Smaller REITs Chasing Big Senior Housing Potential

While the “Big Three” of real estate investment trusts active in the senior housing landscape tends to grab headlines with big deals, smaller and newer REITs to the space are seeking senior housing acquisitions at a solid pace on the horizon—albeit on a smaller scale.

For some, it may mean acquisition targets are portfolios of as few as three or more properties—in contrast to the dozens sought by longer-term, more established players. And while they still benefit from the same low cost of capital enjoyed by the big players like Ventas, Health Care REIT, and HCP Inc., in some ways they are offered more flexibility in the property types they are targeting.

“We will look at smaller deals,” says Kent Eikanas, president & COO for Cornerstone Healthcare Properties. “We’ll look at an operator if they only have a few facilities if they have a track record and want to grow.”

Cornerstone will pursue acquisitions in the range of $40 million—or $8 million, Eikanas says.

“We’re still selective, but the size isn’t a huge factor,” he says.

Other newer REITs to the space expect the pace of deals to continue, albeit not on the scale seen in recent memory.

“We are expecting the dollar volume to be relatively the same as last year, but we’re also definitely seeing an increase in deal flow,” says Doug Bath, chief investment officer for NorthStar Realty Healthcare. “It’s difficult to predict the dollar volume because much of it depends on what the big three REITs are buying but they’ve already gobbled up a lot of the larger deals.”

NorthStar owns approximately 80 senior housing properties and is a lender for an additional 20 senior housing properties.

“We target the regional operators and owners that own or operate between two to 40 properties,” Bath says. “NIC indicates that about two-thirds of our market is operated by companies that have fewer than 10 properties in their portfolio. That’s a massive number. There are a lot of very capable regional operators we’d love to partner with.”

A recent Wall Street Journal article brought to light a recent trend of large REITs in senior housing: a distinct “shying away” from skilled nursing properties due to the uncertainty surrounding Medicare and Medicaid reimbursements in the future.

Executives from Health Care REIT and Senior Housing Properties Trust told the Wall Street Journal they were considering selling off skilled nursing properties in the coming year due to the uncertainty and financial strain those communities experience in the current climate.

Ventas, also cited in the article, said while it is not actively pursuing sales among its skilled nursing portfolio, it is not actively pursuing new purchases of the properties, due to the same risks noted by the other two REIT giants.

Yet newer, smaller REITs say that yes, reimbursement uncertainty is a consideration, but due to their flexibility, it’s not a dealbreaker.

“We’re consciously focusing on a nice mix of assisted living and Skilled Nursing Facilities mitigating reimbursement risk.  With that said, we will still pursue assisted living facilities with Medicaid waivers,” Eikanas says.

Especially given the nature of smaller portfolios of properties, skilled nursing communities are still viewed as an opportunity, although there are caveats.

“We do underwrite them differently,” says Kevin Maddron, Senior Managing Director at CNL Financial Group. “We pay attention to what’s happening to the reimbursement arena on a national level and within every state. We appreciate the risk but we see them as a viable component that will be a complement to private pay.”

In some cases, the financing can present a unique opportunity.

“Are we scared of Medicare and Medicaid? No, but we are also very diligent about investments that have reimbursement risk,” Bath says. “However, if you can buy a SNF at around a 13% cap rate and get attractive first mortgage financing through HUD or otherwise, the cash flow is tremendous. Although you will still have reimbursement risk, the cash flow could often withstand a cut and still generate handsome returns.”

Written by Elizabeth Ecker