Thematic Investing: The Rise of Senior Living

These are the statistics.

• The U.S. population aged 65 and over grew nearly five times faster than the total population over the 100 years from 1920 to 2020, according to the 2020 Census.

• The older population reached 55.8 million or 16.8% of the population of the United States in 2020.

• In the next ten years, the number of Americans reaching their eighties will grow by 4.3 percent every year, or 7.3 million people—increasing demand in the senior housing market.

• There are currently roughly 62 million adults ages 65 and older living in the U.S., accounting for 18% of the population. By 2054, 84 million adults ages 65 and older will make up an estimated 23% of the population.

• The rapid growth was largely driven by aging baby boomers (born between 1946 and 1964) who began turning 65 in 2011.

It’s no secret that the US has an aging population with the Baby Boomers making up the largest part of the older population. It should come as no surprise that these Baby Boomers are among the wealthiest aging population in the world, but there is a serious lack of senior accommodation for them in the US market, as they age.

While there is an increasing trend of aging in place driven by more affordable & better home healthcare, changing trends among these baby boomers and senior housing facilities will continue to see people moving into more retirement communities.

Today we look at some of the trends in the Senior Housing market as an investment opportunity for the long run and identify potential stock ideas for this theme.

Trends in Senior Living

Baby Boomers are Wealthier = Affordability + Lifestyle

Baby boomers hold the most wealth of any generation, coming in at 51.8% as per the Federal Reserve’s Q4, 2023 report. A major source of this income has been retirement savings but, more so the rise in home prices. This segment of the population has seen a 215% increase in home prices leading to increased home equity and wealth.

Roughly 22.5% of households in the U.S. are occupied by homeowners aged 65 and older. and more homes will be sold to transition to senior living. There will be 9.2 million fewer boomer homeowner households by 2035, according to a recent Freddie Mac analysis.

This certainly presents an opportunity for senior housing communities, which on average, tend to be more expensive. According to the National Institute of Housing & Care (NIC), the average rent for senior housing is just over $4,900 per month.

But Baby Boomers can afford this.

Furthermore, interestingly enough, the rental growth has been lower than single-family and apartments and any rent increases are being well absorbed because of the higher affordability.

But Baby Boomers also want a lifestyle.

There is a rise in Active Adult Communities, which are multifamily properties where the consumer is not looking for care but wants to belong to a community. Residents want to engage but seek a carefree lifestyle. They want to be free of the responsibilities of homeownership. They have parking and storage, but no meal plans or care facilities that make them feel like they live in an old folks’ home!

Baby Boomers Need More Care

While the “younger” generation of this cohort certainly wants Independent Living, those transitioning into the 75+ age bracket however, have started to require more care.

Firstly, you have a population where life expectancy is increasing. US centenarians are projected to quadruple by 2054 (according to the Census Bureau and Pew Research).

This means more people will move from communities & independent living to assisted living & nursing care, and will remain there longer.

The Baby Boomer generation came of age during the era of more processed foods, double-income families, and more stress - all leading to higher requirements for care. Covid has added to these complications. So, while this generation may have longer life expectancies due to modern medicine, they will require continuing care.

The chart below shows almost 23% of 65+ adults have poor health and close to 10% have difficulty with self-care.

This is why more communities are now opting for “combined” offerings - which have a mix continued care retirement communities, independent living, assisted living, and memory care.

Problems in the Senior Living Industry

Shortage of Inventory

Given the above trends, there is a serious shortage of senior housing to accommodate the 65+ population over the next 30 years. Calculations by NIC MAP Vision project the need for an additional 200,000 senior housing units by 2025.

Aging In Place

Aging in Place (staying in their current homes) has become a more viable option these days because of more home health care options. The Home Health Market is expected to grow at a 3% CAGR from $132B in 2023 to $161B in 2030. 7% of older adults are already using this option and many are covered by Medicare.

Managed care companies such as United Health (UNH) and Humana (HUM) are building horizontally integrated home health offerings to serve their Medicare Advantage population.

However, most homes are not ready for an aging population. According to the US Census Bureau

• About 50 million or 40% of U.S. homes had what were considered to be the most basic, aging-ready features.

• About 4 million or 11% of older households reported difficulty living in or using their home. The share increased to nearly 25% among households with a resident age 85 or older.

Pandemic Occupancy

Occupancy fell strongly during the pandemic era and many companies in the senior living sector are still struggling to get back to pre-pandemic levels. The need to improve occupancy levels has led to discounting and competing based on the add-ons they provide. Not everyone has the capacity to do that.

At the outset of the pandemic in the second quarter of 2020, the occupancy fell sharply by 2.8 percentage points from 87.7% to 84.9%, marking the largest quarterly decline since data reporting began in 2005 (National Investment Center). The trend continued into 2021, reaching a record low in the first quarter of the year when occupancy fell to 78.8%, down by 8.7 percentage points from the previous year.

Higher for Longer

The aggressive increase in interest rates by the Federal Reserve since 2022 has done little to help the Senior Housing sector.

• About $19B in Senior Housing Debt matures in 2024, and most of these will have to be refinanced at significantly higher rates. Some may not be able to accommodate the interest cost at these higher rates.

• Where agency debt is concerned, Fannie Mae holds about $16B in Debt of which $5.9B is subject to floating rates of interest and about $7B is at a high risk of default. $1.1B is already 60 days past due.

• About $20B in bank loans are taken out for construction finance or as bridge loans and usually have floating rates. About 50% of these are already starting to show distress.

As far as capital markets go, this sector is in a dire situation and only the strong will survive. Companies with solid balance sheets will need to rescue the smaller players, who don’t have the ability to service their existing debt.

Construction slowdown

New construction starts in senior housing have been falling since 2017 and have now reached less than 2% of annual stock. While existing debt is faltering, getting new loans for construction is an even bigger problem.

The high cost of new development and lack of financing for big projects have pushed some operators to renovate and reposition older communities. But as operators serving the baby boomers can attest, the incoming generation of residents wants something different than their predecessors.

Another issue plaguing the sector is the Certificate of Need (CON) that is required in some states to purchase, construct, or expand senior living facilities. The procedures are often slow. Even where a CON is not required, states take a long time to approve new facilities and impose stringent development standards.

Labor Issues

We all know that the healthcare sector suffered with labor issues during the pandemic. It was worse for the senior sector because the precautions to be taken were more stringent. Caregivers were forced to vaccinate and take extreme care when dealing with the elderly. Burnout was real and many people quit, not wanting to come back.

Lack of labor supply and having to hire agency staff to fill roles led to higher costs. Labor supply fell by 15% during 2020 and 2021, and still remains 7% below pre-pandemic levels. Compensation is 33% below the national average making the sector unattractive in a tight labor market.

Where are the opportunities?

We know that there is a supply crisis brewing in the face of increasing demand. Since the pandemic, we’ve seen a gradual improvement in operating metrics.

In 2023, the annual growth rate of rent reached a record high of 5.4%, and seniors housing occupancy has recovered to 83.9%, regaining approximately two-thirds of the occupancy lost compared to pre-pandemic levels.

The labor market has also shown improvements and wage growth has slowed, with employment in assisted living surpassing previous highs. Additionally, the reliance on agency staff as a proportion of labor costs has decreased by over half in the past year.

There are a few ways to capitalize on the long-term growth potential brought on by what is called the “Silver Tsunami”.

1. Operators

These companies manage the day-to-day operations of senior living facilities, providing care, accommodation, and services directly to residents.

• Brookdale Senior Living Inc. (BKD): One of the largest operators in the U.S., offering assisted living, independent living, and memory care services.

• Atria Senior Living: Operates independent living, assisted living, supportive living, and memory care communities.

2. Developers

Developers focus on the construction and development of new senior living facilities.

• LCS: Develops and manages senior living communities through partnerships and joint ventures.

• Five Star Senior Living Inc. (FVE): Develops and operates independent living, assisted living, memory care, and healthcare centers.

3. Management and Advisory Services

These companies provide management, consulting, and advisory services to senior living operators.

• Capital Senior Living Corporation (CSU): Provides management services to independently owned senior living communities.

• The Ensign Group, Inc. (ENSG): Provides a broad spectrum of skilled nursing and assisted living services, along with physical, occupational, and speech therapies. We like the growth prospects of ENSG and would consider adding on dips.

4. Healthcare Services Providers

These companies provide specialized healthcare services to senior living facilities.

• HCP, Inc. (PEAK): A REIT that also focuses on providing medical office space and life science properties to healthcare providers.

• Genesis Healthcare, Inc.: Offers specialized care services, including rehabilitation and skilled nursing.

5. Real Estate Investment Trusts (REITs)

REITs invest in senior housing properties and often lease them to operators. They benefit from rental income and property appreciation.

• Welltower Inc. (WELL): A leading REIT specializing in healthcare infrastructure including senior housing.

• Ventas, Inc. (VTR): Invests in a diverse portfolio including senior housing, medical office buildings, and research centers.

There are 16 publicly traded healthcare REITs that collectively hold an enterprise value of approximately $170 billion and generate an EBITDA of around $11 billion. These REITs provide investment opportunities in various types of healthcare-related properties, including senior housing facilities, health systems and hospitals, outpatient medical centers, and life science properties.

What’s interesting is the recent changes to the healthcare REIT structure.

RIDEA, which stands for the REIT Investment Diversification and Empowerment Act of 2007, is a significant regulation for Real Estate Investment Trusts (REITs) in the United States. It allows REITs to participate more actively in the operational aspects of the properties they own, particularly in sectors like healthcare and senior living.

Before RIDEA, REITs were primarily restricted to owning real estate and collecting rent, but they could not actively participate in the management or operations of these properties. They had to rely on third parties to manage the properties, which limited their potential returns and control over property operations.

Under RIDEA, REITs can now:

1. Operate properties: They can engage in the active management and operation of their properties, such as senior living facilities, by forming taxable REIT subsidiaries (TRS). These subsidiaries can hire staff, manage daily operations, and potentially increase profitability.

2. Share in operational revenues: Instead of just earning rental income, REITs can share in the operating profits and losses, which can provide a more direct link to the economic performance of their properties.

Check out which stock we like to play this theme below.

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