Best practice sharing
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Health Care REIT’s Outlook
Merrill Gardens
Merrill Gardens2011
William D. Pettit, Jr.
President
Merrill Gardens
Multi State Regional Operator West Coast focus
• Private, family company• 53 communities in 9
states• 7,300 resident capacity• Mid market private pay
rental model• Independent and assisted
living apartments
Merrill Gardens
Acuity Mix
Level Residents Using
I 60%
II 24%
III 16%
Frequently Used Services
Medication Reminders
Bathing
Dressing
Senior Housing Model
Merrill Gardens
Acquisitions and Sales
Merrill Gardens
The University – an Intergenerational Campus
Merrill Gardens
Merrill Gardens at Campbell
Merrill Gardens
Foster City Community Partners
Merrill Gardens
International StrategyOffice in Shanghai offering:
•Pre-Development Planning and Feasibility
•Market Analysis
•Design
•Sales and Marketing
•Staff Training
•Operations
Merrill Gardens
Health Care REIT Partnership
• $817 million partnership - 38 communities
• Health Care REIT owns 80% interest and Merrill Gardens owns 20% interest
• Merrill Gardens retains exclusive rights to manage assets
• Partnership’s focus on long term expansion through both acquisition and development
• Strong alignment of economic interests
AEW Capital Management, L.P. Manages $48.8 billion of real estate assets and securities on
behalf of institutional and private investors
A pioneer investing institutional capital in the senior housing sector, AEW made its first investment in 1997 and has acquired, repositioned and/or developed over 11,600 senior housing units with a gross property value in excess of $1.7 billion
Investments have primarily been joint ventures with experienced national, regional and local senior housing operators, both public and private
Investments have focused on age – restricted multifamily, independent, assisted living, memory care and CCRC communities across the U.S. and Canada
AEW Overview1
Rent Growth in Seniors Housing Vs. Apartments
Rent growth remained positive for seniors housing throughout the most recent business cycle
Rent growth has been less volatile for seniors housing than for apartments
RENT GROWTH (%)
Source: NICMAP, CBRE-EA
AEW Real Estate Market Outlook3
Property Type Comparisons
AEW Real Estate Market Outlook
Rent levels for independent living remain at all time highs, while assisted living rents are only down 0.3% from peak levels; rents for all other property types remain below peak
Over the past year, rents have seen positive growth for independent living, assisted living and multifamily properties
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RENT GROWTH COMPARISONS AS OF Q2 2011
Property Type Comparisons
AEW Real Estate Market Outlook
Assisted living and apartment vacancy rates have seen the most improvement since their cyclical high points, but remain above their cyclical low points
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VACANCY RATE COMPARISONS DURING THIS BUSINESS CYCLE
Seniors Housing Returns Vs. Other Property Types
AEW Real Estate Market Outlook
On a three, five and eight year basis, seniors housing outperforms the overall NCREIF NPI index and the apartment index.
The one-year and 2nd quarter underperformance reflects the “catch up” the other sectors are undergoing after their oversized write-downs.
Total NPI Total Apartment
Total Stabilized Senior Housing
2nd Qtr 2011 3.94 4.21 2.271st Qtr 2011 3.36 3.34 4.88One Year 16.73 21.38 11.55Three Years -2.56 -1.40 2.78Five Years 3.45 2.94 8.18Eight Years 7.91 7.41 14.92
Source: NCREIF, AEW Research
Total Returns
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Seniors Housing Income Returns Vs. Other Property Types
AEW Real Estate Market Outlook
Income returns for seniors housing outperforms the overall NCRIEF NPI as well as the apartment index for all periods.
Total NPI Total Apartment
Total Stabilized Senior Housing
2nd Qtr 2011 1.54 1.36 1.831st Qtr 2011 1.52 1.35 1.86One Year 6.44 5.68 7.53Three Years 6.20 5.42 7.14Five Years 5.96 5.16 7.06Eight Years 6.38 5.43 7.82
Source: NCREIF, AEW Research
Income Returns
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Seniors Housing Occupancy Rates
Source: CBRE-EA
Q2’11/Q2’10
New York (tightest)92.1%/91.7%
Las Vegas (loosest)85.1%/81.3%
U.S.88.0%/87.5%
Above the line implies improvement; below the line implies deterioration
SENIORS HOUSING OCCUPANCY RATES: CURRENT QUARTER VERSUS YEAR AGO
AEW Real Estate Market Outlook6
Property Type Comparisons
AEW Real Estate Market Outlook
Rent levels for independent living remain at all time highs, while assisted living rents are only down 0.3% from peak levels; rents for all other property types remain below peak
Assisted living and apartment vacancy rates have seen the most improvement since their cyclical high points
Q2 2011 (%)
Change from Lowest Vacancy Rate During This
Cycle (basis points)
Date of Cyclical Low
Vacancy Rate
Improvement from Vacancy
Rate Peak
Date of Vacancy Rate
Peak
Q2 2011 (year over year
change, %)
Change from Peak Rent
Date of Peak Rent
Independent Living 9.9 600 Q2 2006 20 Q3 2010 1.9 Assisted Living 7.7 270 Q1 2007 110 Q2 2009 0.7 (0.3) Q1 2011Retail* 13.2 680 Q4 2005 (4.1) (26.0) Q3 2009Offi ce 16.2 380 Q2 2007 60 Q2 2010 (3.7) (14.1) Q4 2008Industrial* 13.9 430 Q3 2007 60 Q3 2010 (1.6) (16.5) Q1 2008Multifamily 5.4 100 Q3 2007 200 Q4 2009 4.2 (1.5) Q3 2008Source: NIC MAP, CBRE-EA
* Availability rates are reported for Retail and Industrial
Note: AL, IL based on median occupancy rates in Top 31 NICMAP markets
Rent GrowthQ2 2011 Property Type ComparisonVacancy Rates
Currently At Peak
Currently At Peak
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Inn at Robbins BrookActon, Massachusetts
Morningstar at LittletonLittleton, Colorado
Carlisle at Palm BeachLantana, Florida