The long-term care industry plays a vital role in our society, providing care for those who can no longer live independently due to health concerns or old age. Investing in the long-term care sector, particularly a nursing home investment, has long piqued the interest of savvy investors looking to capitalize on demographic shifts and the seemingly inexorable demand for elderly care.
Of course, breaking down the profitability of a nursing home investment is not a straightforward process. The sector is influenced by everything from healthcare legislation and insurance reimbursements to operational challenges and shifting consumer preferences. Here we provide an in-depth analysis that will help you understand the potential returns and inherent risks associated with such an investment.
The growth of the long-term care market
In 2022, the global long-term care market achieved a notable valuation of $1.11 trillion. And projections show that the market has not come close to reaching its full potential, with an expected compound annual growth rate (CAGR) of 6.62% over the next eight years.
A couple of significant demographic and economic trends are propelling this robust growth. The main catalysts include:
- A rising global geriatric population: The world is witnessing a substantial rise in the number of individuals over the age of 65. As more people age, there is a greater need for various types of long-term care, such as home care, assisted living, nursing home care, and hospice care.
- Rising global life expectancy: Modern medicine, improved healthcare, and advancements in technology have contributed to longer life spans. People are living beyond their retirement years and, in many cases, require help with daily activities and medical needs.
- Societal changes impacting family care availability: Declining family size, changes in residential patterns of people with disabilities, and rising female participation in the formal labor market contribute to a decrease in the availability of family carers. These societal transformations are expected to drive an increase in the need for paid care.
- An increasing demand for high-quality social care systems: As societies become wealthier, individuals demand better quality and more responsive social care systems. People’s expectations for patient-oriented and well-coordinated care services are also rising, driving the need for comprehensive, quality long-term care options.
- Rising prevalence of chronic diseases like heart disease, diabetes, cancer, and Alzheimer’s, particularly among the elderly population: These illnesses often require ongoing, extensive care that can extend for years, if not decades.
- The rising cost of healthcare: Hospitalization for chronic conditions can be prohibitively expensive, and the long-term nature of these illnesses often necessitates alternative and more cost-effective care solutions, like long-term care. Nursing homes offer a cost-efficient alternative to hospitalization for patients suffering from chronic illnesses, providing them with the necessary care and treatment while freeing up valuable hospital resources.
The combination of an increasing global geriatric population, rising life expectancy, and a surge in chronic disease prevalence creates an opportunity for nursing home investment.
Nursing Home Stocks and Other Wise Investments
Clearly, the growth potential of nursing homes presents an attractive option for investors seeking stable or increasing yields in the coming years.
So what are some of the best ways to invest in nursing homes?
1. Direct investment
Direct investment in nursing homes involves the acquisition of a nursing home by outright buying nursing home stocks and either managing it independently or delegating the management to a professional entity.
Revenue in this type of nursing home investment is generated from the rent paid by the individuals in need of care. As the owner, you have a certain degree of control over the operation of the facility, which can be advantageous if you possess the necessary industry knowledge and resources.
2. Indirect investment
When we look at the data, the strength of senior housing as an investment becomes quite clear According to the NCREIF Property Index (NPI), the total investment return stood at 9.4% for the ten years ending in the third quarter of 2020. While this figure in itself is commendable, the returns from senior housing investments outshine it.
The senior housing sector boasted an 11.6% annualized investment return over the same period, outperforming the overall property index. Returns for both income and appreciation were higher for senior housing than the overall property index, as well as the multi-family sector, highlighting the superior investment performance of senior housing.
What sets senior housing apart in the commercial real estate realm is its unique blend of real estate, hospitality, and need-driven services. This intersection creates a resilient investment opportunity that can weather economic fluctuations better than many other real estate sectors.
There are various avenues for indirect investment:
- Open real estate funds: These are generally safer as the risk is spread across multiple properties. Investors should ensure that the fund’s focus aligns with their investment goals, such as concentrating on nursing real estate.
- Closed real estate funds: Here, the investment is tied to individual projects, which may carry a greater risk if a project does not perform as anticipated.
- Crowdfunding or Crowd Investing Platforms: These require significantly less capital for financing projects, with minimum investments typically between 200 and 500 dollars. Such platforms also offer risk diversification by spreading the investment over several projects.
It should be noted that investment performance in this sector is tracked and captured by the National Council of Real Estate Investment Fiduciaries (NCREIF), a reliable resource providing robust insights and data submissions from investment managers.
3. Stocks
Stocks can be either direct or indirect investments, depending on how you purchase them. So what are some of the nursing home stocks that you should consider that are benefiting from these investment returns?
- Brookdale Senior Living (BKD): Brookdale Senior Living Inc. owns, manages, and operates senior living communities across the U.S. It spans three segments: Independent Living, Assisted Living and Memory Care, and Continuing Care Retirement Communities (CCRCs). Market capitalization: $771,679,300.
- Welltower (WELL): An S&P 500 company, Welltower Inc. partners with top seniors housing operators, post-acute providers, and health systems to finance the real estate infrastructure needed to scale innovative care delivery models and enhance people’s wellness and overall healthcare experience. Market capitalization: $39,663,075,328.
- Sinodia Senior Living Corporation (CSU): This company develops, owns, operates, and manages senior housing communities throughout the United States. Market capitalization: $216,072,064.
- The Ensign Group (ENSG): The Ensign Group, Inc. provides skilled nursing, senior living, rehabilitative services, and other ancillary services. It is a diversified care provider. Market capitalization: $5,211,581,952.
- Ventas (VTR): Ventas Inc., another S&P 500 company, is at the crossroads of healthcare and real estate, owning a diversified portfolio of over 1,200 properties in the U.S., Canada, and the U.K. Market capitalization: $18,558,412,800.
- LTC Properties (LTC): LTC is a Real Estate Investment Trust (REIT) that invests in senior housing and healthcare properties primarily through sale-leasebacks, mortgage financing, joint ventures, and structured finance solutions, including preferred equity and mezzanine lending. Market capitalization: $1,386,772,736.
- Omega Healthcare Investors (OHI): Omega is a REIT that invests in the long-term healthcare industry, primarily in skilled nursing and assisted living facilities. It has assets across all U.S. regions. Market capitalization: $7,507,652,096.
It should be noted that investment performance in this sector is tracked and captured by the National Council of Real Estate Investment Fiduciaries (NCREIF), a reliable resource providing robust insights and data submissions from investment managers.
Reach out to us if you’re interested in long-term care EHR software tailored for the effective management of senior living communities.
Private Equity Nursing Homes: Risks and Challenges
Before we conclude on the topic of investing in long-term care, it is worth mentioning private equity nursing homes and how they fit into nursing home investment. Private equity involves buying, improving, and then selling stakes in private (i.e., not publicly traded) companies. Unlike public equity markets, where many investors buy small stakes in a large number of companies, private equity firms often buy a controlling stake in the companies they invest in.
Of course, there are some concerns with this model of investing in nursing homes. In fact, the National Bureau of Economic Research (NBER) published a study that raises important questions about the implications of private equity nursing homes. The research identified key trends and outcomes associated with private equity acquisitions of nursing homes, including the following:
- Increased patient mortality rates: Nursing homes purchased by private equity firms are associated with higher patient mortality, both during the nursing home stay and in the subsequent 90 days. The patient mortality rate is found to be 10 percent higher in facilities owned by private equity firms than in other skilled nursing facilities.
- Private equity ownership surge: In 2005, private equity firms owned less than one percent of skilled nursing facilities. A decade later, this figure had risen to nine percent. This trend is unsettling for some outsiders.
- Different financial considerations: Private equity-owned nursing homes face unique financial situations compared to their for-profit and not-for-profit counterparts. Buyouts are typically financed with considerable borrowing, resulting in more than triple the average interest payments.
- Increased lease payments: To generate cash for investors, private equity managers often sell the nursing home’s property and lease it back. This leads to an average increase in lease payments of 75 percent following the buyout. Simultaneously, cash on hand falls by 38 percent.
- Staffing level reductions: Cost-cutting measures often entail staffing reductions. Hours for frontline caregivers decline by 3 percent compared to the industry average in private equity-owned nursing homes. However, registered nurses, who constitute a smaller portion of the care staff, see an eight percent increase in hours.
- Higher charges: Private equity ownership leads to more substantial charges. The overall bill for a patient in a private equity-owned nursing home is more than 10 percent higher compared to other homes.
- Deterioration in care quality: Despite higher fees, the quality of care does not improve in private equity nursing homes. In fact, patients in such contexts are 50 percent more likely to be placed on antipsychotic medication. These patients also experience a greater decline in mobility and an increase in their levels of pain.
Clearly, private equity nursing homes are run differently than non-profit or for-profit nursing homes, whose nursing home stocks are available for anyone to buy. In private equity facilities, nursing home care often takes a hit for the sake of wider profit margins.
Fortunately, private equity funds have high cash requirements for investors, limiting them to institutions and high net-worth individuals. Most investors, then, will focus on the other for-profit nursing home investment options available to them, options that value residents more.
Profitable Nursing Home Investment Strategies
Investing in nursing homes can be a profitable venture if approached strategically. Whether you’re a seasoned investor or a beginner, the following nursing home investment ideas can help you maximize your return on investment while minimizing risk:
- Buy and Hold: Purchase an investment and hold on to it for an extended period, ideally for at least 3 to 5 years. This method focuses on long-term gains rather than short-term fluctuations, hinging on the performance of the underlying business over time. If the nursing home improves its operations and profitability, you can expect your investment to appreciate.
- Buy Index Funds: Instead of investing in individual nursing homes, you might consider buying an index fund based on an attractive stock index. An example of an index fund that focuses only on long-term care facilities is the Solactive Long-Term Care Index. This approach offers a well-diversified collection of investments, aiming to replicate the market’s returns rather than trying to outperform it.
- Index and a Few: This strategy is a combination of the index fund strategy and investing in a few individual stocks. The majority of your investment could be in index funds, with a small percentage allocated to individual stocks such as well-performing long-term care companies.
- Income Investing: Income investing involves owning investments that generate cash payouts, typically through dividend stocks and bonds. In the context of nursing home investments, this might involve owning stakes in nursing homes or healthcare companies that regularly pay dividends. The cash returned can be used for any purpose, including reinvesting into more stocks and bonds.
- Dollar-Cost Averaging: Invest a fixed amount of money at regular intervals, regardless of the market’s current status. This strategy spreads out the buy points, avoiding the risk of attempting to time the market and ensuring an average purchase price over time. It’s particularly effective for investors who prefer a hands-off approach and wish to gradually build their investment portfolio.
Each of these strategies has its advantages and drawbacks, and the right choice will depend on your investment goals, risk tolerance, and time horizon. By thoughtfully applying these strategies, you can work towards making a profitable nursing home investment.
For more on recent trends in long-term care, read our blog and subscribe to the LTC Heroes podcast.
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