is what killed the sector last time around more than anything else. This is a real estate business at its core, with an operating component.
The ultimate weakness seniors housing properties have is to new competition- the market for seniors housing, while exhibiting stronger growth than certain other real estate sectors, is not explosive. It is higher than inflation, but not double-digit.
Thus, in a market that has about 1,000 assisted living units, if a new facility is built with 100 units, market occupancy could drop by roughly 9% overnight. Assisted living facilities are very easy and cheap to build.
When the M&A market became very heated for seniors product in the 1990's, people saw this trend and began to build rather uncsrupulously. The current health of the sector is largely a result of very little construction in 2000-2005, as a result of the overbuilding before.
With pricing for properties at all-time highs, new construction will be justified by many investors. The most important item to watch, is the pace of construction. If supply begins to increase much higher than 10,000 assisted living units per year, danger could be around the corner.
Me? I know a lot about the industry. Please tell what sort of premium I should ascribe to developable land in Fond Du Lac or Middleton, Wisconsin? Texarkana, TX? Fort Collins, CO? Pensacoloa, FL? Kokomo, IN? Hixson, TN? The list goes on!
If all BKD owned was urban, high-density properties in hard-to-build locations, that would be one thing. But they don't, they own a conglomeration of properties all over the country, dozens of them in very small, suburban or rural towns with literally no limits on development.
To say I know nothing about senior housing, when I mention overbuilding as a factor in the problems of the late 1990's, indicates that you yourself weren't around watching the sector during that time period.
Please advise what you believe "premium land" costs in these small-town markets where BKD exists, and why it would be ludicrous that overbuilding could happen again.
Yes, this business is a real estate business & an operating business. In the past, the oversupply of beds were primarily concentrated in "thin" markets i.e. Midwest, southwest and southeast. Companies built in these markets because it was easy to get approvals and there was cheap land.
To be successful, a company needs a presence in major MSA's like NYC, LA, Chicago, etc, NOT Kokomo, Ind or Waco, TX.
Disagree with this analysis. Overleverage brought the business down combined with too much reliance on proforma numbers. Proforma never benchmarked against actual performance. Companies also built product in secondary markets where demand was never very deep and paid high prices for land and construction costs. Seemed to go with a philosphy of "build it and they will come".
On one level, you're right. To be successful, these type of facilities need to be in high income density markets - major metros where there are enough people that can pay the high private pay rates and where the children of the residents can visit and work. Sounds like location, location location.
Can't do this in small towns in Kansas, Wisconsin, Indiana, Ohio, etc. Best places in CA - LA, SF, NY/NJ, Boston, Metro Chicago, etc.
Let's not confuse cause and effect. The "overleverage" was the result of (required to finance) the binge of overpriced acquisitions. Then, as now, the partyline was (1) denial of excess supply and (2) false hopes for post-merger operating synergies/savings.
The dense urban markets being targeted/acquired may have "bubble prices" in all residential RE including seniorcare. BKD may have just paid a "bubble" price for RE where Mom-n-Pop can no longer sell their home for sufficient funds to finance the purchase and monthly fees of a seniorcare unit.
Finally, the financial management at BKD appears unusual. E.g., as noted by Steve Monroe, a veteran industry analyst at Levin Associates: "...no one questioned the wisdom of increasing the quarterly dividend rate by 40% when the cash flow in the fourth quarter, after adding in interest income, could barely cover that quarter's lower dividend. The fourth quarter's "adjusted" EBITDA was about $27 million, but after deducting $12.8 million of interest expense, you are left with $14.2 million, compared with a dividend payout of about $16 million."