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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38 www.seniorshousingbusiness.com Seniors Housing Business n February-March 2018 of the past few years. The cap rates might go up a little bit, so buyers have to be more conservative. The sector is not collapsing, but it takes longer for buyers and sellers to get comfortable with a transaction." However, one factor could continue to keep cap rates low, according to Jeff Erhardt, manag- ing director with Maryland-based seniors housing investor Capital Healthcare Investments. The com- pany is the healthcare investment vehicle for publicly traded REIT MTGE Investment Corp. As development costs continue to rise, notes Erhardt, the "build versus buy" equation still can push many owners to buy, regard- less of low returns. "You are seeing those costs to develop increase pretty signifi- cantly, mostly driven by labor and the cost of raw materials," says Erhardt. "Land costs are going up, and it's taking longer for proper- ties to lease up. As construction costs per unit continue to increase and oversupply issues increase, it may start to make buying existing product more attractive." Despite not being a publicly traded REIT, Erhardt reports that Capital Healthcare Investments is also sharpening its pencil when it comes to what it chooses to buy. "Our underwriting has gotten significantly more conservative. We are a landlord, so our leases are being written more conservatively. We're still looking at acquisitions, but at a much more conservative valuation." Previewing 2018 When asked to look into their crystal balls for 2018, the sources all said not to expect any drastic changes compared with 2017. Historically low cap rates and a high cost of capital for the REITs should keep transaction volume around its current level, according to Costello. "Until sellers are compelled to sell for some reason — such as not being able to refinance or return capital to investors — there may not be much of a reason to sell. They'll just hold on and wait and see how it goes." Erhardt also expects 2018 to be on pace with 2017, but he has seen some early signs of potential resurgence. "There's been a lot of product coming to market so far. There have been some big portfolios launched, driven by REIT divesti- tures. We've talked to the invest- ment banker community and they all seem to be very bullish on 2018." HCP's Young predicts 2018 will be a similar but "active" year, with private equity and foreign capi- tal "bridging the gap left by the REITs." According to RCA, although foreign capital has fallen in terms of total percentage of the invest- ment market (from 12 percent in 2015 to 6 percent in both 2016 and 2017), foreign investors are still net buyers and therefore increasing their stake in U.S. seniors hous- ing. "They've been increasing their overall exposure to the sector," says Costello. In fact, in a deal that could have drastically changed the outlook on 2017, Chinese investor Zhonghong Zhuoye reportedly offered to buy Brookdale, the largest owner and operator of seniors housing in the United States, for $3 billion. The deal later fell apart when the Chi- nese bank funding the acquisition put its financing on hold. "I notice at industry conferences there are more foreign funds look- ing at the space," says JMP's Mar- tin. "We're heading more toward the bottom of the cycle — we've already rolled past the top — so foreign capital doing due diligence right now would be very smart." Martin says new construction would have to slow before mar- ket fundamentals could boost rents and occupancies to stable rates. That said, despite the many headwinds facing the industry, the eventual demographic wave of Baby Boomers reaching the appropriate age for seniors hous- ing makes it a perpetually enticing real estate investment option. "For the future, it's really going to depend on how patient some- one's capital is going to be. Given that demographics are going to get better over the next decade, investors just have to decide how long they're willing to wait to meet occupancy and cash-flow goals." n Private Buyers, Institutional Investors Pick Up Slack As REITs dramatically drew back their transaction volume from 2015 to 2017, private buyers and institutional investors increased their buying and selling activity in seniors housing. Source: Real Capital Analytics Foreign Investors REIT User/Other Institutional Private 2014 42% 42% 13% 2017 48% 15% 30% 6% 2016 38% 26% 29% 6% 38% 42% 8% 12% 2015

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