By Bob White
The headline numbers will show a plunge in sales of seniors housing properties in 2012 compared to 2011 when all is said and done. The drop is magnitudes greater than any other property type in a commercial real estate investment market that, overall, was up more than 10 percent in 2012.
The expected 70 percent drop in seniors housing acquisitions from 2011, or about $18 billion fewer deals, looks very bad and is typically associated with severe and negative influences. For example, investment sales in Spain and Portugal were similarly down in 2012.
However, the seniors housing sector is nothing like Spain or Portugal. In fact, the investment trends for seniors housing properties are quite healthy, and the prospects are bright. Prices are holding steady, if not slightly improving.
The composition of investors is becoming more diverse with new buyers, particularly foreign ones. Mortgage capital is more plentiful and much cheaper. Demand is outstripping development.
Make no mistake, the investment fundamentals in the seniors housing sector are favorable, even though the headline investment sales numbers indicate otherwise.
Appearances can be deceiving
For 2012, U.S. sales of seniors housing properties greater than $2.5 million was approximately $9 billion, compared to $27.4 billion in 2011. The poor showing of 2012 compared to 2011 is only relative to an exceptional 2011 with REIT mergers and acquisitions greatly skewing the stats.
Without these entity deals in 2011, volume was off 40 percent in 2012 — still a considerable drop. That difference is largely attributed to a decline in large-scale portfolios, primarily from the rush in 2011 to take new advantage of sale-leasebacks, again involving the REITs.
Perhaps the best measure of sales volume in this case is simply sales of individual properties, excluding entity and portfolio deals. Using this measure, sales of seniors housing properties in 2012 were flat to slightly improved, more in line with broader market trends.
It is also helpful to put 2012 into perspective with 2010 and prior years. Seniors housing property sales in 2012 were greater than total sales for 2009 and 2010 combined.
The sector has become well established among investors, and volume is roughly equivalent to other significant property sectors such as single-tenant retail or full- service hotels.
Also to put things in perspective, in 2012 seniors housing sales volume was four times the size of all commercial property sales in Spain and Portugal combined.
The REIT factor
Nearly $14 billion of 2011’s total volume stemmed from entity transactions, primarily REIT merger and acquisition (M&A) activity. There were no major REIT mergers or acquisitions completed in the seniors housing sector in 2012, but that is not indicative of any weakness in the REITs.
That pullback is more likely due to digestive issues and not appetite. (While Health Care REIT’s acquisition of Sunrise Senior Living was announced in 2012, it is not included in the 2012 numbers since the deal did not close until early this year.)
In addition, there are simply fewer targets for M&A in the sector after the 2011 binge. REITs are still acquisitive and bought about $5 billion of seniors housing properties in 2012, in addition to billions more in medical office and other healthcare properties.
The listed REITs remain the dominant buyers of seniors housing properties, but a positive development over the past year is that new buyers continue to be drawn to the sector.
The share of acquisitions by the REITs declined from 88 percent in 2011 to 55 percent in 2012. The new capital is derived from a variety of sources with foreign investors and non-listed REITs making the greatest strides.
Foreign buyers from Europe, Asia and Canada have all been active investors or joint-venture partners and were involved in almost 10 percent of all seniors housing acquisitions in 2012.
In addition, non-listed REITS stepped up to claim just under 10 percent of the properties sold in 2012. Institutional investors, which accounted for almost a quarter of volume in 2009, also have a growing appetite for seniors housing. Private investors nearly doubled their share of acquisitions in 2012, greatly facilitated by improved financing conditions.
Improving finance climate
One of the most positive influences in the investment market for seniors housing and for all commercial properties has been the improvement in the availability and cost of financing.
The government agencies remain the primary source of mortgage capital for seniors housing, but the resurgent CMBS market has added competition. In addition, lending by regional and local banks is also on the upswing. More importantly, mortgage interest rates declined throughout 2012 and financing has rarely been more favorable.
The positive spread between cap rates and mortgage rates for seniors housing is near historical highs, making the sector very attractive to leveraged buyers. Leveraged returns can easily reach well into the double digits, even for the best properties.
In addition, with capitalization rates for seniors housing averaging slightly more than 8 percent, and 11 percent for nursing care properties, yields in the sector are well above other property types, another factor drawing new investors to the space.
These yields are particularly attractive, given improving fundamentals for seniors housing. According to the National Investment Center for the Seniors Housing & Care Industry, rents for seniors housing rose 2.2 percent during the first three quarters of 2012, and occupancies ticked up 20 basis points.
Demand has outstripped new supply during the past two years, and this trend should continue as development occurs at a moderate pace.
Thus, the seniors housing sector is well positioned for a healthy 2013. Don’t let the alarming headline sales numbers for 2012 fool you or anyone else. Seniors housing investment trends remain positive.
— Robert White is the founder and president of New York-based Real Capital Analytics (RCA) Inc., an international research firm that publishes Capital Trends Monthly. RCA provides real-time data concerning the capital markets for commercial real estate and the values of commercial properties.