By Elizabeth Ecker of Senior Housing News for ALFA Update
The seniors housing market enjoyed a blockbuster year in 2011, with
merger and acquisition activity reaching its highest level since the sector’s
peak years of 2006 and 2007.
The $25 billion worth of transactions were conducted primarily by
real estate investment trusts (REITs), which were responsible for almost $20
billion of those deals, according to the National Investment Center for the
Seniors Housing & Care Industry (NIC).
If 2011 was the year of the mega-deals, smaller, regional
communities will be the acquisition targets of the next 12 months, industry
experts say.
Buyer vs. Seller
Buyers are seeking a few specific qualities in today’s senior
housing market, says Rob Reis, San Francisco-based senior associate for senior
living brokerage firm Marcus & Millichap.
The ideal assisted or independent living communities are 15 years
old or newer and are located in large metropolitan areas such as Seattle,
Portland, Chicago or Dallas, Reis says. Sellers look for in-place cash flow and
strong occupancy performance that allows them to ask a premium at a cap rate
around 8%, often getting multiple offers on the table.
Average cap rates have seen a moderate increase over the course of
the last year after falling sharply from 9%-plus to below 8% in 2010, according
to NIC. Today, the average cap rate hovers around 8%, the latest NIC data
shows.
Buyers benefit from these scenarios in their upside potential, Reis
says. An ideal situation may be where an 80- to 100-unit property is 85% or 90%
occupied, but with a margin less than 30%.
“That is a great opportunity for those buyers waiting with cash
ready to go, or who have a relationship with a REIT or access to FNMA
financing. They can look at the property and see that occupancy is OK, but can
be improved, and that margins can be increased to 35% or more,” says
Reis.
Private pay is preferred, due to its lack of exposure to government
Medicare and Medicaid policy and reimbursement changes. Buyers also look to
cases where they can improve occupancy, says Ben Firestone, a senior associate
with Marcus & Millichap at its Chicago office, considering the 88.2%
national average occupancy rate for senior housing properties, according to
NIC.
“Buyers really like upside. Is there occupancy upside? Can you
increase the level of care and cut expenses?” Firestone asks.
Seller motivation is still driven by the same factors—a life
changing event, partnership issues or other opportunities. For those who did
not have to sell immediately, however, they are well positioned in today’s
market.
“What may have changed is that three years ago someone in that
situation might have been able to hold on,” Reis says. “Now, they can look out
and say, ‘Occupancy has been good. We’re able to keep this place full without
major discounts on rent. Let’s take it out to market.”
Leave Distress in the Past
The biggest change over the past few years, according to many
working on transactions, is that the distressed properties today are not having
too big an impact on the greater market. This opens opportunities for higher
quality properties and sellers who are not as desperate to make the sale.
“Since 2008, I think people thought there would be a lot more
distress. It’s not that there haven’t been distressed properties, but they tend
to be concentrated in several large portfolios and not disbursed,” says Jeff
Davis, president and CEO of Chicago-based Cambridge Realty Capital Companies.
“Combined with banks being reluctant to sell some of their assets, it created
an environment where people thought there would be more distressed properties
than there actually were.”
These large portfolio deals can be seen in a joint venture between
Emeritus and Blackstone Corp., when they agreed in 2010 to buy a $1.2 billion
portfolio of more than 140 Sunwest properties out of bankruptcy.
“In the several years leading up to 2011 there were few high-quality
assets coming to market,” Reis says. “That changed in 2011. Although there were
some broken development projects, there were quite a few stabilized,
well-maintained properties that traded hands. These communities had cap rates
in the range of 7.5-8.5%.”
There has been some perception change, however, as a result of REITs
buying other REITs or strings of large operating companies. While it may not
have a direct impact on the small seller, it can still have some bearing.
“It does have an effect where the perception out there is better,”
Reis says.
Buying Power
REITs have changed the landscape with their buying power in recent
years, having accounted for more than three-quarters of sales activity in the
senior housing sector last year according to NIC. But their strategy tends to
differ from other buyers in the market.
“Our strategy has been very consistent,” says John Cobb, chief
investment officer for Ventas REIT Inc. “We’re focused highly on private pay
senior housing. Usually Class B, or Class A, that’s our main focus.”
A good deal might not have any particular specifications in terms of
occupancy, location or financing, but rather, the operations are the essential
component, Cobb says.
“There are some banks and others that might say we are only interested
in ‘X’ percent occupancy,” he says. “We have over 100 operator relationships.
We like better properties, better operations, we like to be full.”
Smaller deals have also garnered new interest after institutional
investors like private equity firms and REITs recapitalized the majority of
larger opportunities in the market.
“Now, given the institutions’ continued need to place capital in the
marketplace, they are willing to seek out relatively smaller deals that would
have been less attractive relative to an available mega-deal,” Firestone
says.
Ventas, for example, acquired a single-property Arizona assisted
living community from Milestone Retirement for $7 million in March 2011. That
transaction represented a smaller deal for the large REIT.
“Smaller deals have become more attractive,” Firestone says. “The
seller of a small company is now in a better position. Now there’s an
opportunity for regional and smaller players to capitalize.”
An instance of this can be seen in the sale of Tiffany Court, a
15-year-old 57-unit building with consistent high occupancy and a great
reputation in the community, which Reis brokered in December 2011. The San
Francisco-area property was previously operated by a husband and wife team who
sold it in order to move on to a new venture.
“The buyer, SHPT, saw the value in the location and the strong
operational history,” Reis says. The property sold at 95% occupancy for $11.3
million, or $198,246 per unit.
Still, market hasn’t lent itself to easy transactions.
“Nothing is easy anymore given the last few years,” says Cobb. “We
take our time and try to find good operators. They need to get to know you and
you need to get to know them. Very rarely do we walk fresh into a client and do
a deal overnight.”
The number of deals may not return to its previous level, but volume
projections are steady for the coming year.
“The volume of sales is not going to be what it was,” Firestone
says, “but probably the number of sales will be relatively consistent.”
New Opportunities
Looking back at several years with little conventional financing and
still next to no new construction financing, the sector appears well positioned
as demand for senior living communities is stable.
“There are a lot of deals out there that are good for both the buyer
and the seller,” Firestone says. “We can make a match where it’s not a zero sum
game.”
Sellers are able to get a price they feel is sufficient and buyers
see opportunity in reshaping communities to meet higher acuity level
needs.
“It might be taking an independent living community and licensing
some units for assisted living, then taking assisted living and converting a
portion of those units to memory care. I see that in all markets,” Reis
says.
“The sector has performed strong versus other businesses,” Davis
says. “It’s not that different from how it was in the 2005-2007 period.”
The property quality is an important driver in today’s climate, as
occupancy has risen steadily in both assisted living and independent living
communities since 2010, with demand now outweighing supply.
“The
variable being satisfied that wasn’t the case a few years ago is the quality of
properties. We saw them coming to market last year, and this year and continue
to see them,” Reis says. “That is what satisfies a good deal for the sellers
and buyers out there.”
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