Seniors Housing Business

AUG-SEP 2018

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

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www.seniorshousingbusiness.com 59 August-September 2018 n Seniors Housing Business prices driving up cost of capital. As such, REITs are not as competitive against the vast amount of other institutional and private capital. Firestone: A large shift in desired investment structures (away from triple-net leases) is the biggest driver. Also, many of the most desirable regional operators found lasting partnerships several years ago. Mooney: The combination of increased foreign capital and pri- vate equity investment has, to some extent, displaced REITs on the acquisition side. These alternative equity sources offer a lower cost of capital and are better positioned to take on value-add deals and new development. We anticipate that REIT dispo- sition activity will continue and potentially increase as lease cov- erage ratios decrease and annual lease rate increases outpace rev- enue growth. As the pendulum swings, and as the supply of for- eign capital and private equity capital contracts, the REITs will be in a better position to pursue acquisitions. Lowes: Many of the REITs have had idiosyncratic issues (such as tenant restructuring or mergers) not necessarily related to the overall market that have slowed down their acquisition activity. Many of the REITs are also simply tar- geting larger transaction sizes that are becom- ing less and less available in the market due to c o n s o l i d a t i o n . Obviously, many of the value-add opportunities on the market don't work under the typical tenant lease acquisition model of a REIT. SHB: Compare and contrast the last 12 months with previous years. Heavenrich: The biggest change in senior housing has been an aggressive movement to capture residents earlier and allow them to age in place within a community through the addition of indepen- dent living or active adult units. The marketing approach has been drastically modified from care (needs) to lifestyle (wants). Location, build-out, amenities and adjacencies are a key focus. Addi- tionally, the marketing is directed more to the future resident than the oldest daughter. By targeting a younger demographic (75 instead of 85) with few or no care needs, the market size has more than tripled. While there will always be opportunities for strong opera- tors of boutique assisted living and memory care communities, the larger continuum-of-care proj- ects will put additional competi- tive pressure on traditional assisted living. This trend has also signifi- cantly increased the capital needs for developing these new projects. Mooney: Over the past decade, interest rates have remained at historical lows, and capitalization rates for senior housing proper- ties have declined steadily from an average of 9.8 percent in 2009 to 7.5 percent in 2017. Investors have remained bullish in spite of over- building in many markets and compression of capitalization rates. It is difficult to determine if this is another example of "irrational exu- berance." However, we saw a simi- lar pattern prior to the Great Reces- sion with average capitalization rates declining from 10.8 percent in 2003 to 8.3 percent in 2007. We sus- pect that eventually there will be a "price correction" and some result- ing shakeout. Jandris: Several years back, REITs went on a tear acquiring properties with long-term leases. Occupancy and rates have not kept up, lead- ing to a shift in investment strat- egy. Rather than triple-net leases being the pri- mary investment vehicle, private equity buyers are putting together joint ventures with operators to handle management. There's a smaller pool of buyers now, but the market is seeing a lot more capital and easier access to debt despite higher interest rates. Clousing: The past 12 months we have seen a sharper focus on com- petition, labor markets and stricter underwriting standards. About 12 to 18 months ago, the buying com- munity was willing to look for- ward on operations. In-place cash flow and the performance of the competing assets in the market are part of every decision now. Addi- tionally, most financing has been either bridge-to HUD or Fannie/ Freddie as buyers look to control inflationary risk on the debt side of their capital stack. Pricing has Damien Carriero Colliers Joshua Jandris IPA

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