Though baby boomer demographics and controlled supply will
ultimately make senior housing and care an attractive investment, this sector is
not without risk. Of the publicly traded skilled nursing companies, only HCR
Manor Care has avoided bankruptcy. It has generated five-year average annual
returns of about 19 percent. Genesis HealthCare’s stock grew over 40 percent per
year on average since it emerged from bankruptcy in 2004.
In the low acuity segment, few barriers to entry exist, so
overbuilding can be a problem. In this nongovernment reimbursed sector, margins
range from the mid-20 to mid-40 percent levels, but can quickly erode when
overbuilt supply outstrips demand.
As might be expected, a predominantly government-paid business,
like skilled nursing, carries low margins (generally single digits to upper
teens). Ironically, what should be a low margin, low volatility business has not
been the case. Changes in reimbursement, labor markets and liability issues
surrounding care have wreaked havoc on the profitability of skilled nursing
facilities.
Senior housing and long-term care is still a niche market, and
the ebb and flow of capital can have a tremendous impact on it. Yet, it is a
market that is moving from niche to the mainstream, therefore opening up
tremendous long-term investment possibilities.
Kevin McMeen is managing director
of Merrill Lynch Capital
Healthcare
Finance in Chicago. |  |
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