Seniors Housing Business

FEB-MAR 2018

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

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36 www.seniorshousingbusiness.com Seniors Housing Business n February-March 2018 By Jeff Shaw The fast and furious days of seniors housing property and port- folio sales have officially faded. The total volume of annual sales fell 32.3 percent from 2015 to 2016, according to Real Capital Analyt- ics (RCA). That trend continued in 2017, with deal volume slump- ing 31.6 percent compared with the prior year. (RCA's sales data is based on property and portfolio sales $2.5 million and above across the United States.) Based on RCA's preliminary totals, transaction volume in the seniors housing space totaled $11.7 billion in 2017, compared with $14.6 billion in 2016 and $18.4 bil- lion in 2015. Leading up to that peak in 2015, sales volume had been on a steady year-over-year climb since the Great Recession. Despite the slowdown in the volume of property trading hands, Jim Costello, senior vice president at RCA, notes that the seniors housing industry is still strong. "It's not like the market's col- lapsing," says Costello. "Prices are still very competitive. Cap rates are at record lows. There are still investors looking to get into the sector. It's a great economic story." The main source of this recent decline has been general inactiv- ity by the major seniors housing REITs due to a combination of depressed stock prices, high rates of new development, increas- ing interest rates and a struggling skilled nursing sector. REITs accounted for 42 percent of transaction volume in both 2014 and 2015, but only 26 percent in 2016 and 15 percent in 2017. Pri- vate buyers now account for the bulk of transactions (48 percent in 2017), followed by institutional investors (30 percent). What's more, for the first time in many years, the major REITs were net sellers in 2017. The pendulum swing has been quite dramatic. In 2015, REITs bought $7.7 billion in seniors housing properties and sold $907 million, so they pur- chased $6.1 billion more than they sold. In 2017, REITs sold $4.8 bil- lion and bought $1.7 billion, mean- ing they sold $3.1 billion more than they bought. The REITs have been espe- cially active on selling assets in the skilled nursing sector. Three of the year's biggest transac- tions involved REITs selling off large portfolios of skilled nursing facilities: • Ventas sold its entire portfo- lio of 36 Kindred Healthcare com- munities for $700 million. Kindred bought the facilities before it sold them again as part of the compa- ny's planned exit from the skilled nursing sector. The deal was announced in late 2016, but closed in 2017. • As part of a larger $930 mil- lion sale, Welltower sold its 75 percent interest in 28 skilled nurs- ing facilities to a Chinese joint venture between Cindat Capital Management Limited and Union Life Insurance. This deal was also announced in 2016, but closed in 2017. • Sabra Health Care REIT has announced its intentions to divest its entire portfolio of skilled nurs- ing facilities leased to Genesis Healthcare Inc. Those sales are ongoing, but several were com- pleted or announced in 2017. • HCP announced in Novem- ber it plans to sell six Brookdale- operated properties for an esti- mated $275 million. The REIT also plans to sell its remaining 40 percent stake in a joint venture to Columbia Pacific Advisors for $332 million. The joint venture — RIDEA II — owns 49 seniors housing proper- ties, of which Brookdale operates 46. Those deals had not yet closed at year's end, but are examples of the trend. HCP no longer par- ticipates in skilled nursing, having spun off its entire portfolio into a separate REIT in 2016. What's holding back REITs? Although Welltower and Ventas declined to be interviewed for this article, HCP confirmed some of the prevailing explanation for slow REIT investment activity. "We slowed our acquisitions starting in 2016. There are a couple of factors influencing this," says Kendall Young, senior managing director of seniors housing proper- ties for HCP. "First, we have been more selective on our acquisitions in part due to new supply. Sec- ond, we have been focused on the execution of asset sales and transi- tions from our announced Brook- dale transactions." On the few acquisitions HCP made, the determining factors were the growth potential of the specific market, "including both new supply and long-term demand characteristics," adds Young. Stock prices have slumped in recent months, and all of the "Big Three" REITs, are well below their recent peaks. • HCP's stock price closed at $21.77 per share on Feb. 14, down from $30.42 a year earlier and a five-year peak of $49.53 on May 13, 2013. • Welltower's share price closed Transaction Volume Tumbles Again n Mergers & Acquisitions Downward trend that started in late 2016 continued through 2017 as REITs became sellers rather than buyers of seniors housing. Largely credited to low activity by the major seniors housing REITs, total sales volume across the property sector fell 31.6 percent from 2016 to 2017, dropping to $11.7 billion on the year. This is a notable decline from 2015, when transaction volume hit a record high of $18.4 billion. Source: Real Capital Analytics Billion ($) 20 18 16 14 12 10 8 6 4 2 0 Q1 2013 Q1 2014 Q1 2015 Q1 2016 Q1 2017 Rolling 12-month Total Quarterly Volume Roller Coaster Ride for Total Sales Volume

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