When it comes to the seniors housing investment sales climate, experts are calling 2012 the year of the small deal.
Of course, it’s all relative compared to last year’s blockbusters like the $5.8 billion Ventas-Nationwide Health Properties deal or the $2.4 billion deal between Health Care REIT and Genesis HealthCare.
The first two quarters of 2011 saw a staggering $15.9 billion worth of deals closed, according the National Investment Center for the Seniors Housing and Care Industry (NIC). In the first half of this year, those numbers rang in at a more modest $2.1 billion.
“I don’t think we’ll be within shooting distance from the 2011 numbers, but that was an exceptional moment,” says Bob Kramer, NIC president. Full year 2011 investment sales totaled $27.4 billion, Kramer says. “If we achieve 50 percent of that it would be a very, very active year.”
That doesn’t mean investors are sitting on their hands. Kramer notes the current 2012 tally does not include last month’s Genesis HealthCare Corp.’s $275 million acquisition of rival Sun Healthcare. For the most part, however, Kramer says the current market offers smaller opportunities.
“They’re good opportunities, but they may be eight or 10 or 13 properties, not 50 or 100,” he notes.
For example, earlier this month the REIT CNL Healthcare Trust Inc. acquired seven senior housing communities valued at $226 million through a joint-venture agreement with Sunrise Senior Living Inc.
Mel Gamzon, president and CEO of Fort Lauderdale-based Senior Housing Investment Advisors, is seeing the same trend.
“It’s not as robust as we would have hoped for, but it’s pacing well,” he says. Gamzon notes he is in the midst of a $50 million portfolio deal in one part of the country and just came off another $76 million deal.
Bob Noonan, senior vice president of acquisitions for Benchmark Senior Housing, says activity should pick up in the fall, especially given the possible expiration of the Bush tax cuts.
“People have valuable assets and they’re going to want to get to the exit before the end of the year,” Noonan says. “There is no guidance with what is going to happen concerning capital gains tax changes.”
Matthew Whitlock, senior vice president and managing director with CBRE senior housing services, says 2012 is different from the most recent past in that there is far less activity in portfolio sales and far more activity by private equity players buying single properties and smaller properties.
“We continue to feel strongly that this acquisition activity will continue until development re-enters the marketplace or until we see interest rates for long term debt rise,” he notes.
Big deals from previous years continue to have a ripple effect.
“Because of the recent activity many owners have contacted CBRE with an intent to sell their property or pools of [properties], but the expectation is that valuations will be akin to the valuations announced around large platform sales,” Whitlock says. “Many owners have the false sense of valuation for their own properties. With large platform sales, purchase price and cap rate are but two myriad factors in arriving at a transaction. Location of all properties, recent performance, upside potential and the way in which a seller is compensated—cash, stock, combination thereof—all contribute to the success of a major platform transaction.”
Whitlock adds that the activity of the REITs over the past 24 months has created a bifurcation in the market in terms of transaction value and size.
“In my opinion, this is due to the cost of capital that REITs have available to them versus the cost of capital in the return threshold that private equity requires in order to transact,” he says.
Richard Donohue, managing director for seniors housing/healthcare at Lee & Associates, says REITS are still “on a tear.”
“It’s continuing the trend of buying portfolios wherever they may be available,” he says. “Prices are strong, reflecting the supply/demand reality. With large portfolios having been acquired in the last couple of years, the REITs and other institutional buyers are looking at smaller portfolios.”
When it comes to different property sectors within seniors housing, Whitlock says acquisitions are robust across independent living, assisted living, memory care and skilled nursing facilities.
“However it is not robust in acquisitions in CCRE because the basic business plan there is predicated upon new move-ins paying for a large upfront endowment,” he adds. Thanks to a sagging housing market, seniors who might want to go to a CCRE facility are not able to come up with the cash. A needs-based facility like assisted living is the most in demand, compared to a choice like CCRE.
So what’s selling? Primarily it’s institutional-grade assets, according to Gamzon.
“We’re talking about a portfolio with 45 percent operating margins and a 90 percent occupancy,” he says. “There are not a lot of them out there.”
Benchmark’s Noonan says hot properties are those that either offer a continuum of care or the ability to be retrofitted for continuum of care.
“If you can provide a setting where you can transition from traditional assisted living to a memory care unit, that’s pretty important,” Noonan says.
Gamzon says there is not one particular region in the U.S. that is stronger than another.
“It’s all strong for good, quality product,” he says. “What we are finding is that the supply and demand is still strong because there has been practically no new construction, relative to the size of the industry. There is no capital to build and the economy is not good.”
Data from the NIC MAP from the first two quarters of this year shows occupancy rates continuing to recover. The overall occupancy rate for the second quarter for seniors housing properties was 88.6 percent, an increase of 0.3 percent from the first quarter and 0.9 percent from the same period last year. At the sector’s cyclical bottom, in the first quarter of 2010, occupancy was 87 percent.
Those occupancy rates are goosing some investors, says Chuck Harry, of NIC.
“It does attract investors to the sector. However, I think a lot of the investors who are now looking at seniors housing, particularly new investors, have been attracted to the sector given the resilience it has seen during the great recession,” he notes. “Seniors housing has not experienced as dramatic a downturn with its [rents] and investment returns given [its] needs-driven nature.”