Active investment sales market ahead for assisted living?

Market conditions are favorable for high deal volume in 2014, but eager buyers chase a limited amount of available product.

By Mark Yontz

U.S. property and portfolio sales in the assisted living segment of seniors housing totaled $696.5 million during the first quarter of 2014, down significantly from the same period a year ago when transaction volume reached a whopping $2.9 billion, according to the National Investment Center for the Seniors Housing & Care Industry (NIC). 

Despite the comparatively slow start on the transactions front in 2014, many industry experts say they expect buyers and sellers to be highly active in light of favorable market conditions that include pent-up investor demand, an improving economy and low interest rates. (The 10-year Treasury yield was approximately 2.6 percent as of May 2.)

Mel Gamzon, president of Miami-based brokerage firm Senior Housing Global Advisors (SHGA), anticipates a big year on the deal front in his shop. “While it’s still early in the year, we anticipate an increase of at least 20 percent in our U.S. transaction activity, especially for the below-the-radar deals,” says Gamzon. 

The veteran broker adds that foreign investors are also poised to become increasingly more involved in the seniors housing sector. “We’re seeing a surge of fresh equity entering the industry.” Senior Housing Global Advisors provides asset and portfolio advisory services and also helps clients secure debt and equity.

U.S. property and portfolio sales in the assisted living sector during a three-year period (2011–2013) topped $17.8 billion, according to NIC, with roughly $14.8 billion of that total coming from portfolio sales and the remainder from single-property transactions.

While total portfolio sales dropped sharply during the first quarter of 2014 compared to the first quarter of 2013, there was a modest increase in single-property sales.

The volume of portfolio deals annually tends to be “volatile” compared with single-property sales, says Beth Mace, chief economist for Annapolis, Md.-based NIC. “Overall, though, there’s a lot of interest in the senior living sector. There’s also lots of capital on the sidelines waiting to be invested. So, there’s a long list of potential investors we anticipate will be active yet this year.”

Sellers hold advantage

Scott Kavel, leader of Grey-stone’s seniors housing finance group headquartered in New York City, says that it is a seller’s market right now and has been for the past few years. “Folks are eager to buy, but there’s more money to be spent than product to buy. So, this may eventually lead to buyers consolidating.”

Greystone recently worked with a borrower to provide bridge financing for a Class A asset that was completing its initial lease-up. The borrower’s plan was to sell in 18-plus months at a price exceeding $300,000 per unit. 

Greystone was able to provide the borrower several attractively priced bridge options, but also presented it with a sale oppor-tunity at slightly above the price it was targeting to achieve in 18 months. 

Kavel predicts the seller’s market environment will hold for the rest of the year, adding that there will eventually be a slight increase in supply, which should lead to a higher number of sales transactions in 2014 as compared to last year.  

“We don’t know what the next big deals will be, but I anticipate there will be some in the marketplace this year,” says Kavel. “We may even start seeing REITs acquiring REITs, but a lot of it has to do with the timing of buyers and sellers.” 

Neal Raburn, managing director at Greystone, predicts that because many of the large portfolios in seniors housing have already changed hands, “there are going to be a lot of smaller transactions this year.” 

Raburn and Kavel are part of a Greystone seniors housing team that focuses on offering advisory services and finding creative capital solutions for clients through either Fannie Mae, Freddie Mac, HUD, life companies, banks or other financing sources.  

“The publicly traded REITs have been active acquiring large and regional properties and are now entering into joint ventures with regional owners and operators to fuel their development and acquisition pipelines,” explains Raburn.

Non-traded REITs have capital to compete with public REITs for the acquisition of individual Class A properties or a small portfolio of high-quality assets, according to Raburn and Kavel.  Non-traded REITs have also been focusing on smaller, value-add acquisitions and/or development, as have regional owners and operators.

“REITs have certainly been active, but the pension and opportunity funds have been primarily investing in joint-venture transactions in larger markets,” says Kavel.  “All of these groups, though, have capital available and are active in the market.” 

Aggressive pricing

Because investor demand is so strong, particularly for need-based housing such as assisted living, cap rates for Class A properties in major markets are in the low- to mid-6 percent range, according to Kavel.  Well-run properties in smaller markets may trade in the mid-7 percent range, whereas smaller properties in tertiary markets and troubled properties may trade in excess of 9 percent.

That spread in cap rates creates opportunities for savvy buyers, according to Adam Zeiger, senior vice president of sales at GE Capital, Healthcare Financial Services in Chicago.

“Over the last several years, we have seen the REITs primarily do larger portfolio transactions. But many of our smaller customers — particularly regional operators and private equity shops — have augmented their portfolios by adding turnaround facilities they can acquire at considerably less aggressive prices,” explains Zeiger. 

GE Capital, Healthcare Financial Services has provided more than $65 billion in financing to the U.S. healthcare market over the last 10 years. Even though seniors housing-related deals make up a small portion of that total, Zeiger says his company’s experience in the assisted living sector is representative of many in the marketplace.

“As one of the largest lenders to the [seniors housing sector], I think you can use us as a microcosm of the broader industry,” says Zeiger. “We helped our customers by providing approximately $1.8 billion of volume in 2013, which was split fairly evenly between skilled nursing and assisted living, and we expect to do a similar volume in 2014.”