The long-term prospects are encouraging for this specialty segment, The long-term prospects are encouraging for this specialty segment, but facilities with more care options have recently gained favor.
By Jane Adler
An investment in memory care would seem like an almost no-fail proposition. More than 5 million people already suffer from Alzheimer’s disease and other forms of dementia — a number that is expected to triple by the year 2050.
Lately, however, investors have become somewhat wary of putting capital into new units designed only for persons with memory loss. Concerns have mounted about overbuilding as the number of memory care units has increased quickly over the last five years while occupancies have slipped.
Investors are hedging their bets, opting to mostly fund buildings that offer assisted living along with a smaller portion of memory care as a way to provide a continuum of care for residents and keep buildings full.
Then there’s the issue for investors of finding a quality operator. Residents with memory loss are difficult to manage, requiring a high number of staffers with special training in dementia care, which cuts into profit margins.
Still, freestanding or stand-alone memory care facilities have their supporters. They argue that a property designed only to provide memory care is best positioned to offer the optimal environment for those suffering from memory loss, a group that is only going to continue to grow.
“I’m a big believer in stand-alone memory care buildings,” says Adlai Chester, chief investment officer at Invesque, a healthcare real estate investment company based in Carmel, Indiana. “I like focused buildings rather than ones that try to be a jack-of-all-trades for seniors.”
By the numbers
Memory care is facing headwinds as the number of units has grown. Five years ago, in the first quarter of 2013, there were about 63,000 memory care units across the 99 primary and secondary metropolitan markets tracked by NIC MAP, a service of the National Investment Center for Seniors Housing & Care (NIC) based in Annapolis, Maryland. As of the first quarter of 2018, the number of memory care units had risen to about 98,000 — an increase of about 55 percent from 2013.
Many of the new memory care units are in buildings that offer both assisted living and memory care. The ratio of assisted living units to memory care units in a combination building is typically about two to one.
Memory care units in combination buildings grew by about 60 percent over the last five years, rising from about 40,000 units in the first quarter of 2013 to 64,000 units in the first quarter of 2018.
Memory care units in stand-alone buildings over the last five years increased from about 22,000 to 34,000.
“Memory care inventory in combined communities has been growing at a faster pace than freestanding memory care properties,” says Lana Peck, senior principal at NIC.
This wave of new construction has resulted in lower occupancies.
In the first quarter of 2018, NIC data shows that buildings offering both memory care and assisted living recorded an average memory care occupancy rate of 84.9 percent. That was down from the peak of 89.3 percent in the third quarter of 2013.
The average occupancy rate at stand-alone memory care buildings peaked in the second quarter of 2014 at 86 percent and currently stands at about 81.1 percent.
The number of new units coming on line peaked in the third quarter of 2016. The growth of new combination and freestanding buildings has moderated recently, allowing the absorption of units to meet or exceed inventory growth in the past three quarters, notes Peck.
A nod to combo projects
Properties that offer both assisted living and memory care are finding favor with investors. They understand that the average age of an assisted living resident is 87, and who by that age probably already has some memory problems.
“Investors owning independent- and assisted living-only properties don’t want to lose residents to a stand-alone memory care building,” says Chad Elliott, managing director of the mergers and acquisitions group at financial services firm Lancaster Pollard. He is based in the company’s Philadelphia office. “Investors like properties with a continuum of care so that residents can step into higher acuity care as needed within their network.”
National Health Investors, a healthcare REIT (NYSE: NHI), owns about 220 properties, most of which are seniors housing projects, along with skilled nursing and medical office buildings and specialty hospitals. “We favor buildings with a combination of assisted living and memory care,” says Kevin Pascoe, chief investment officer at NHI, which is based in Murfreesboro, Tennessee.
NHI and Bickford Senior Living have developed a handful of ground-up projects that offer both assisted living and memory care units. The projects include a total of about 60 units — 44 assisted living units and 16 memory care units.
Assisted living buildings with memory care offer residents and their families more options, says Pascoe. If an assisted living resident develops memory problems, the elder can move to the memory section of the building, thereby avoiding a disruptive relocation for the elder and the family.
Other considerations come into play for investors. For example, stand-alone memory care buildings are typically smaller than properties that also include assisted living units. The projects require less land and are less costly to develop. “It’s a double-edged sword,” says Pascoe.
NHI’s typical stand-alone memory care buildings include about 30 to 40 units, which makes them efficient. However, a small building of 40 units that loses just four residents has a 10 percent decline in occupancy. “That’s a headwind,” says Pascoe.
He adds that NHI owns several stand-alone memory care properties, noting that those properties still play an important role in the sector. But stand-alone communities require an operator highly experienced in the field of memory care.
Eye-opening survey
A recent survey of investors conducted by commercial real estate services firm JLL showed that seniors housing overall ranked third among 24 commercial and multifamily subsectors in 2018 for best investment and development prospects.
But 56 percent of investors said stand-alone memory care facilities were not desirable, while 81 percent said assisted living buildings with or without a memory care unit were desirable.
Also, 97 percent of respondents said the most desirable property was an independent and assisted living building with or without a memory care unit. Stand-alone skilled nursing facilities were viewed as the least desirable property by 70 percent of the respondents.
Generally, investment returns are lower for stand-alone memory care buildings than for those that also include assisted living, say sources. The average investment return for seniors housing properties is about 14 percent. Higher levels of care require more staffing, which cuts into profit margins.
Cap rates for well located, high-quality, memory-care-only properties are currently about 8 percent compared with about 6.75 to 7.5 percent for combination assisted living and memory care buildings, say sources.
Lancaster Pollard recently marketed a portfolio of properties in Northern California that included two stand-alone memory care buildings. The memory care buildings were also marketed separately, but were much less desirable on a stand-alone basis, says Elliott. “A meaningful number of investors are not interested in stand-alone memory care.”
The case for memory care
Stand-alone memory care still has a place in the sector, according to sources. Done right, memory-care-only properties are the facilities that can best manage and treat residents with memory loss.
Memory care provider Silverado operates 36 stand-alone memory care properties. The Irvine, California-based company has four new projects under development. Twenty-eight of the Silverado communities are owned by Welltower, the giant healthcare REIT, in a RIDEA agreement under which the companies share revenues.
“We are moving in the direction of developing and owning our own properties,” says Paul Mullin, senior vice president of development at Silverado. He explains that by owning the communities Silverado can recognize their full value once they are stabilized via a construction loan refinance or sale into their RIDEA partnership.
Silverado’s latest prototype is a single- or two-story building with 50 units and 90 beds. (Many of the units are shared.) A new project in Alexandria, Virginia, which was expected to open in late May or early June, will feature 66 private units. Silverado’s development partner is Cambridge Healthcare. Silverado has the right to purchase the building from Cambridge after the lease-up period.
Across Silverado’s portfolio, occupancies range from 85 to 100 percent at its buildings. Monthly rents average $6,500 to $8,000, depending on the market. Silverado underwrites the properties assuming a 20 to 25 percent internal rate of return for investors, says Mullin.
In his opinion, the real challenge in the memory care market today is that too many developers have jumped into the arena without understanding the requirements to operate the properties. “We have an incredible amount of overhead and staffing,” says Mullin.
He figures a well run stand-alone memory care building will operate in the red before occupancies stabilize, which could take 6 to 12 months.
Nurses staff Silverado’s buildings around the clock. Every building has a social worker with a master’s degree. A community with 90 residents typically has 90 to 100 staffers. “A lot of developers don’t have a strong operational platform,” says Mullin.
Invesque’s Chester agrees that the operator is key to investment success with seniors housing in general, but with memory care in particular. The company owns $1.4 billion in assets, about 45 percent of which are in seniors housing. Other assets include skilled nursing and healthcare services properties.
The company’s buildings include both assisted living with memory care as well as stand-alone memory care communities. Invesque does not invest in ground-up development, and shies away from markets with low barriers to entry.
Invesque partners with regional memory care operators such as Constant Care. It operates buildings in Arizona and Texas. A typical project includes 36 to 42 units.
“A combination building is a safer investment,” says Chester. He explains that an assisted living/memory care building can still perform adequately even if it misses the market with the wrong number of units, or if the operator isn’t quite the best. “But with the right market and the right operator, I love stand-alone memory care,” he says.
Chester believes that stand-alone memory care will be a winner in the long run because an operator that focuses exclusively on residents with memory problems can deliver better care.
While it’s relatively easy for an assisted living building to add a memory care wing, it can be quite challenging to staff the building for memory care and general assisted living residents. What’s more, a dedicated memory care building can probably handle the end stages of the disease more effectively than a combination building, says Chester.
Testing the market
The LaSalle Group is rolling out a new concept. The Irving, Texas-based company operates 44 communities and has three under construction. In February, the company opened a stand-alone memory care building with 54 beds in the Milwaukee area, its first in that market.
All but one of LaSalle’s existing communities are stand-alone memory care properties. They operate under the name Autumn Leaves.
LaSalle owns most of the buildings, while NHI owns five communities as a result of a sale-
leaseback arrangement.
The company’s new concept is a combination assisted living and memory care building, called the Whitley, in Wheeling, Illinois, a northwest suburb of Chicago.
The building is scheduled to open this fall and features a total of 96 units, 32 of which are memory care units. “Our product has a dual focus,” says Mitch Warren, CEO, chairman and co-owner of The LaSalle Group.
What’s different from other blended buildings, he says, is that the entire first floor of the two-story building will be operated like a stand-alone Autumn Leaves memory care facility. Each assisted living and memory care section of the building has its own entrance, dining and common area. The memory care programming will be similar to that offered at LaSalle’s memory-care-only properties.
Investors will prefer the combination building for the next five years because they perceive it as less risky, says Warren. He admits the strategy makes sense, but is quick to add that “depending on the market, the stand-alone building provides better care and can be more profitable as well.”
Warren also questions the investor rationale for an assisted living building with memory care that assumes assisted living residents will automatically move into memory care as needs change.
In his experience, less than 10 percent of memory care residents come from assisted living. The other 90 percent typically move to memory care from home or from a rehab facility after a hospital stay.
“We have been providing memory care longer than other companies,” says Warren. “Hopefully, we will stand out.”