REITs get international investment itch

by Jeff Shaw

To boost NOI, Welltower and Ventas ramp up seniors housing investment in Canada and Europe with new frontiers to come.

By Bendix Anderson

In October, Welltower Inc. closed a deal to buy Regal Lifestyle Communities Inc., a Canadian seniors housing company, for $574.6 million in U.S. dollars, according to Real Capital Analytics.

It was the latest major acquisition for the Toledo, Ohio-based estate investment trust (REIT), which has spent in excess of $2 billion to buy more than 100 seniors housing properties in Canada and the United Kingdom since the beginning of 2013. And Welltower plans to invest much more.

“We continue to like the opportunities that we see in Canada and the U.K.,” says Scott Brinker, chief investment officer for Welltower, which until recently did business as Health Care REIT and still trades under the same stock symbol (NYSE: HCN). The market cap of this giant company was about $21 billion as of Nov. 9.

A handful of leading companies in the seniors housing sector like Welltower continue to invest billions of dollars in markets abroad where they have established relationships.

American investors are also eyeing new markets overseas, such as Continental Europe. Meanwhile, a growing number of foreign investors are considering buying seniors housing product in the United States.

 

Follow my lead

Leading U.S. REITs — including Welltower and Ventas (NYSE: VTR) — have made most of the direct acquisitions of seniors housing properties by U.S. investors in foreign countries during the last three years. High barriers to entry prevent smaller investors from directly investing in seniors housing overseas. 

“There is a steep learning curve,” says Beth Mace, chief economist for the National Investment Center for Seniors Housing & Care based in Annapolis, Md. Smaller investors often invest indirectly in the sector by buying stock in REITs, for example, or giving their money to an overseas private equity fund.

However, some larger investors might want to consider following the path blazed by leading REITs. Just four years ago, all of Welltower’s seniors housing properties were located in the United States. Today, 15 percent of Welltower’s net operating income is derived from its portfolio in Canada and the United Kingdom.

Welltower has also developed strong partnerships with companies including Sunrise Senior Living and Avery Healthcare, which give the company the opportunity to participate in unique, off-market investments. 

The deal Welltower closed in October is a prime example. The company bought Regal Lifestyle Communities Inc. with its partner Revera Inc., a Canadian seniors housing operating company that already managed
71 properties for Welltower.

The partnership helps both Welltower and Revera grow. “At Revera, we are entering an exciting period of expansion in the senior living sector focused on growth and innovation across our private pay portfolio in Canada, the U.S. and the U.K.,” says Thomas Wellner, president of Revera.

Welltower’s partnerships also provide a platform for acquisitions and development. The company plans to build roughly 10 new seniors communities a year in the United Kingdom, for example. Welltower is also positioned to grow because it has hired local staff. Over the past two years, the REIT has opened offices in Toronto and London.

Sunrise Senior Living is also posi-tioned well to invest in the United Kingdom since partnering with Gracewell Healthcare, which operates luxurious care homes in England.

“The Gracewell acquisition in 2014 afforded us a steady pipeline of new development for the next several years,” says Chris Winkle, CEO of McLean, Va.-based Sunrise. “Our expanding Gracewell portfolio is set to grow from 15 to 21 properties over the next year.” 

Foreign investors in seniors housing nearly always partner with a strong operating company who understands local markets. 

These relationships can take years to build. That’s one reason international investments tend to come in large bursts of capital as investors enter new markets.

 

Hiccups in stock market

The ups and downs of the stock market have made bidding for properties more difficult this year for REITs. This past summer, stock prices fell sharply as Wall Street became preoccupied with economic troubles in places like China. 

For example, total returns for the healthcare REIT sector were negative 11.5 percent year-to-date through Nov. 5, according to the FTSE NAREIT US Real Estate Index, which tracks 16 companies.

Although the stock price of Ventas has taken a hit, the company continues to grow its portfolio of properties and its network of relationships throughout the United States. The company’s stock price fell from roughly $72 per share at the start of January to $51 at the end of trading on Nov. 6, a decrease of approximately 29 percent.

In June, Ventas bought five seniors housing properties in and around London, expanding on a deal the Chicago-based company made at the beginning of the year. The properties are relatively new, with an average age of four years. 

At the beginning of 2015, Ventas sealed the deal to buy another five care homes for seniors in highly affluent markets in the southeast part of the United Kingdom. The seller and operator, Canford Healthcare, now leases the properties from Ventas.

“With this investment, the management team was kept in place,” says a spokesperson for Ventas. “That provides Ventas a platform for growing.”

Welltower’s stock price also has dipped considerably this year, falling from about $76 per share at the start of January to $61 per share on Nov. 6, a drop of approximately 20 percent.

A lower stock price means a higher cost of capital for a publicly traded REIT, which can lead to different investment strategies. “We don’t invest unless the rate of return exceeds our cost of capital,” says Brinker.

That didn’t stop Welltower’s deal to buy Regal. But this summer Welltower did miss out on the chance to buy a portfolio it was “very interested” in acquiring, according to Brinker. 

“There are deals that we missed out on because of the cost of cap-ital,” says Brinker. “We’ve been outbid.”

 

New frontiers

So far, U.S. investors have largely plowed their capital into Canada and the United Kingdom, both English-speaking countries. However, they may soon also invest in Continental Europe.

“All the major REITs have one eye on Germany,” says Tim Edghill, European director and head of mergers and acquisitions for Jones Lang LaSalle. Investors from the United States are also considering Finland, France, Spain and the Netherlands.

“We’ve looked at other countries. They suffer from the same demographic changes that we do,” says Welltower’s Brinker. “However, our investment activity will be focused on the U.S., Canada and the U.K.”

So far, however, relatively few large portfolios have come to market. “The next big transactions are more likely to be in Continental Europe than in the U.K.,” says Edghill. “The more [leading REITs] buy, the less is available.”

 

Who’s investing in the U.S.?

At first glance, foreign investors don’t seem to be spending as much on seniors housing properties in the United States in 2015 as they have in the recent past. And some major Canadian investors are selling large portfolios in the U.S. 

Acquisitions by foreign investors in U.S. seniors housing properties totaled $168.1 million through the first nine months of 2015. At the current pace, property and portfolio purchases made by foreign investors may not match the $307.4 million for all of 2014 and are on track to be much less than the $968.5 million of foreign investment in U.S. seniors housing in 2012, according to Real Capital Analytics. 

“It’s a little bit slower than in prior years,” says Mace. “A lot of the big portfolios have been traded.”

It’s important to point out that the total amount of foreign investment by dollar volume does not always include seniors housing properties acquired by partnerships that include significant amounts of capital from overseas. For example, Safanad Inc., the U.S. subsidiary of Safanad Ltd., based in Geneva, Switzerland, has partnered with Formation Capital, a private equity firm based in Atlanta, to buy well over $1 billion in U.S. seniors housing so far in 2015. 

Safanad’s CEO Kamal Bahamdan founded the firm to make real estate investments largely on behalf of high-net-worth individuals, including the Bahamdan Family, a prominent Saudi Arabian merchant family.

Other buyers headquartered in the United States that deploy international capital include Senior Resource Group, based in Solana Beach, Calif., which invests on behalf of a significant Canadian pension fund, and MBK Senior Living, based in Irvine, Calif., which invests on behalf of Mitsui & Co. of Japan.

“International investors continue to look at our space as a prime investment opportunity,” says Mel Gamzon, principal of Miami-based Senior Housing Global Advisors (see sidebar, page 39). 

 

Canadian firms bid adieu

Not every foreign investor that enters the U.S. stays. In July, Extendicare International Inc., a Canadian REIT, sold its portfolio of 158 seniors housing properties in the United States for $1.1 billion. 

But when one foreign investor exits the U.S. market, another often takes its place. Extendicare sold its properties to a joint venture between Safanad, Formation Capital and NorthStar Healthcare Income Inc.

The deal is part of Extendicare’s long-planned strategic divestiture in the U.S. The Canadian firm had some difficulty navigating regulations that differ from state to state. 

“There is a higher regulatory burden here,” says Vincent Pica, managing partner and president of Safanad. For example, state regulations on seniors housing slowed down the process of selling the properties. “We were probably talking to [the sellers] for three years.” 

The Extendicare properties include 152 skilled nursing facilities and another six assisted living communities spread across 12 states, with the largest concentrations in Indiana, Kentucky, Ohio, Michigan and Wisconsin.

Another Canadian REIT, Chartwell Retirement Residences, based in Mississauga, Ontario, sold its portfolio of 35 private pay seniors housing communities in June to Brookdale Senior Living and HCP Inc. for $849 million.

Chartwell cited a favorable currency exchange as one of its motives to sell. 

As of Nov. 5, $1 in U.S. currency was equal to $1.33 Canadian dollars. That’s a stark contrast from 2011 when Canada, relatively unscathed by the financial crisis, had a currency that traded evenly with the U.S. dollar. In effect, the stronger U.S. dollar created a 33 percent increase in the value of Chartwell’s investment in U.S. real estate in just four years. 

Such a quick change in exchange rates is unusual among First World economies — and it has given Canadian investors like Chartwell a strong motive to cash in.

 

Safanad: U.S. market still a standout

In July 2014, Safanad bought 14 skilled nursing properties from Consulate Health Care Co. 

Consulate Health Care, the sixth largest provider of skilled nursing care in the U.S., will continue to manage the properties, though the operator will no longer have any equity in the properties. 

Safanad makes seniors housing investments in the U.S. as joint venture partners with Formation Capital. Formation also brings large amounts of foreign capital to U.S. seniors housing. 

Together, the joint venture partners paid $156 million to buy the Consulate Health Care portfolio, using a large bank loan and $40 million of their own equity, split 50/50 between money from Formation and Safanad. 

“The U.S. is still an economy that you want to have significant exposure to. Even through the recession, the seniors care market has done very, very well,” says Pica.

Safanad’s portfolio of 14 properties includes 11 in Virginia, two in Maryland and one in Pennsylvania. 

Foreign investors are known to invest in famous buildings in big U.S. cities. That’s less important for seniors housing portfolios because the risk of the investment is spread over several properties. 

“If one blows up, the other 13 are still there,” says Pica. “It’s really about the transaction itself rather than the geography.”

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