Silver Linings — Muni Bond Opportunities in an Aging Population

Introduction

Our research shows that demand for senior living communities will continue accelerating rapidly over the coming decades due to the aging of America’s population and longer life expectancies. In this article, we explore key reasons driving the increase in senior living facility expansions and our perspective on selecting municipal bonds in this space that can provide solid and stable revenues to minimize the risk of default.

America Is Graying and Needs Care

The U.S. population is aging. The massive baby boomer generation started to turn 65 in 2011, and according to the U.S Census Bureau, 2030 will mark a demographic inflection point: by 2030, all baby boomers, or people born from 1946 to 1964, will be over 65. By 2040, nearly 81 million people will be of retirement age in the U.S., representing 22% of the population, as seen in the table below — and amid this generational wave, senior living facility spaces are set to take center stage as a means of addressing the growing demand for enhanced health and housing services.

An Aging America

In 35 Years, Nearly One in Four Americans Will Be Older than 65

Source: U.S. Census Bureau, 2017 National Population Projections

As background, senior living facilities typically encompass four types of occupancy arrangements: independent living, assisted living, skilled nursing and memory care. Independent living facilities offer communities for active seniors and are designed for those still able to manage their personal hygiene, health care, food prep, finances and safety. These seniors are typically those looking for communities where they can build their social networks and enrich their lives through recreational activities provided by the facility via amenities like pools, gardens, on-site restaurants, group entertainment and trips.

The other three types of arrangements serve seniors who require increasingly substantial care. Assisted living occupants typically need help with one or more personal care activities, which may include bathing, dressing, meal prep and medical management, but they do not require nursing assistance. Meanwhile, skilled nursing facilities offer 24-hour care by a professional to manage physical therapy, feeding tubes, surgery care, medication and pain management. On the far end of the spectrum are memory care occupants who typically suffer from mental impairment and require highly trained staff to keep them secure and safe.

Senior Housing Boom

Due to the rising population and the growing number of retirement-age Americans, investments in the senior living industry are expected to increase in the coming years. While “aging in place” has gained momentum, increasing numbers of older people are also changing their attitudes about senior living communities and are favoring moving into senior homes flush with services, activities and conveniences. This has sparked a notable trend toward high occupancy rates in independent living facilities, contributing to a surge in municipal bond issuance to finance the building and expansion of these types of projects. Through our research, we’ve discovered that there are a myriad of factors driving this expansion.

In the majority of bond issuance deals to build new senior living facilities or expand existing campuses, we see a trend of the largest and most expensive independent living units in new buildings selected by residents first, before the smaller living units.  Many senior residents today seek more square footage than what was demanded in the past.  An innovative way that some facilities are adapting to these newer preferences, we’ve observed, is by merging two existing living units and undertaking renovations to create a larger and more appealing unit. Another way facilities are enhancing their desirability is by modernizing and adding alluring amenities such as pools, gyms, hair salons or better-designed communal spaces.

Facilities may also invest in expanding their parking lots to enhance their overall appeal in a competitive senior living market and to meet regional demands. When a facility experiences high growth in its occupancy rates, additional parking is critical not only for serving residents with vehicles but also for better visitor accessibility, accommodation for a more extensive staff, and the ability to host events and provide transportation for resident outings.

All of these upgrades and enhancements help these facilities remain competitive in the marketplace, and they support senior facility expansion. That demand translated into increased Muni bond issuance through 2021, as seen in the chart below. Although the COVID pandemic and its aftermath sharply curtailed new issuance in the last two years, we believe new supply is poised to recover quickly as the number of older Americans grows much more rapidly than other cohorts going forward.

We Expect Senior Living Center Issuance Will Recover Sharply Following the COVID-Inspired Drop

Senior Living Bond Issuance ($ billions 2001-2023)

Source: Bloomberg

Credit Selection Matters

The senior living industry is still a sector with notable risks in the U.S. Muni bond market. While the wave of COVID-related defaults is slowing down after the 2020-to-2022 surge, facilities with operational sensitivities will likely continue to face financial challenges and, in some cases, bankruptcies. That is why it is critical to understand the intricacies of each senior living facility’s operating environment, financial health and management team when examining its municipal debt. In other words, active management may work in the investor’s favor.

Our research aims to uncover any idiosyncratic risks and opportunities associated with a particular Muni bond deal. We actively assess the senior living facility’s specific competitive landscape, demand or occupancy fluctuations for its region, demographic composition and operational complexities, and the management team’s decision-making track record. In particular, when a facility is trying to raise more capital (or issue bonds) for expansion projects, we strive for a clear understanding of the magnitude of the expansion and whether management has a realistic and well-thought-out business plan in place to recoup the costs of capital and retain the ability to service its debt over the long term. All of these factors play a role as to whether a senior facility can remain consistently profitable and whether its credit will be a good investment for investors.

We believe our meticulous credit-by-credit research process is critical in handpicking high-quality senior living municipal bonds in the best position to capitalize on macro trends related to the aging U.S. population and increased acceptance of senior living facilities as a part of the American retirement journey. We are excited about the current opportunities in the senior living sector and over the decades to come.