CHICAGO — What are the best buying opportunities today for investors in the seniors housing space? The answer begins with an understanding of the deals that are among the least attractive, according to veteran broker Ryan Saul.
A property that is 99 percent full that trades at a 6.5 percent cap rate could hardly be called opportunistic because there is no upside, points out Saul, managing director of Chicago-based Senior Living Investment Brokerage.
Instead, buying a property that is 75 percent occupied for $100,000 a unit with a broken management team in place presents real opportunity, he believes. “You can go in, turn it around and really add value so that you can sell it stabilized for a much larger premium.”
Saul’s insights came during a panel discussion on the state of the investment market at InterFace Seniors Housing Midwest, which took place Tuesday at the Westin Chicago River North Hotel. The conference attracted 265 attendees from a cross-section of the seniors housing industry.
Moderated by Ben Firestone, managing director of Blueprint Healthcare Real Estate Advisors, the investment panel discussed who’s buying, who’s selling and what’s driving deal velocity.
In addition to Firestone, the panelists included Talya Nevo-Hacohen, chief investment officer, Sabra Health Care REIT; David Watkins, partner, SHA Capital Partners; Alan Plush, president and senior partner, HealthTrust; Saul; and Matt Pyzyk, managing director, Green Courte Partners
The investment landscape has clearly changed over the last year with private equity coming to the forefront and displacing real estate investment trusts (REITs) as the main source of capital on the acquisitions front, the panel agreed. The top health care REITs saw their stock prices fall precipitously in 2015, which sharply curbed their appetite for acquisitions.
“I would point to [private equity] groups like Blue Moon Capital and Harrison Street Real Estate Capital,” said Watkins of SHA Capital Partners, a Chicago-based firm that focuses on value-add type investments in seniors housing properties across the Midwest.
“Some of these entities that are paying real top dollar for super core assets would have been frozen out a year ago. A Ventas or even a Sabra Health Care REIT would not have let a private equity investor get those assets a year ago,” pointed out Watkins. “They would have just bid up the price because they have a much lower cost of capital. But the REITs appear to be much less active and that trickles down to the rest of the sector.”
Plush of HealthTrust, a Sarasota, Fla.-based appraisal firm that specializes in the seniors and healthcare space, said he’s not surprised that the pace of property and portfolio transactions among REITs has slowed considerably. “My spin on it is that a lot of the asset pools have been consolidated, have been purchased.” In short, there’s not much left for the REITs to buy in the space other than each other, he added.
Transaction volume isn’t slowing down, Saul emphasized. It’s just that the deals are not nearly as big as in the recent past. Many of the buyers today are relatively small entities, Saul pointed out.
Private owners whose portfolios include anywhere from three to 10 assets, and who are looking to grow those portfolios to between 15 and 20 assets, are leading the charge on acquisitions in certain markets across the country because capital is available to them, said Saul. “Balance sheet lending is available. There are multiple terms sheets on every single deal.”
With so much pent-up demand for assets among private investors, many of the REITs are pruning their portfolios to capitalize on this favorable selling environment, said Nevo-Hacohen of Sabra Health Care REIT (NASDAQ: SBRA), headquartered in Irvine, Calif. The company primarily net leases the properties it owns to operators across the United States and Canada.
After experiencing so much growth and aggregation of assets, it’s prudent for REITs to re-evaluate their portfolios, she pointed out. Now is a good time to unload unwanted assets because the window for the “strong, private-market bid” might be closed a year from now.
“It’s an opportunity to sell into a market and rationalize portfolios and think about where you want to be focused, or how you want to be geographically spread, or what sectors you want to have more or fewer assets in,” according to Nevo-Hacohen.
SHA Capital Partners is in a growth mode, according to Watkins. “We want to acquire. The biggest problem that I see is that [brokers] have done too good of a job educating the mom and pop owners as to what the value of their community is. It’s harder to find good opportunities.”
According to Watkins, SHA pursues properties in the $5 million to $15 million range. He finds that there is often a disconnect between SHA and the seller on the appropriate valuation for the property. Some sellers believe their properties should sell at a 7 percent cap rate, for example, which if realized would result in a big payday for them.
Watkins sees great opportunity in properties that are “a little bit broken.” In other words, it’s a Class B property that needs a capital infusion for cosmetic improvements.
“The other thing I’m waiting for is all the developers who have come into the market from other sectors that are going to make a mess of things,” said Watkins. “We’ll have an opportunity to buy at a good price, and take them out.”
Green Courte Partners, a sponsor of private equity funds, is the new kid on the block that seeks to build a niche portfolio made up of active adult and independent living communities. Green Courte has a history of investing in niche sectors such as manufactured housing and near-airport parking companies such as The Parking Spot.
“As new entrants into the markets, we’ve had success in acquiring assets because of the REITs slowing down their acquisition activity,” said Pyzyk, who is charged with growing the firm’s seniors housing platform.
Green Courte Partners recently acquired Arbour Square of Harleysville, a 276-unit independent living community in the Philadelphia suburb of Harleysville, Pa. The property was built in two phases, with Phase I (151 units) opening in 2006 and Phase II (125 units) opening in 2014.
— Matt Valley