Investment Returns in Senior Living

Just how much can an investor make by investing in the senior living market?   We will examine the industry average returns, the returns from public companies, public REIT’s and private companies.    (This set of comments is NOT legal or investing advice and it is not an offer to sell anything. It is simply a look at what returns an investor may earn by putting money into the senior living market.) 

Industry Returns

The average return over the period from 2004 through 2015 was 14.7%.  This chart from the National Investment Center and the National Council of Real Estate Investment Fiduciaries tells the story.   The returns shown are “total returns” which came to 14.7% for the 10-year period ending in Q1, 2015.   How many investments do you have that are earning that kind of return?   Certainly there are some investors who are doing this well investing in senior living.

Sr Housing Returns vs Other Sectors

But how do you earn this average?   And what goes into this average?

The returns include investments reported to NCREIF; they are self-reported so there are publicly traded senior living companies and REIT’s and various forms of private ownership in this set of numbers.  Let’s look at returns for some[i] of the public companies, public REIT’s and some private deals to get a deeper understanding.

Public Companies

In the US market there are a few publicly traded senior living companies.[ii]

Company                                                   Primary Type              Market Cap $Millions

  • Brookdale Senior Living     BKD             Assisted Living                         $3,300
  • Capital Senior Living            CSU              Assisted Living                             $548
  • Five Star Quality                    FVE               Assisted Living                               $99
  • Ensign Group                           ENSG           Skilled Nursing                        $1,030
  • Kindred Healthcare             KND             Skilled Nursing                        $1,010
  • National Healthcare            NHC             Skilled Nursing                           $946
  • Genesis Healthcare             GEN              Skilled Nursing                           $290
  • Diversicare Health               DVCR          Skilled Nursing                              $52
  • AdCare Health Systems    ADK             Skilled Nursing                              $39

So what returns do these companies provide? Let’s image you bought into each of these companies 5 years ago.  Here is what you would see:

REIT Returns

Certainly if one had purchased Capital Senior Living or Ensign Group life would be good.  But only 2 of the 9 companies beat the numbers reported by NIC/NCREIF of 13.5%[iii].   This analysis may be unfair, but the numbers are the numbers.  As an investor the message here is to be very, very careful about what you buy.  One can earn solid returns over 9%/year IF the right companies are selected.

Let us look at the publicly traded REIT’s.

Public REIT Returns

 

There is only one of the 13 REIT’s that has a negative implied return.   If you choose one of the top 7 you will do better than 12% per year!   So if you are looking for a place to earn 12% here are companies to consider.   And not surprisingly, institutional investors know this.   The next chart is pulled from StockRover:

Stock Rover - Public REIT's

 

So exactly how is the return for the industry averaging over 14% for 10 years and 13.5% over the past 5 years?  There must be many companies we are not seeing in the data examined so far.  They must be private companies.

NIC says the senior housing market is between $250 and $270 Billion in size.   Stock Rover shows the size of the public senior’s REIT market as $164 Billion and the publicly traded companies at $23 Billion.   This implies the private senior living market is between $86 and $106 billion in size.   So the private market must be doing better that 13.5% annual returns on average in order for the NIC/NCREIF numbers to be correct.   So backing into the number by weighting the returns by the economic values for REIT’s and publicly traded companies give us this view[iv]:

Private Company Returns

 

Private companies are earning 23%.  Well, maybe not quite.   They need to raise money and there are fees involved.  Those costs may well approach 6% so the investor in a private firm should be able to earn 17%.   And there is data that supports this. As this is being written, there are four private equity firms out raising money and each is promising the investors a preferred return of 8% to 9% and an IRR (internal rate of return) of 15%.  From this top-down analysis it appears that private investors are earning better than the 15%.

Summary

An investor in the senior living market can reasonably expect these returns:

  • Public Companies   — 4% to 20% with careful selection
  • Public REIT’s            — 2.5% to 18% (buying a dollar weighted basket of all of them has returned 10% per year over the past 5 years)
  • Private Companies — 15%-17% or more

Senior living does offer solid returns!

 

[i] The list of companies is not exhaustive.  It is meant to give examples to understand typical returns for each type of investment only.

[ii] All data from Yahoo Finance, June 15, 2016

[iii] The 13.5% is an estimate from the graph reported for the 5-year period ending in 2015 from NIC/NCREIF.

[iv] The 13.5% is an estimate from the graph reported for the 5-year period ending in 2015 from NIC/NCREIF.  All other numbers are calculations from the tables used above.

Investment Returns in Senior Living

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