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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56 www.seniorshousingbusiness.com Seniors Housing Business n February/March 2017 By Jeff Shaw Investors started putting the brakes on acqui- sition activity in late 2015, and that trend con- tinued throughout 2016. The end result: a 35 percent drop in year-over-year activity from $21.8 billion in 2015 to $14.1 billion in 2016, according to preliminary totals of publicly closed deals in the United States tracked by the National Investment Center for Seniors Hous- ing & Care (NIC). However, that drop may simply signify a return to normalcy, as the 2016 total is nearly identical to the $14.2 billion tallied in 2013. The industry experienced three consecutive years of major increases leading up to 2016. The 2012 total was only $11.7 billion, barely half the 2015 total. The number of deals per year also fell from 2015 to 2016, but by only 15 percent from 563 to 477. In 2014 there were 556 deals and in 2013 there were 414. This shows that the deals them- selves were mostly smaller, one- or two-prop- erty acquisitions instead of massive, nine-figure purchases. The average acquisition in 2016 was $29.6 million, compared with $38.7 million in 2015 and $34.2 million in 2014. "The sale of large portfolios was down, and entity-level transactions — where one company buys another — has really gone away entirely," says Jim Costello, senior vice president with data firm Real Capital Analytics. "But certain types of transactions were still around. Sin- gle-asset activity was actually up for the year, $5.9 billion in 2016 up from $5.3 billion a year earlier." Despite the overall decline in deal volume, the average price per unit has stayed consis- tent, notes Beth Burnham Mace, NIC's chief economist. In 2016, the price per unit for inde- pendent living, assisted living and memory care was approximately $176,000, comparable to the previous two years, thus remaining "in the $175,000 to $180,000 range." "The price per unit is hovering around the same level, and close to peak," says Mace. "Despite the slowdown we saw in volume, pricing still held up pretty well." On the skilled nursing front, the price per unit even increased 34 percent — from $76,000 in 2015 to $101,800 in 2016. Out of all skilled nursing deals in 2016, 28 properties sold for more than $200,000 per unit, adds Mace. REITs pump the brakes The main reason for the overall transaction slowdown was that publicly traded REITs sig- nificantly pulled back, continuing the trend they started in late 2015. Public buyer trans- action volume dropped a dramatic 71 percent from $12.7 billion in 2015 to $3.7 billion in 2016, according to NIC. Private REITs and other private buyers, such as owner-operators, held steady year over year, with transaction volume of $5.7 billion in both 2015 and 2016. Institutional buyers, such as pri- vate equity groups and pension funds, covered some of the void left by the big REITs, increas- ing their volume 37 percent from $3.1 billion in 2015 to $4.3 billion in 2016, according to NIC. The cause for the REIT slowdown, Mace says, is a combination of low stock prices early in the year, increasing interest rates and their need to digest all the new properties and port- folios they purchased in 2014 and 2015. "The REITs' cost of capital shifted last year, and that slowed some of their acquisition activ- ity down," explains Mace. "There was also some portfolio repositioning going on in some of the larger REITs. They were absorbing all the activity from prior years." Much of the REIT transaction volume was in dispositions. The industry's three biggest REITs ¬— Welltower, Ventas and HCP — all sold massive portfolios during the fourth quarter of 2016. In November, Welltower announced it was more than tripling its 2016 disposition goal from $1.3 billion to $4.1 billion. Shortly thereaf- ter, the company closed two major dispositions. In the first transaction, Welltower sold 64 prop- erties to Second Spring Healthcare Investments for $1.1 billion. The second major disposition was the sale of 75 percent interest in a 28-prop- erty skilled nursing portfolio to Chinese inves- tors as part of a $930 million transaction. Ventas, meanwhile, continued its exit from the skilled nursing business by selling 36 skilled nursing facilities to Kindred Healthcare Inc., the operator of the properties, for $700 million. Kindred is looking to exit the skilled nursing business as well, but needed to pur- chase the facilities to get out of the lease con- tract, creating an opportunity for Kindred to sell off the properties. M&A; Volume Falls Back to Earth n Mergers & Acquisitions While acquisition activity drops dramatically in 2016 as REITs retool their strategies, institutional investors make a splash. Roller Coaster Ride on Acquisitions Volume $25 billion $20 billion $15 billion $10 billion $5 billion $0 billion Transaction Volume in Billions of Dollars 2012 2013 2014 2015 2016 The volume of U.S. seniors housing acquisitions fell 35 percent in 2016 versus the prior year. A close review of the ebb and flow of the industry reveals that the period 2014-2015 may have been the exception, not the rule. The publicly traded REITs were particularly aggressive buyers during that two-year period, resulting in big spikes in deal volume. Source: National Investment Center for Seniors Housing & Care

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