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Senior Housing Sector Suffering Effects from Recent Supply Glut

Property Owners Shuffling Operators, Exploring Options
March 6, 2018
Brookdale Guadalupe River Plaza in Kerryville, TX. Credit: Brookdale Senior Living

With apologies to The Rolling Stones, the senior housing sector knows that 'Time is on its Side,' but right now it 'Can't Get No Satisfaction.'

The problem facing the sector in a nutshell is too much senior housing stock added in too short a timeframe. With more than 10,000 baby boomers turning 65 each day, it would seem demand would be fairly strong.

The problem, as noted in the Year-End 2017 Seniors Housing Investor Survey by JLL, is that developers jumped in and built thousands of units of new senior housing, resulting in inventory far outpacing absorption last year, although construction of new units appears to be leveling off. Overbuilding issues are most prevalent in outlying suburban areas, where product is relatively easy to develop quickly, JLL notes.

While demographics favor the long-term prospects for the senior housing sector, investors are concerned with the market today, which right now is not a pretty picture.

Under pressure from shareholders, several REITs in the senior housing sector are changing operators, slashing dividends, and undertaking strategic reviews.

Elevated senior housing supply remains the biggest issue affecting the senior housing sector, according to analysts at Morgan Stanley Research. Developers have been very active on the senior housing front, expanding total inventory by 3.2% compared to the long-term average of 2% for the senior housing sector.

For public REITs in the sector, growth is also being hampered by higher prices for the best properties, a higher cost of capital, and operator-specific issues.

This week, HCP (NYSE: HCP) said it will replace the manager for a portfolio of 24 of its senior housing communities, replacing Brookdale Senior Living (NYSE: BKD) with Atria Senior Living.

"Atria has a proven track record of providing outstanding care for residents and strong property operating performance for owners," said Tom Herzog, HCP president and CEO. "We have been discussing ways to grow together and this agreement is a win-win for both organizations."

That move follows Brookdale's conclusion last week after conducting a review of its strategic options and decision to reject a buyout offer of $9/share. Brookdale's stock value dropped by nearly $3/share to about $7.20/share after turning down the buyout offer.

Nashville-based Brookdale did announce changes to its executive leadership, appointing CFO Lucinda M. Baier as president and CEO and electing Lee S. Wielansky as non-executive chairman to succeed executive chairman Daniel A. Decker, who will retire.

"It is time for meaningful change at Brookdale and the board is committed to making sure the company's new strategic plan creates long-term value for our shareholders," Wielansky said

Brookdale operates independent living, assisted living, and dementia-care communities and continuing care retirement centers, with approximately 1,023 communities in 46 states.

The company reported a net loss of $571.6 million for year end 2017 compared to a net loss of $404.6 million for year-end 2016.

In November 2017, Brookdale and HCP amended triple-net leases covering substantially all of the communities leased from HCP into a master lease and agreed to the termination of leases on 35 communities totaling 3,331 units.

The amendments reduced HCP's exposure to Brookdale and increased tenant diversification in its portfolio, HCP officials said.

While Brookdale has concluded its review, another senior housing firm, New Senior Investment Group Inc. (NYSE:SNR), announced this past week that it will undertake one for its business.

"As has been widely reported, the senior housing industry has been facing near-term challenges as new supply and increased competition continue to impact performance," said Susan Givens, CEO of New Senior. "These industry dynamics and other factors have exerted negative pressures on our own portfolio."

Givens said the measures the firm has taken to-date, including stock buybacks, a tender offer in 2016, and selected asset sales has not improved its stock price performance.

Analysts at Stifel noted in their review of New Senior Investment's fourth quarter results that the REIT's ability to generate enough cash flow to cover its dividend may be impaired given declines in its managed portfolio. The REIT generated $0.22 per share of funds available for distribution but needs to cover a $0.26 per share dividend payment.

"Something will eventually have to give on this front, either core operations improve significantly or management will be forced to cut its dividend payments," Stifel analysts said.

Non-traded REIT Healthcare Trust Inc. ended up doing just that. Last week, the REIT slashed its monthly distributions to holders of its common stock from $1.45 per share on an annualized basis to $0.85 per share.

The REIT said it reduced the distribution to more closely align with current cash flows.

"Similar to the experience of other health care REITs, performance of skilled nursing facilities and senior housing operating properties have been challenged by changes in reimbursement, increased supply and other factors," the REIT said. "Management responded to these challenges in 2017 by repositioning the portfolio by signing leases with new, more credit-worthy tenants and changing tenants and/or managers in 41 properties, including replacing tenants in two skilled nursing portfolios and operators of two seniors housing portfolios."

In addition, Healthcare Trust said it has begun buying more medical office buildings to help improve property net operating incomes.

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