Market dynamics will improve in senior living in 2020, but it’s too soon to say the industry has turned around from recent financial and occupancy challenges, Healthpeak President and Chief Investment Officer Scott Brinker said Wednesday on the Irvine, CA-based real estate investment trust’s fourth-quarter 2019 earnings call.
“From where we sit today, occupancy across the sector is generally flat, which is certainly improvement from where it’s been the past three years or four years. But too often, I think that occupancy is coming at the expense of discounting and incentives, and those aren’t being picked up by the [National Investment Center for Senior Housing & Care] data that a lot of people like to focus on,” he said.
Rents in certain markets may be growing at a 3% rate, Brinker said, but nationally, they are growing at a rate of 1% to 2%.
“With flat occupancy growth, you can assume that revenue is growing 1% to 2% a year, and if labor is the vast majority of your operating expenses, growing 5% a year on a 30%-margin business, it’s pretty simple math to understand why [net operating income] at an industry level has been declining in the 5% to 10% range,” he said. “We see that improving slightly throughout the course of 2020, but we don’t think we’ve yet hit that inflection point, despite the fact that occupancy is flat. We really need to see both flat occupancy and pricing power or a dramatic increase in occupancy so that revenue growth can keep pace with expense growth, and we’re just not there yet as an industry, but getting closer, for sure.”
Among Healthpeak’s senior living transactions in the fourth quarter and after:
- Healthpeak entered into an agreement with Oakmont Senior Living that provides Healthpeak the option to acquire up to 24 of Oakmont’s senior living development properties as they are completed and stabilized over the next four years.
- In January, Healthpeak closed on the transactions with Brookdale Senior Living related to the acquisition of Brookdale’s 51% interest in more than a dozen continuing care retirement communities for $641 million. The amount includes payment of a $100 million management termination fee to Brookdale.
- Also in January, Healthpeak closed on the sale of an 18-property triple-net portfolio to Brookdale for $405 million.
- In December, Healthpeak closed on a $790 million sovereign wealth fund senior housing joint venture in which the REIT sold a 46.5% interest in a 19-property senior housing operating portfolio managed by Brookdale to a sovereign wealth fund.
- In December 2019, closed on the sale of the remaining 49% interest in Healthpeak’s holdings in the United Kingdom, which resulted in $91 million of net proceeds.
Asked about an agreement announced Tuesday by Capital Senior Living, whereby the REIT and operator are ending their 15-community relationship, Brinker said: “They have important strategic initiatives on their end, which included reducing their lease liabilities. Healthpeak was their smallest partner. They certainly have others. They were not core assets for us, and we’ve talked about having, two or three years ago, 30 different senior housing operating partners. Today, we’re down about 20. We’d like to get down to about 10, and we were not looking to grow with CSU, so it made sense both for us and for CSU, strategically, to exit that relationship.”