Seniors Housing Business is the magazine that helps you navigate the evolution of the seniors housing industry.
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38 www.seniorshousingbusiness.com Seniors Housing Business n February/March 2017 By Jane Adler Remember 2011? That year marked the hey- day of the real estate investment trusts (REITs), when they ruled the acquisition market by snapping up seniors housing and skilled nurs- ing portfolios at a rapid clip. In fact, publicly traded REITs and operators hit a high point back then, with U.S. deals totaling $24.5 bil- lion, or about 89 percent of the total transaction volume. Times change. Fast-forward to 2017, and the REITs are taking a pause and recalculating their seniors housing and care investment strategies as quickly shifting economic and market condi- tions come into play. Several large public REITs have spun off large skilled care portfolios as questions about government reimbursement and falling occu- pancies due to length-of-stay pressures con- tinue to stress the sector. A wave of new construction, mostly of assisted living and memory care projects, has increased competition and heightened concerns that overbuilding has already and will continue to hurt occupancies. Although REIT stock prices have rebounded somewhat lately, the companies still face a cli- mate of rising interest rates. There is an inverse relationship between interest rates and REIT prices. Interest rate increases are likely to cause REIT price declines as the cost of capital climbs and earnings decline. That makes it harder to finance new acquisitions. Non-traded REITs have faced their own investment capital shortages for a number of reasons, including new regulations that require the upfront disclosure of fees, which has sty- mied their ability to raise funds from retail sources. Meanwhile, competition for properties from private equity groups has helped to keep asset prices high and slowed REIT investment activity. Other factors weighing on the seniors hous- ing industry include uncertainty of a new administration in Washington, D.C., growing labor expenses, and the overall direction of the economy, the latter of which has a big impact on family decision-making and the willingness to commit to an expensive living arrangement. "It's challenging to invest widely in the [seniors housing] space," says Dave Hegarty, president and chief operating officer at Senior Housing Properties Trust based in Newton, Mass. "We are not being aggressive." The REIT has an $8.5 billion portfolio. Senior living com- munities comprise 53.6 percent of the total portfolio. Transactions stall In 2016, transaction dollar volume for seniors housing and skilled care properties totaled $14.4 billion, a 34 percent drop from $21.8 bil- lion in 2015, according to the National Invest- ment Center for Seniors Housing & Care (NIC) based in Annapolis, Md. Acquisitions by public buyers, dominated by the REITs, declined in 2016. Public buyer volume was down 72 percent compared with 2015, a decline from $12.7 billion to $3.6 billion, according to NIC. Transaction dollar volume by private investors (including non-traded REITs) remained stable in 2016, while volume by insti- tutional investors grew to $4.4 billion. "The REITs are in a disposition mode," says Chad Vanacore, analyst at Stifel, an investment banking firm based in Saratoga Springs, N.Y. "It's a good time to sell." Cap rates remain tight on a historical basis and valuations are elevated, he explains. Yields remain attractive to investors and capital continues to flow into the space. The REITs are selling underperforming assets, those in need of large capital expendi- tures, and property segments such as skilled nursing that no longer fit current investment strategies, according to industry sources. REITs are also looking to sell assets not man- aged by their core operators, and those in oversupplied markets with new competition. According to NIC, more than 5,900 new seniors housing units were delivered nationally in the last quarter of 2016, the most in a single quar- ter since NIC's data collection began in 2006. Nearly 4,100 of the units were assisted living. "The REITs are cleaning house," says Ross Sanders, first vice president at brokerage firm CBRE. Sanders works from an office in St. Louis and previously ran the acquisitions group at American Realty Capital, a non- traded REIT that has since changed its name to Healthcare Trust. "The REITs are spinning off what doesn't make sense," adds Sanders. The big three healthcare REITs are retool- ing their portfolios. Chicago-based Ventas (NYSE:VTR) expects to be out of the skilled nursing business by the end of 2017. The com- pany has been diversifying with its purchase of Ardent Health Services, an operator of health systems and hospitals, and plans to acquire life REITs Adopt Cautious Investment Strategies n Investment Higher capital costs, new supply and competition from private equity groups force industry giants to rebalance their portfolios. Boonespring of Boone County in Union, Ky., is a new $24 million skilled nursing facility in the Cincinnati area financed by LTC Properties. The facility, expected to open in 2018, will be operated by Carespring, which manages other projects in the area.