Seniors Housing Business

FEB-MAR 2017

Seniors Housing Business is the magazine that helps you navigate the evolution of the seniors housing industry.

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58 www.seniorshousingbusiness.com Seniors Housing Business n February/March 2017 HCP's own disposition was sim- ilar to Welltower's — 64 properties for $1.1 billion. In this case, Black- stone Real Estate Partners VIII LP was the buyer of the portfolio, which includes 5,967 units leased to Brookdale Senior Living. The REITs have also been diver- sifying their portfolios. In some cases, this means increasing the percentage of private-pay proper- ties, or sometimes entering sepa- rate healthcare industries, such as life sciences. The most notable example was Ventas' $1.5 billion purchase of Wexford Science & Technology's national portfolio. "This diversification has now pretty much been accomplished," says Chris Kazantis, director with global asset manager AEW. "So you are seeing the public REITs focusing on consolidating and improving operations and being more highly selective in their acquisition appetite. They're also looking to step up the overall qual- ity of acquisitions and prune their portfolios of older, less state-of- the-art communities." Another reason for the REIT drawback could be low capitaliza- tion rates, making deals more dif- ficult, and a "swoon in the credit market," according to Costello. "It just created a bit of caution on the part of investors," says Costello. "Maybe the ongoing decline in cap rates has reached an end. They're at record lows." According to NIC's data, cap rates in private-pay seniors hous- ing have hovered between 7 per- cent and 8 percent for several years, down from a peak above 9 percent in 2009. In skilled nursing, cap rates have steadily declined from a peak above 12 percent in 2009 to just over 9 percent. By comparison, cap rates in other commercial real estate industries are often below 6 percent for Class A properties, according to CBRE data. (For more on REIT strategies, please turn to page 38) Investors step up to the plate At the end of 2015, Mace pre- dicted that more foreign capital would flow into the seniors hous- ing space as the industry became better understood. It was her belief that the higher capitalization rates in the seniors housing sector com- pared with other property sec- tors would draw yield-hungry investors. This prediction proved to be true, most notably with the afore- mentioned $930 million Welltower deal. Investors from Bahrain, Can- ada and others from China also made investments each totaling hundreds of millions of dollars seniors housing during 2016. The institutional investor class, which includes foreign investors, accounted for 30 percent of the total transaction volume in 2016, up from 14 percent in 2015 due at least in part to the pullback by REITs. PGIM Real Estate, an institu- tional fund manager and division of Prudential Financial, uses "a little bit of foreign capital" in its funds and generally seeks deals between $25 million and $125 mil- lion, according to Steve Blazejew- ski, managing director and portfo- lio manager of the company. The increase of institutional equity as a response to a REIT slowdown is a natural part of the cycle, he says. "With the REITs drawing back, that's opened up opportunities for us that we wouldn't have had a couple months ago," says Blaze- jewski. "There's an ebb and flow of capital into the space. It's always been that way. Some are dominant players while others take a back seat, and then it switches." Blazejewski cites another poten- tial reason for the slowdown — a dearth of major portfolios avail- able for purchase. "There are only so many large transactions that can be com- pleted. There simply aren't that many big portfolios available," says Blazejewski. "It's not that the REITs aren't active. They still have the ability to strike. When deals reach a certain size and have cer- tain characteristics, they are very active and very competitive." Private investors have endured a steep learning curve, according to AEW's Kazantis. "Everyone is aware of the industry's compelling demographics and investors are getting much more comfortable with the operating nature of the business and its inherent risks." The stability of the seniors hous- ing sector and its strong cash flow characteristics have become increasingly compelling for pri- vate equity investors, according to Kazantis. "As the asset class has matured and its acceptance contin- ues to increase, seniors housing is migrating from being categorized as an opportunistic/value-added asset class to more of a core or core-plus investment asset class." Looking ahead to 2017 Once the influx of new supply peters out, Blazejewski expects to see an uptick in M&A; activity several quarters later. Construc- tion starts have been down for two consecutive quarters, Blazejewski notes, although he's quick to point out that "two quarters does not a trend make." "If you look back, very little was developed between 2008 and 2011. Then you saw a lot of aggressive M&A; activity between 2010 and 2015," he says. "As new devel- opment starts to come on, inves- tors see yield eroding from all the transaction activity." The new communities that have opened have had a negative impact on occupancy. Assisted liv- ing took the hardest hit, with the average occupancy nationwide dropping to 87.6 percent at the end of 2016 in the markets NIC tracks, the lowest level since 2010, accord- ing to Mace. The silver lining, she adds, is that absorption was still strong during 2016. In other words, while new completions outpaced demand, the fundamental assump- tion of the developers was correct: More and more seniors want to live in seniors housing. Absorption was a strong 2.6 percent annual rate during the fourth quarter of 2016 in the 31 markets NIC tracks. "Unit absorption was as strong as it's been since we started track- ing that data in 2006," says Mace. "Demand was strong, just not strong enough for the amount of inventory that came into the market." The future will be hard to pre- dict, as the big REITs continue diversifying their portfolios into other industries and move away from skilled nursing. But the outlook is still bright, Mace notes, as the underlying fun- damentals reflect a generally health industry, although some markets will feel pressure from new supply, especially in assisted living. "When there's a good opportu- nity, the capital will flow. There are many good opportunities in seniors housing." n Some mega-deals that closed in 2016 Although 2016 saw a smaller number of big-dollar transactions, there were still a few mega-deals, according to the National Investment Center for Seniors Housing & Care (NIC): • Second Spring Healthcare Investments, a joint venture between private equity firm Lindsay Goldberg LLC and healthcare REIT Omega Healthcare Investors Inc. (NYSE: OHI), acquired 64 properties from Welltower for $1.1 billion. • A joint venture between Cindat Capital Management Limited and Union Life Insurance, both Chinese investment companies, purchased a 75 percent interest in a Welltower-owned portfolio of 28 skilled nursing facilities and 11 seniors housing communities for $930 million. • Kindred Healthcare Inc. purchased the 36 skilled nursing facilities it operated for Ventas for $700 million. Kindred will presumably sell off those assets as part of its long-term strategy to exit the skilled nursing business. • Blackstone Real Estate Partners VIII purchased 64 Brookdale-operated properties totaling 5,967 units from HCP for $1.1 billion. • Welltower purchased 19 independent living, assisted living and memory care communities on the West Coast from Vintage Senior Living for $1.15 billion. The portfolio includes 2,590 units in Northern California, Southern California and the state of Washington. • NorthStar Asset Management Group Inc. (NYSE: NSAM), Colony Capital Inc. (NYSE: CLNY) and NorthStar Realty Finance Corp. (NYSE: NRF) entered into an all-stock merger to create a global equity REIT with a total capitalization of $17 billion. Welltower purchased Vintage Golden Gate, an independent living, assisted living and memory care community in San Francisco, as part of a $1.15 billion portfolio in August 2016.

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