“Terrific Environment” for Senior Housing and Care Investment

“Any time there’s a big moment of disruption, I think it’s really important to step back as an investor to look at the space that we’re in. Let’s set the stage a little bit here: We look like we’re at the end of a 12 plus year credit cycle, which in my 30 years in the industry, is the longest cycle that I’ve ever participated in.

Interest rates are rising. We have a war in Europe. Inflation is spiking. Market volatility is increasing. There is change everywhere, but capital is really interested in what we have to offer. We have a simple, easy to understand story around the drivers of growth in our space. And we have demonstrated good returns over the long run. Those are things that attract capital. However, the pandemic has accelerated the recognition that senior housing and care is an important part of the broader healthcare ecosystem. And many of the sessions here at NIC are going to talk about that.

So what does that mean to be part of the healthcare ecosystem? Let me give you a couple of facts just to set the stage on how we fit into this. As you know, healthcare spending is roughly 20% of GDP in the U.S. — that puts it at over $4.1 trillion a year. The health insurance industry has over $2 trillion a year in revenue. And just three of the larger companies in the health insurance space — United, Aetna CVS, and Humana — have more assets than our whole industry combined, about $480 billion. Why is that important? Because the health insurance industry is large, it’s healthy, and it’s well capitalized. And what are they looking at?

A growing number of their members live in our buildings and are more and more part of the equation of the increasing costs. And they require a lot of care. If you’re a health insurer or a risk taker in our space, they look at our space and say, “we’re not the senior living industry, we’re not the skilled nursing industry, we’re not the CCRC industry.” But, we have their members that are either pre-acute or post-acute. A pretty interesting distinction from the way we look at it.

And they have a business model that’s pretty easy to understand; sort of three things they’re looking at. One is they need to increase membership, particularly in their special needs plans, because those are the most expensive members they have. They need better, more integrated care delivery networks. Think about what that means. It’s all of you in this room (the care delivery network). And they need better, more integrated data. That’s why it’s so important for all of us to continue to contribute our data to NIC MAP Vision.

It’s pretty easy to see where this is going. Whether you’re a small operator, a developer, a large investor, we should all anticipate that this well-capitalized health insurance industry will be a force for change both in capital formation and in operations. At NIC and NIC MAP Vision, it’s clear that we need to remain at the forefront of creating more consistent, timely, useful data to engage with risk takers in the insurance industry at both the granular level (that means in your buildings) as well as at the industry level.

I’m a private equity investor. We’re raising our eighth fund. Am I bullish on investing in the senior living space? We are very bullish. We anticipate investing a lot of our next $500 million fund in the senior living business.

Why? Let me just remind you, other than the obviously wonderful demographic growth story, as we shift our focus to the baby boom generation, which is 62% larger than the silent generation we have been serving, let’s talk about the structural characteristics of our industry quickly that make it very favorable to invest in this space.

First, there’s an aging stock of supply in our industry. Second, rents are not correlated to the broader economy. Demand is inelastic; it’s driven by need. Our residents are not tied to the labor market (even though we’re having trouble with staffing) because they’re already retired. The industry is highly fragmented, which means there’s great opportunity for consolidation and growth. It’s notoriously difficult to scale. So those participants who can execute have a big advantage. Why is it hard to scale? Local markets matter. Customer demand, competition, land usage, and labor markets are all driven locally. Operations are a complex mix of real estate, wellness, healthcare, and hospitality. That’s hard to do. Branding has a limited effect. Families only make the decision to use our product once or twice in their entire lives. And regulations are a confusing mix of local, state and federal rules.

And lastly, one of my favorites is, you can’t offshore personal care.

All these factors favor dedicated, focused, expert participants and combine to create a terrific environment to earn a premium return on your effort.”