International money chases seniors housing

In August, Health Care REIT Inc., paid $257 million for a portfolio of 11 properties from Gracewell Healthcare, including Highclere House, a seniors property in Weymouth, England. In August, Health Care REIT Inc., paid $257 million for a portfolio of 11 properties from Gracewell Healthcare, including Highclere House, a seniors property in Weymouth, England.

REITs and partnerships bring capital across national borders, and the trend is expected to intensify.

By Bendix Anderson

Leading real estate investment trusts (REITs) don’t just shop for properties in foreign markets. They build partnerships that can last for decades.

“We are not flying over on a three-day road trip to meet potential partners,” says John Goodey, senior vice president for Toledo, Ohio-based Health Care REIT (HCN). “We are making a 25-year decision.”

New investment is increasingly crossing national borders for seniors housing. Top REITs like HCN and Chicago-based Ventas Inc. lead the way, setting up webs of partnerships that will create investment opportunities far into the future. 

This past summer, HCN and Ventas bought more than $1 billion in seniors housing properties in Europe and Canada. Global corporations, private equity firms and high-net worth individuals are also purchasing properties and creating joint venture partnerships, though on a much smaller scale. 

“The international action appears to be largely on the REIT side,” says David Schless, president of the American Seniors Housing Association, based in Washington, D.C.

‘O Canada’: Ventas ventures north of the border

Canada has become a first stop for U.S. seniors housing investors venturing outside their home country. In 2007, Ventas began investing in seniors housing outside the U.S. by buying property in Canada. 

“Now 5 percent of our net operating income is outside the U.S. in Canada and the U.K.,” said Debra Cafaro, chairman and CEO of Ventas, during a recent panel discussion at the NIC Conference in Chicago. The session was titled “Hail to the REITs: REIT CEOs Talk Big Growth Amid Big Changes.”

In August, Ventas spent close to $1 billion to buy 29 senior living communities in Canada from Holiday Retirement. These private-pay properties are located in seven Canadian provinces, with the majority in Ontario and Alberta. Ventas created a new operating partner as part of the deal. 

“The entire Canadian leadership group from Holiday Retirement has joined us in creating a new Canadian management business, Atria Retirement Canada,” says Atria CEO John Moore.

Ventas also crossed the pond this year to buy three private hospitals in the United Kingdom for $183 million in a sale-leaseback deal. Spire Healthcare, the second largest private hospital operator in the U.K., will occupy the properties under long-term, triple-net lease agreements. The investment comprises the largest part of the total $208 million invested worldwide by Ventas in the first quarter of 2014. 

In September, Ventas issued CAN$650 million in bonds. “It’s the largest REIT bond deal ever,” said Cafaro during the NIC show. The proceeds of the bond sale will reportedly pay down some of the short-term financing used to buy the Holiday Retirement portfolio, providing longer-term financing for the massive purchase.

HCN builds partnerships in Europe

Today’s international deals are laying the groundwork for future development and acquisitions. “U.S. healthcare REITs will be a regular buyer of European assets over time,” predicts HCN’s Goodey. European countries like the U.K. are attractive because of strong demographics and property values that are likely to create strong demand for private-pay seniors housing. 

For example, HCN is already so deeply involved in the U.K.’s seniors housing business that HealthInvestor, a British trade pub-lication, gave the company its 2014 Property Investor of the Year award.

In August, HCN bought a portfolio of seniors housing properties in the U.K. The REIT bought 11 seniors housing communities for £153 million (approximately US$257 million) from Gracewell Healthcare. The 767 luxury units are mostly concentrated in Southern England. Upon stabilization, HCN expects its investment to achieve about an 8 percent annual yield from property income.

The deal expands HCN’s long-standing relationship with one of its partners and creates a new relationship with another. Sunrise Senior Living, McLean, Va., in which HCN owns a 24 percent interest, will separately purchase Gracewell’s management company and manage the portfolio. “We are pleased to expand our relationship with our largest operating partner,” says Tom DeRosa, CEO of HCN.

HCN has also created an agreement with Gracewell’s founders, Tim Street and Daniel Kay, who will continue to develop new seniors housing communities in the U.K. managed by Sunrise and owned by HCN. 

The Gracewell duo are already planning to develop 11 new seniors communities primarily in greater London and Southern England over the next two years, totaling 812 units. HCN plans to buy these properties for a fixed price of £160 million (about US$269 million). Once they stabilize, HCN expects these developments to achieve net operating income yields in the high-single to low-double digits.

For the foreseeable future, HCN expects the development partnership to create about five communities per year. The REIT will purchase the communities as they are finished.

Buying the Gracewell portfolio is just the latest deal in the U.K. for HCN. In 2013, HCN completed $1 billion in real estate investments in the U.K. with three leading operators of seniors housing: Sunrise Senior Living, Signature Senior Lifestyle and Avery Healthcare. The company also successfully completed a £550 million bond (more than US$880 million) offering to help provide long-term financing for its acquisitions.

“We built our U.K. portfolio like our U.S. and Canadian portfolios by partnering with the best-in-class operators,” says DeRosa of HCN.

The conventional wisdom says international investors should always find a strong, local partner that is deeply familiar with the local markets, regulations and customs. That’s a familiar challenge for seniors housing developers, who often make a habit of finding strong local operating partners when they buy or build properties in unfamiliar markets.

HCN brought to Europe a partnership model that has worked for it in the U.S. “We find a great business or management team,” says Goodey. “Then we double or triple the size of their business over a period of years.”

These partnerships will help HCN create future opportunities. That’s especially important in the U.K. “The U.K. doesn’t have the land bank,” says Goodey. “All the places you wish you could build a luxury seniors development are the places where it is really difficult to build.”

In return, HCN will provide its new partner with a ready and knowledgeable source of capital. For more than three years, HCN has averaged more than $600 million in repeat business per quarter from its partners. “We quite often become the single point of capital for our partners,” says Goodey. “We remove the need for them to seek in scale other sorts of financing.” 

However, HCN’s investment criteria has boundaries. “We absolutely do say ‘no’ to things that don’t work for us,” says Goodey. 

For example, HCN focuses on high-end, private pay seniors housing rather than depend on reimbursement for services from U.K. government programs. HCN’s partners are 88 percent backed by private capital, so the REIT has been less vulnerable to funding changes as the U.K. trims its budget.

Up next: Continental Europe

Germany, France and Switzerland are receiving considerable attention from foreign seniors housing companies interested in expansion. The publicly traded REITs have not yet decisively entered continental Europe, though HCN is making its plans. 

“We envision HCN entering Europe at the appropriate time and with the appropriate management team and assets,” says Goodey. 

Germany’s strong economy and aging population are helping draw foreign investors to seniors housing, including high-net-worth individuals and private equity funds buying on behalf of large institutional investors.

“Over the last two to three years, more money from foreign investors has been coming into Germany,” says Ines Löwentraut, CEO of Avivre Consulting, a real estate advisory firm based in Bad Homberg, Germany. “The transaction volume has almost doubled.” 

Growing interest from purchasers of seniors housing has driven up property prices in Germany, pushing capitalization rates down to 6 or 7 percent on average, according to Löwentraut. “The yield is high, but it is getting lower as more and more investors come to our housing market,” she says. 

The demand for seniors housing is quite strong in Germany as its population ages. “The need is almost doubling,” says Löwentraut. The German seniors housing business has also proven to be a safe investment, with a low default rate for permanent loans, she says. 

In the last 10 years, the seniors housing business in Germany has also become more transparent. Germany’s Medizienischer Dienst der Krankenkassen, or Medical Service of Health (MDK), inspects seniors housing facilities once a year. The ratings are made available to the public. 

However, as investors consider their opportunities to grow overseas, they also need to analyze the regulatory environment and the strength of the capital markets locally.

“Is the foreign currency and the bond environment efficient enough to not take away all of your profit?” asked Cafaro of Ventas during the NIC Conference. Taxes can also be a particular concern. “There is leakage in the tax structures,” she added. 

Foreign investment in U.S. seniors housing 

A growing amount of capital from overseas is also flowing into U.S. seniors housing, despite intense competition to acquire stabilized seniors properties.

“There is a lot of international money coming in,” confirms Beth Burnham Mace, chief economist for the National Investment Center for the Seniors Housing & Care Industry based in Annapolis, Md. Foreign investors are putting capital into difficult-to-quantify vehicles like private equity funds and the stock of U.S. REITs.

However, the biggest deals may be yet to come, according to experts. Large foreign investors are now considering significant portfolios of U.S. seniors housing properties, but have not yet made commitments. 

“We have seen the interest from these investors, but we haven’t seen a tremendous amount of activity,” says Matthew Whitlock, senior vice president of the CBRE National Senior Housing Group. 

Industry experts say that it’s difficult to determine the exact amount of foreign capital now invested in U.S. seniors housing. “Certainly it is well in excess of $5 billion,” says Mel Gamzon, president of Senior Housing Global Advisors, a real estate advisor based in Fort Lauderdale, Fla. 

“Going forward, we can anti-cipate that ‘quiet money’ from foreign private and public sources will make its presence known in a big way.” Gamzon’s ‘quiet money’ includes non-traded REITs and private equity funds from a broad range of nations, in addition to sovereign wealth funds.

Many of these potential investors may be drawn to structures like non-traded REITs that can help protect them from potentially punitive taxes, such as the Foreign Investment in Real Property Tax Act in the U.S.

Interested international investors can just as easily buy stock in publicly traded U.S. seniors housing REITs. “We have a good international following that invests in our company’s stock,” points out HCN’s Goodey.

Smaller transactions may also be affected by immigration regulations. The Immigrant Investor Program, or E-5 program, run by U.S. Citizenship and Immigration Services, gives individuals who invest in a new commercial enterprise in the U.S. an advantage in the process of applying for a visa to enter the U.S. 

This has encouraged some foreigners to plow money into U.S. housing, particularly joint venture opportunities in seniors housing. “That’s happening on new development,” says CBRE’s Whitlock. 

Several foreign capital sources have a long history of investing in U.S. senior housing and are likely to continue. Chartwell Retirement Residences, a Canadian REIT based in Mississauga, Ontario, has built up a portfolio of nearly three dozen U.S. properties over many years — though this past June Chartwell sold four U.S. seniors assets for $136.1 million to a joint venture between Focus Healthcare Partners and Garrison Street Partners.

“This transaction is in line with our strategy to concentrate our U.S. investments in our core states of Florida, Texas and Colorado,” says Brent Binions, president and CEO of Chartwell.

Other long-term partnerships between U.S. companies and foreign capital sources include Formation Capital, based in Alpharetta, Ga., and its Middle-Eastern capital partner Safanad Limited; and Benchmark Senior Living, based in Wellesley, Mass., and its partner Kuwait Finance House.

MBK turns to development

Some of these long-time investors have responded to high property prices in the U.S. by turning to development. That’s the case for Irvine, Calif.-based MBK Senior Living. MBK is a wholly owned subsidiary of Mitsui & Co., a global company based in Japan that has invested in U.S. home building, retail properties and, recently, multifamily properties.

MBK currently holds a portfolio of more than 2,000 units of seniors housing at 16 properties. It typically holds properties for five to seven years.

“We are building,” says Terry Howard, MBK president. “We are finalizing an opportunity in Northern California adjacent to an existing property and tying up multiple development sites.” 

Through MBK, Mitsui has been investing international capital in U.S. seniors housing for more than two decades. It turned to development as prices rose for stabilized seniors housing properties. Capitalization rates now hover in the low 6 percent range for the assets that interest MBK. “There is a significant amount of capital chasing a limited amount of product,” says Howard.

Development is a big change for MBK, which has focused on buying existing properties over the last decade. Today, even MBK’s acquisitions include a development component. 

This past June, the company paid $25.5 million for the Tuscany at McCormick Ranch, a seniors housing property in Scottsdale, Ariz., with plans to convert some of the 73 independent living units to assisted living, creating a continuum of care.

“Mitsui’s desire for seniors housing has not been dampened,” emphasizes Howard. “Its enthusiasm remains high.”