As high-quality portfolio investment opportunities for senior housing-focused real estate investment trusts (REITs) dwindle, the large-cap U.S. REITs are expected to chase growth opportunities abroad.
“I would not be surprised at all to see more growth coming outside of the U.S.,” says Jeff Theiler, a research analyst with Green Street Advisors. “As the pool of large, high-quality, US senior housing portfolios continues to shrink, it is likely that the healthcare REITs will start to cast a wider net.”
Some have already begun doing so. Toledo, Ohio-based Health Care REIT (NYSE:HCN) has made two major investments in the Canadian senior living space and also owns 30 senior housing communities in the U.K. operated by Sunrise Senior Living and another operating partner, Signature Senior Lifestyle.
In February 2012, HCN closed a RIDEA-structured partnership for a 42-property portfolio valued at $952.2 million (USD) with Canadian owner and operator Chartwell Retirement Residences.
Last month, HCN announced an approximately $1.01 billion investment in Canadian operator Revera Inc.’s $1.35 billion portfolio, totaling about 5,000 units in 47 “Class A” senior housing communities located mostly in Toronto, Vancouver, and Calgary.
In both RIDEA-structured deals, HCN projected a 7% or better yield, with longer-term NOI growth between 4-5%.
“Our international investments are additive to our U.S. strategy, and highlight our targeted approach to external growth,” says Scott Brinker, HCN’s executive vice president of investments. “Similar to our strategic approach in the U.S., our investments in Canada and the U.K. represent high quality buildings, affluent locations, and premier operating partners. We’re convinced that these characteristics will generate superior returns for our stakeholders.”
HCN identified Canada and the U.K. as markets with “tremendous demand” for private pay senior housing several years ago, he continued, noting the expected doubling of Canada’s senior population, similar to both the United States’ and United Kingdom’s growth profile.
“The U.K. and Canada have senior housing markets that are reasonably similar to the US, making them attractive places for the REITs to deploy capital,” Theiler said.
Asset quality in senior housing has three components, says Brinker: the building, the location, and perhaps most importantly, the operating partner. Health Care REIT “deliberately sought out” Revera and Chartwell for their scale, experience, and platform, he says.
That’s important to other “Big Three” REITs as well.
“We continue to look internationally, into European assets, [but it] has to be the right opportunity [in terms of] risk adjusted return and with the right expertise,” said Lori Wittman, senior vice president of Capital Markets and Investor Relations at Ventas (NYSE:VTR), which currently owns 12 senior housing properties in the Canadian provinces of Ontario and British Columbia.
There are other ways for the senior housing-focused REITs to make foreign investments. In the past year, HCP Inc. (NYSE:HCP) has made two sizable investments in U.K. nursing home chain debt.
The Long Beach, Calif.-based REIT recently acquired 30% of Barchester Healthcare’s property arm’s junior debt, amounting to about $264 million (USD) and also provided about $215 million (USD) of financing for Terra Firma’s £825 million acquisition of the Four Seasons Health Care company, another U.K.-based nursing home chain, in June 2012.
Some of the smaller REITs say there’s still plenty of opportunity to chase at home.
“We don’t have any plans or present intentions [to invest outside of the U.S.],” says Craig Bernfield, CEO of Chicago-based Aviv REIT (NYSE:AVIV). “The larger healthcare REITs perhaps need to look elsewhere, based on the size of deals [they're chasing] and deal flow. We think there are extensive and attractive opportunities here in the U.S. to continue our strategy to consolidate skilled nursing facility and other healthcare-related properties—at least for the near term.”
HealthLease Properties REIT, listed on the Toronto Stock Exchange and affiliated with Indiana-based developer Mainstreet, has a dual focus on new development and acquisition and already owns properties in both Canada in the U.S.
The dwindling supply of Class A properties does motivate foreign investments to an extent, says Zeke Turner, chairman and CEO of Mainstreet. But HealthLease isn’t necessarily in the market for the same portfolios being chased by the Big Three.
“We’re developing a large volume of Class A [assets] but don’t see a lot of that Class A come across in terms of portfolios,” he says. “We’ve done some [deals] in the middle market and will continue to do more.There’s still opportunity in the U.S.”
Turner says he doesn’t expect to see a glut of foreign investments going forward.
“There’s the added complexity of going cross border—not a complete barrier, but it keeps most people shying away from looking too much abroad,” Turner says, adding that it’s true going the other direction as well.
Investing internationally does add a level of complexity and cost, Brinker acknowledged, but said HCN has been able to find “attractive investment opportunities in both [Canada and the U.K.] that meet our return requirements even after taking the additional costs and complexities into account.”
Other European countries may also come into focus, according to Christopher Donovan, a partner with Foley & Lardner LLP and member of the law firm’s Health Care team.
“There are opportunities outside the U.S., as seen from these two transactions,” he says of HCN’s two Canadian deals. “There’s nothing holding the REITs back from investing in those countries, and you might see more of it in the future. It wouldn’t surprise me to see publicly-traded REITs look more seriously at the U.K., Germany, France, some of the western European countries with more [accounting] transparency and a high level of senior housing market demand.”
Written by Alyssa Gerace