The SeniorCare Investor: Beneath The Myth of Census--
We all watch occupancy, but it may not have the answers
Everyone is trying to figure out if the bottom of the economic cycle, at least for seniors housing, is actually behind us. And most everyone puts a positive spin on any recent results as well. From a review of the public companies’ third quarter results as well as the NIC MAP data, it is reasonable to conclude that things are not getting worse. The problem, however, is that they are not getting appreciably better either. A small increase in occupancy from a year ago, when the economy was just coming out of the bottom of the recession, does not get anyone very excited.
One of the troubling aspects of the so-called economic recovery is the theoretical relationship between home values and seniors housing occupancy. Since the beginning of 2007, they have both been moving in the same direction, which is down, but if home values continue to drop next year, does that mean seniors housing census will also decline? Not necessarily. And there is another correlation which had been close to perfect for a few years. According to Rob Mains of Morgan Keegan & Co., the correlation between the Case-Shiller Home Price index and the share price of Brookdale Senior Living (NYSE: BKD) was 0.90 in 2006 and 2007, which is statistically very unusual. The correlation has since dropped to 0.39 in the beginning of 2008 and 0.23 in early 2009, which may imply that investors don’t view Brookdale’s performance as being tied to the housing market, whether they did or not in the 2006 to 2007 period, which is a good thing. The other explanation is that a lag developed between the two, but that is next to impossible to determine at this point.
There is also the myth that new development in the seniors housing market came to a virtual halt because of the lack of financing and the fill-up risk in a severe recession. Judging by the number of press releases and news articles around the country announcing new projects, there is actually a fair amount of development going on, just not like four years ago. And the other big difference is that most of the development is being done by smaller companies and joint ventures and not the marquee names of the past, in what seems to be very targeted locations.
The other troubling aspect about the focus on occupancy, and we are as guilty as anyone, is trying to figure out the true “quality” of that occupied unit. If occupancy rises by 50 basis points, but the cost of that rise is rent concessions, then that could be viewed as somewhat of a hollow gain, especially since we do not know how long that new resident actually stays there, and how significant the discounts are. The extreme we have seen on the concession front is Holiday Retirement Corporation’s “free rent for life” raffles if you come to one of their open houses. There are a few restrictions, of course, and we have to believe it is more marketing bluster than a real cost. Fortunately or not, we have only heard of one potential resident possibly taking them up on it. The point is that not all occupancy gains are created equal, and as many providers know, when one community gets aggressive with concessions, it can hurt the entire local market, including existing residents who hear about the discounts from their new neighbors. The funny thing is that many providers will not own up to their discounting practices, even when we know they are doing it, so it is difficult to pinpoint who is doing what in each market.
One of the difficult things about trying to decipher financial statistics from the public companies is that they don’t all do the same calculations for the same periods... Want to read more? Click here for a free trial and download the current issue today