Investors Look for Hidden Value in This Seller’s Market, Say InterFace Seniors Housing Panelists

by Jeff Shaw

ATLANTA — The seniors housing industry is undoubtedly in a seller’s market right now, with record-high sales prices and record-low capitalization rates. How, then, do investors find properties worth buying in such a hot market?

Industry experts discussed this topic at a panel entitled “Investment Market Update: Who’s Buying, Who’s Selling & Will Velocity Keep Going Up and Cap Rates Keep Going Down?” at the recent InterFace Seniors Housing Southeast conference in Atlanta.

Nearly 350 owners, operators, investors, brokers, developers and other seniors housing industry professionals attended the conference.

The panel opened with moderator Krone Weidler, vice president of investments and seniors housing specialist for Marcus & Millichap’s Tampa, Fla., office, asking who the sellers are and why.

“It’s a pretty broad spectrum of sellers — institutional sellers, others repositioning portfolios, operators selling geographic concentrations and mom-and-pop operators,” said Robb Chapin, the Orlando, Fla.-based CEO of ROC Seniors Housing Fund Manager. “The market is brisk.”

In addition to “a lot of capital flowing into the market” for acquisitions, Bradley Clousing, managing director at Illinois-based Senior Living Investment Brokerage, said there has been an increase in sale-leaseback deals in the market.

“There are a lot of regional operators going through a generational change,” said Clousing. “They’ve handed off the operating business (to younger executives in the company) and they’re looking to recapitalize the real estate.”

So if prices are so high, how can buyers continue to compete?

Capital is readily available to seniors housing investors, and many more investors than usual are positioned to spend it, according to Clousing.

“The capital is flowing pretty well right now,” he said. “We all know about the appetite from the institutional side of the business, but we’ve seen the buyer pool widen out a bit.”

“The regional owner-operators are very well capitalized right now,” continued Clousing. “A lot of them have sold properties and have very strong banking relationships, so they’ve been a very good buyer pool in some of the smaller markets.”

With so many players entering the scene, smart investors have to narrow their focus, according to John Sweeny, the Atlanta-based director of healthcare acquisitions for Virtus Real Estate Capital. Sweeny said his company’s approach to such a feverish market is to only pursue properties that already have a leg up over the competition.

“We’ve got to find competitive advantages, whether that be a high-barrier-to-entry market on a development deal or acquiring a product or operator with a significant advantage over the market,” said Sweeny.

Chapin said ROC Seniors Housing Fund Manager often adds value via renovations to an aging community.

“There is a lot of obsolescence,” said Chapin. “There are great locations, great teams of people serving the residents, but they just need some tender, loving care. Repositioning those assets, making them relevant to compete, those are the opportunities we like to look for.”

California-based Sabra Health Care REIT’s standard procedure is to visit a prospective acquisition and look at the intangibles of an operation that hard numbers might hide, according to Talya Nevo-Hacohen, the company’s chief investment officer. She looks for indicators such as whether the operators know the residents’ names and whether the residents are well-dressed and well-groomed.

“We’re looking at how the operator is interacting with the residents,” said Nevo-Hacohen. “That’s the critical relationship. That’s the relationship that will drive everything. You can have okay real estate and a great operator and have an amazing result. You can have great real estate and have a mediocre operator and have lousy results.”

Chapin echoed the sentiment, and noted that even after replacing a poor operator, the damage done can be hard to overcome. He recounted a story of a property his company purchased. After replacing the operator and creating a quality community, occupancy was still low due to the previous operator’s bad reputation in the town.

“No matter what we did, we had a hard time overcoming (the community’s bad reputation),” said Chapin. “Eventually we changed the name and that made a world of difference.”

Despite the feverish acquisitions pace in seniors housing, there is still a lot of opportunity to purchase smaller communities and smaller portfolios of one or two communities, according to Bob Gaines, vice president and senior care community specialist at Colliers International’s Baltimore office.

Although acquiring communities that are part of a mom-and-pop operation is difficult, some investors have found success that way.

“If you look at the total number of beds in this country, the majority are still in that great wonderland out there of the small operator — one or two locations,” said Gaines. “That hasn’t seen the kind of activity you’ve seen in mid-size and larger assets.”

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