Overview

NHP invests in senior housing facilities, long-term care facilities and medical office buildings throughout the United States. NHP generally acquires real estate and then leases the assets under long-term triple-net master leases to senior housing and long-term care operators and various types of leases to multiple tenants in the case of medical office buildings. The information provided below represents data through our most recent reporting quarter.

• $3.9 Billion in healthcare real estate
• 560 properties in 43 states
  • 271 Assisted and independent Living
  • 181 Skilled Nursing
  • 57 Medical Office Buildings
  • 17 Other
  • 34 Unconsolidated JV Facilities
• Over 80 multi-facility operators

Senior Housing

Asset Type Description

Assisted Living Facilities (ALFs) differ from Skilled Nursing Facilities (SNFs) in that their focus is on assistance with activities of daily living (e.g. feeding, dressing, bathing, etc). ALFs are primarily for frail elderly people who can no longer live independently but do not require roundthe- clock nursing care. This asset class, like the SNFs, crashed in the late 1990s due to overly leveraged balance sheets, causing many operators to go bankrupt or through restructurings. With ALFs, though, the triggering event was excessive overbuilding. This led to mediocre fill rates and attendant cash flow problems. Independent Living Facilities (ILFs) are age-restricted multifamily rental properties with central dining facilities that provide residents with meals and assistance with instrumental activities of daily living, including housekeeping, laundry and transportation. Communities typically provide social and recreational activities. ILFs can be large high-rises or small multi-unit residences.

Benefits

• Private Pay. Unlike SNFs, operators' revenues are not subject to the whims of the government, and they need not provide services to residents who can't pay.
• Modest Regulation. Also unlike SNFs, assisted living is mostly outside the realm of state CON laws, minimizing regulatory expenses and enabling operators to react to demand as it grows. ALFs have also faced fewer litigation headaches than SNFs.
• Supply/Demand Equilibrium. We appear to be approaching the supply demand equilibrium in many markets, enabling operators to pass significant rate increases through.
• Limited Market Penetration. Like SNFs, demographics bode well for this asset type, but even more so in that the market penetration to date has been limited to less than 4% of age and income qualified potential residents.

Risks

• Low Barriers to Entry. The low barriers to entry can and do lead to periods of substantial disequilibrium, creating periods of financial distress or excess profits. Most pundits believe disequilibrium is much less likely in the near term given the capital bloodshed of the late 90’s and early 2000’s.
• Changing Tastes. In some markets, aging baby boomers may not be satisfied with the current ALF product offering, looking for a more upscale version. That in turn could lower the useful life of some existing product.
• Cap Rate Compression. We have seen cap rates decline for this asset class more than 200 bps – whether that is sustainable remains to be seen as unlike ILFs, there is a larger element of risk from providing healthcare services.

Long-Term Care

Asset Type Description

Skilled Nursing Facilities (SNFs) are easily the most controversial healthcare property type since the widely publicized bankruptcies of five of the seven largest providers in the late-1990’s. SNFs serve individuals requiring 24-hour nursing or medical care. Historically, SNFs have the look, feel and functionality of an institutional health care property rather than the residential feel of senior housing.

Benefits

• Demographics. Americans are living longer and longer. As their health deteriorates, they will increasingly require SNF services.
• Regulated Supply. Most states have Certificate of Need (CON) laws that restrict the development of new healthcare facilities. Existing SNF operators have been largely successful at using the CON process to avoid competitive incursions.
• Occupancy Has Stabilized & Begun to Creep Back Up. SNF occupancy in our portfolio (and apparently the market as a whole) has bottomed out and appears to be trending up. Some operators with lower than average occupancy have compensated by adjusting their acuity mix to higher rate patients.
• No Alternative. Even during the Medicare/litigation/labor crisis of late 1990s, almost no SNFs closed. Politicians and regulators simply cannot deal with the political heat of throwing 100 constituents' mothers out of their residence with no readily available housing alternative. As a result, all parties seem to find ways to keep SNFs in business.
• Regulation. While noted as a principal risk, this can also be a benefit in that the state government is making sure the facility is being maintained.

Risks

• Regulation. SNFs are the most heavily regulated of the four property types, most notably in the reimbursement area. Most residents are reimbursed by Medicaid, the federal-state health insurance program for the indigent. (Most residents become indigent while in the SNF, exhausting their assets.) Medicaid pays according to rates set by state legislators and regulators rather than market pressure. Medicare, while less volatile now that the prospective payment system is in place, still presents annual uncertainty with each new budget.
• Labor Costs & Availability. Care in nursing homes is provided primarily by low-wage nurse' aides. Good aides are difficult to recruit, train, and retain. They are supervised by nurses, who are chronically in short supply. On top of this, SNFs generate high levels of workplace injuries, mostly from transporting immobile residents, but also from combative dementia patients. As a result, recruitment and retention costs – and turnover – are higher than the other asset classes.
• Litigation. Until very recently (primarily through tort reform and improved risk management programs), liability costs have been devastating for SNF operators, particularly for deep-pocket, publicly-traded companies.
• Perception. Because of these factors, SNFs are perceived to be the most risky of the four property types.

Medical Office Buildings

Asset Type Description

Medical Office Buildings (MOBs) are completely different in operations from the aforementioned asset types – that is, they do not provide inpatient long-term care and senior housing. Rather, they are typically multi-story buildings on or near an acute hospital campus. They usually house several different unrelated medical practices, although they can be associated with a large single-specialty or multi-specialty group. MOB tenants include physicians, dentists, psychologists, therapists, and other healthcare providers, with space devoted to patient examination and treatment, diagnostic imaging, outpatient surgery, and other outpatient services.

Benefits

• More Potential for Meaningful Rent Increases. Less tenant/customer turnover than an ALF or SNF. MOB leases typically are written for shorter terms than triple-net leases, which in a rising market allows the landlord to capture the appreciation through rent increases more quickly (and conversely exposes the landlord to rent reductions in a down market).
• Less Cyclical Than Office Buildings. Unlike the office building industry but just like the long term care and senior housing industry, the continuous need for healthcare tends to make MOBs relatively immune to economic and other cycles.
• Shifting to Outpatient Services. Outpatient services can be provided at a lower cost in a medical office building than in the hospitals because MOBs can be constructed at lower costs and do not have to conform to the stringent building codes requirements for hospitals. Patient demands for “onestop” shopping of health services have also generated greater demands for medical offices.
• Healthy Vacancy Rates. Occupancy rates have been approximately 90% for MOBs and vacancy rates have historically been lower than general office buildings.

Risks

• Less Predictable Cash Flows. Multiple tenants on shorter term leases can lead to a greater risk of nonrenewal and inability to re-lease, resulting in a hit to cash flow. Additional or new tenant improvements can also significantly impact cash flow.
• Potentially Difficult Tenant Class. Doctors can present a significant management challenge. In some cases the success of a physician group within a MOB can become a threat if the physician’s decide to build their own property. While this threat can be managed by responsive management, some attrition due to physicians turned real estate investors is inevitable.
• Location, Location, Location. MOBs need to be on or near a hospital to maximize their potential for success.
• Hospital Dependence & Affiliation. To a large extent, the viability of a MOB is reliant upon the performance of the hospital, the physician’s practice and the ability of that hospital to attract and retain qualified physicians. These variables are outside the control of the MOB owner. Therefore, having a good affiliation with the hospital is essential.
• Additional Costs. High tenant improvement allowances, greater maintenance and upkeep issues due to the high volume of patient traffic can significantly increase costs.