Beth Mace walks us through some interesting investment aspects of Senior Living.
By Steve Moran
On the last day of NIC Beth Mace, the economist for NIC, made a presentation that mostly made me think I was not very smart. Well, maybe that is not quite fair. She actually did a pretty good job of presenting some interesting data in a way that I could mostly understand.
In her discussion on pricing and senior living she walked us through these steps . . . or rather this thinking.
The current average price per unit for senior living is $173,000 and $73,000 per bed for skilled nursing based on the past 4 quarters.
Risk free investing is assumed to be 10 year treasury notes which are currently at around 2.1%.
The reason investors forego treasury notes in favor of other investments is because they offer a higher rate of return . . . in other words a spread.
The spread is, in effect, a premium or reward for taking a higher risk level. So the higher the risk level the larger the spread must be for an investor to take on that additional risk. So bank CDs will carry a risk premium that is higher but not much since they are perceived as almost as safe at T bills.
In the real estate sector various asset classes have risk premiums attached to them. So hotel’s carry an 8% risk premium, and apartments a 6% premium. In other words, investors in hotels are expecting to receive a rate of return of around 10% and investors in apartments around 8%.
Over the last few years senior living properties have been running at a 7.7% risk premium, that’s someplace between hotels and apartments.
Thinking About This
For most of the life of senior living, these buildings have been seen as sort of a non-standard or non-traditional investment and that one fact has increased the risk premium. Particularly with the aggressive levels of investment by REITs in the senior living sector there is some thinking that senior living properties should be viewed as a standard class of investment.
As a result, it would presumably reduce the risk premium associated with that asset class making these properties more accepted by the investor community and result in even higher evaluations. So maybe senior living properties should be seen as closer to apartments. If there were even a shrinking by half a percent, the increase in value would be huge.
In reality pricing is never that simple. Perhaps the biggest influencer is the cost of getting new product into the marketplace. Other things that can influence the risk premium include demand, operating costs . . . and on and on.
I am not quite sure we will see this kind of shift in valuation and I want to be very clear that Beth did not predict or even hint this would come about, but it is an intriguing thing to think about.