Seniors Housing Business is the magazine that helps you navigate the evolution of the seniors housing industry.
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40 www.seniorshousingbusiness.com Seniors Housing Business n February/March 2017 Nabil Abou-Haidar, AIA, Senior Living Practice Leader 602.744.3660 · nabouhaidar@cuningham.com A crafted design experience to support your senior living market needs ARCHITECTURE INTERIOR DESIGN URBAN DESIGN LANDSCAPE ARCHITECTURE Minneapolis Los Angeles Las Vegas Biloxi Denver San Diego Phoenix Seoul Beijing Doha cuningham.com nate acquisition activity at Seniors Housing Properties Trust in 2017. Several months ago, for example, the REIT acquired two proper- ties in Illinois. The stand-alone, 10-year-old assisted living projects are located in the greater St. Louis area on the Illinois side of the Mis- sissippi River. The properties, Morningside of Shiloh and Morningside of Troy, are nearly 100 percent occupied, says Hegarty. Five Star Senior Living has been brought in as the operator. A fair amount of new seniors housing development is under- way in the greater St. Louis area, according to Hegarty. But the Morningside projects are located on the east side of the river, and Illinois residents tend not to cross the Mississippi for services. "It made me feel better about the investment," he says. National Health Investors (NYSE: NHI), based in Murfrees- boro, Tenn., seeks small seniors housing portfolios as well as single properties to complement its exist- ing portfolio. The company com- pleted about $450 million in acqui- sitions in 2016, about two-thirds of which was seniors housing. "We see better returns from single assets rather than chasing large portfolios," says Kevin Pascoe, executive vice president of invest- ments at NHI. Selective new development Despite worries about oversup- ply, new development continues to be part of the REIT investment strategy. NHI has five projects either underway or which recently opened. Bickford Senior Living will operate all five communities. "Our partners understand the local markets," says Pascoe. NHI recently renegotiated its agree- ment with Bickford, adopting tri- ple-net lease structures in place of a partnership structure under the REIT Investment Diversification and Empowerment Act (RIDEA). RIDEA Romance Between Owners, Operators Cools As the economic climate improved for seniors housing following the Great Reces- sion, real estate investment trusts (REITs) began to widely embrace a new kind of part- nership structure that allows them to share in the operating cash flow of a building. The U.S. Congress authorized the partnerships in 2008 under the REIT Investment Diversi- fication and Empowerment Act, more com- monly known as RIDEA. Aiming to generate earnings above tradi- tional rent escalators in triple-net leases, the RIDEA arrangement worked to the REITs' advantage as long as occupancies and rental rates were rising and expenses held steady. But now that market conditions appear to be shifting, the REITs might be rethinking their RIDEA relationships. Last August, National Health Inves- tors (NYSE: NHI) converted a 32-property portfolio with Bickford Senior Living from a RIDEA structure to a triple-net lease. "RIDEA structures have some volatility," says Kevin Pascoe, executive vice president of investments at the Murfreesboro, Tenn.- based REIT. The new triple-net arrangement works to the advantage of both parties, says Pas- coe. Bickford was able to use its proceeds to restructure it balance sheet, while NHI was able to unwind its only RIDEA partnership. Pascoe doesn't view the exit as an indict- ment of RIDEA structures. NHI will still consider RIDEA deals, but only if they are a "Goldilocks scenario," or just right, he says. Sentio Healthcare Properties, a non-traded REIT based in Orlando, Fla., has most of its investments in RIDEA structures. The REIT continues to be comfortable with the struc- ture, riding the ups and downs of being part owner of the operating results, according to John Mark Ramsey, president and CEO at Sentio. Ramsey is closely watching the impact of rising expenses in RIDEA investments. "We've seen marked changes on the expense side, with labor costs in particular," he says. Wages are rising, as are the costs associated with hiring and retaining workers, and pro- viding competitive benefits. This is espe- cially true in markets where new buildings have opened and are competing for Sentio's staff and managers. "We see more employee turnover creating numerous issues," explains Ramsey. Economy plays big role The REITs may rethink their RIDEA part- nerships if economic conditions worsen, according to Ross Sanders, a broker in the St. Louis office of CBRE who previously man- aged the acquisitions group for American Realty Capital, a non-traded REIT. Factors to watch include a slump in housing prices or a stock market decline that may be harbingers of weakness in the seniors housing market. Rising interest rates could actually boost operating income in some cases, according to Dave Hegarty, president and chief oper- ating officer at Senior Housing Properties Trust (NASDAQ: SNH), based in Newton, Mass. He figures residents who rely on inter- est income from their savings will have more money to spend, and operators should be able to raise rents without a lot of pushback from residents. Rising rates will also put a damper on new development, which lowers the competitive threat to existing projects. "These projects may do better weathering the storm," says Hegarty. A recent report released by Green Street Advisors expects new RIDEA partnerships to slow in 2017-18 while the industry adjusts to lower operating income, higher wages and the rising supply of new buildings. "It's possible RIDEA deals could stagnate," says Michael Knott, author of the report and managing director at the Newport Beach, Calif.-based REIT research firm. The long-term outlook for the RIDEA model is favorable, however, notes Knott. His research shows that RIDEA portfolios are more likely to include the highest qual- ity buildings, which should be impacted the least by worsening market conditions. Five years from now, there will be more RIDEA partnerships, not fewer, even if the appetite for the structure stalls out a bit in the next two years, predicts Knott. "I do not expect the trend to go backwards." — Jane Adler