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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www.seniorshousingbusiness.com 37 February-March 2018 n Seniors Housing Business at $54.15 on Feb. 14, down from $65.58 a year earlier and a five- year peak of $84.31 on Jan. 12, 2015. • The share price of Ventas stock closed at $49.62 on Feb. 14, down from $61.68 a year earlier and a five-year peak of $93.26 on May 13, 2013. "If the REITs are trading at a premium, they have tremendous access to capital. That's what was reflected in 2013 through 2016," says Peter Martin, managing direc- tor with JMP Securities, a San Francisco-based financial services firm. "When their stocks are below their averages, they no longer have endless access to capital." Martin also noted that the high rate of development is perhaps causing some buyers to hesitate. With an estimated 50,000 new units under construction, strong consumer demand is the only thing keeping occupancy rates from dipping even further. (The overall occupancy rate for seniors housing stood at a "relatively weak" 88.8 percent at the end of 2017, according to the National Investment Center for Seniors Housing & Care.) "Demand has been much higher than we expected, partially because the housing industry is so strong," says Martin. "The equity in homes is the purchasing power, and our parents can sell their house at peak pricing right now." This is in contrast to previ- ous market peaks, Martin says, because consumer awareness of private-pay seniors housing has gone from below 30 percent in the late 1990s to above 90 percent now. Previously, even independent and assisted living were considered to be "the nursing home," but most consumers now understand the difference. A silver lining of low REIT activ- ity is that other types of buyers now get to kick the tires on pro- spective deals that were previ- ously snatched up almost exclu- sively by REITs. "The private buyer has a bet- ter look at things just because you don't have the dominant rush of the REITs," says Martin. "Slowly but surely, other institutional investors — hedge funds, high- net-worth individuals — are now getting involved because the deals are now making it to their desks." Have cap rates hit the floor? At the end of 2017, the overall seniors housing capitalization rate for the industry hit a record low of 6.5 percent (with independent liv- ing below that number and skilled nursing above it), according to the RCA data. The cap rate is the expected annual return on a newly acquired asset based on the prop- erty's annual net operating income relative to the purchase price. "Simply put, cap rates have bot- tomed out," says Martin. "The market is now anticipating at least two interest rate increases in 2018. Investment spreads will compress quickly, which will necessitate cap rates to move up." New Senior Investment Group's recent purchase of a nine-property portfolio of Holiday Retirement properties at a 5.1 percent cap rate is a potential indication that rates will not compress any further, says Martin. He also notes that REITs slowing their acquisition volume is often a precursor to cap rates increas- ing. The obligation of publicly traded companies to generate high returns for investors causes them to pull back on their buying activ- ity before other investor types. Costello of RCA doesn't go as far as to suggest cap rates have hit their lowest point, saying "there's room for a little more compres- sion in the short term." How- ever, he does agree they're part of the reason for the slowdown in transactions. "Low cap rates put expecta- tions of buyers and sellers further apart," says Costello. "There's good, steady, ongoing yield, but buyers are hesitant to keep bid- ding with the same aggressiveness Cap Rates Hit Record Low A possible factor lowering seniors housing sales activity was record-low capitalization rates, which hit 6.5 percent at the end of 2017. "Low cap rates put expectations of buyers and sellers further apart," says Jim Costello, senior vice president at Real Capital Analytics. Source: Real Capital Analytics. Includes combined rates for independent living, assisted living, memory care and skilled nursing. 12.0% 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% Q1 2013 Q1 2014 Q1 2015 Q1 2016 Q1 2017

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