International Opportunist

When the GPT Group went shopping for U.S. properties several years ago, the giant commercial property owner from Australia targeted seniors housing. It seemed like a curious decision at the time because it was only GPT's second foray into the States and the group had never owned seniors housing — not even in its native country.

But GPT liked U.S. seniors housing because of its strong fundamentals and solid returns compared with other real estate property types. “We were looking for higher yielding investments,” says Kathryn Sweeney, managing director of U.S. seniors housing at the GPT Group.

To gain a foothold in the U.S., GPT partnered with Benchmark Assisted Living — the largest privately owned seniors housing operator in New England with 43 communities and 3,500 employees. GPT purchased 19 of Benchmark's freestanding assisted living buildings. Eleven of the Benchmark buildings had previously been owned by Kuwait Finance House.

GPT bought 15 more Benchmark buildings last October, bringing its U.S. portfolio to about $800 million, representing a $307 million equity investment. Seniors housing accounts for 3% of GPT's income and about 2% of its $14 billion in assets.

Benchmark kept a 5% ownership in the buildings. GPT also bought a 20% interest in Benchmark. Its headquarters in Wellesley, Mass., houses GPT's U.S. office. Benchmark had been seeking a partner with a long investment horizon in order to build a strong operating company. Most investors with available capital today have an exit strategy of three to five years.

“GPT represents a breakthrough for us,” says Tom Grape, chairman and CEO at Benchmark. GPT typically holds properties for 20 years, and approaches decisions with a long-term outlook in mind, he explains. “It's a big advantage for us.”

Australians bulk up

Australian investors are among the biggest foreign players in the U.S. seniors housing market, backing about $1.7 billion in investments in just the last two years.

Like GPT, the investors are primarily REITs. For example, ING Real Estate Investment manages five property trusts. Foreign REITs invest in the U.S. because most of the high-quality commercial properties in Australia rarely change hands. Also, Australian investors like the U.S. seniors housing rental model that produces relatively stable and predictable returns.

GPT's seniors housing portfolio generates a cash-on-cash return of about 7% after taxes, Sweeney says. “That's about what we expected.” The economic downturn will probably impact results in 2008, however. Increases in fuel and food prices will raise expenses. In early July, GPT (ASX: GPT) was trading at $2.30 (USD), down 53% from its 52-week high of $4.89.

But the outlook is still bullish. A rapidly aging population and barriers to entry will translate into strong growth in net operating income (NOI) year over year. “We are looking to grow our investments in U.S. seniors housing to $2 billion in the next several years,” says Sweeney, current chair of the National Investment Center for the Seniors Housing & Care Industry.

Breaking ground

New development is a top priority. With Benchmark's development team, GPT is pursuing several opportunities. Ground-up development is easier to operate than an existing property, Sweeney notes. “You don't inherit someone else's problems.” And new buildings can be developed in proximity to existing projects to maximize operating efficiencies.

Construction costs are rising more slowly, and land prices are lower because many developers are on the sidelines. “We are not in bidding wars for land,” notes Sweeney. “We can take our time and make offers that make sense with the numbers.”

GPT and Benchmark plan to break ground this fall on a new Alzheimer's facility in Groton, Conn., near an existing Benchmark-operated assisted living building. Other facilities are planned in Massachusetts and New Hampshire. The focus will be on assisted living and memory care facilities.

“We want need-driven product,” says Sweeney, explaining that residents of an assisted living building usually move there out of necessity. “In this economy, the discretionary end of the spectrum like independent living is not where we want to be.”

GPT isn't seeking acquisitions. Few seniors housing portfolios have traded hands lately because of the credit meltdown. “The market value of acquisitions is hard to assess,” says Sweeney.

GPT continues to focus in the Northeast, although it plans eventually to expand outside New England. Housing prices are holding up fairly well in the Northeast, and unemployment rates have remained stable, says Sweeney. “We like the fundamentals there.”

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