Nontraded real estate investment trusts have made a splash in the senior housing and healthcare real estate market in the last few months, with some investors pointing to their impact as 2014’s biggest deal driver.
Similar to REITs that trade on public exchanges, nontraded REITs also invest in real estate and must also distribute at least 90% of their taxable income to shareholders. While shares of publicly listed REITs can be bought and sold on the exchange, shares of nontraded REITs are bought or sold through broker-dealers, who are required to provide valuations within 18 months after the REIT stops offering shares.
“Generally speaking, the REITs that are smaller are the nontraded ones, and as they create scale they become publicly traded,” says Paul Rundell, managing director of the Healthcare Industry Group at Alvarez and Marsal. “We are seeing a massive trend of healthcare organizations including hospitals divide up by selling the land, or creating a REIT that’s a separate property company from the operations.”
American Realty Capital Healthcare Trust, Inc. is an example of a nontraded REIT whose board of directors have filed to list its common stock on a national stock exchange, which will likely occur in the first quarter. The REIT acquired $1 billion of healthcare real estate in 2013 and has another $371.5 million of assets under purchase and sale agreements for an expected total portfolio of $2 billion, and ARC is expected to raise a second nontraded fund.
NorthStar Healthcare Income, Inc. has also been active, recently closing a joint venture with The Freshwater Group with intentions of acquiring and managing a portfolio of senior housing assets throughout the U.S. The initial joint venture announcement included three properties with a price tag of nearly $87 million.
Another active player is Griffin-American Healthcare REIT II, sponsored by American Health Investors and Griffin Capital Corporation, which recently beat out other senior care investors to buy a $300 million portfolio of continuing care retirement communities, part of a $541 million healthcare real estate December spending spree.
“Our rapid portfolio growth has been accompanied by superior performance, as we have established consistent operating metrics that compare favorably with those of our publicly traded healthcare REIT peers,” Dan Prosky, president and chief operating officer, said in a statement.
Because the “Big 3” REITs—HCP, Inc., Ventas, and Health Care REIT—generally have a lower cost of capital than the nontraded REITs, Prosky says Griffin-American Healthcare Trust II doesn’t have much of an advantage compared to larger players. But when it comes to the smaller REITs, the nontraded ones usually do have an edge.
“We tend to have a substantial amount of cash and don’t need to finance acquisitions; we mostly can pay cash,” he says. “If we want to do financing, it can be done after the fact. We don’t have to raise the money.”
In part because of that ability to make acquisitions without first having to line up financing, some investors in the senior housing space believe nontraded REITs will play an integral role in shaping the senior housing merger and acquisition landscape in 2014.
“The biggest driver of how the market develops over the year will be the impact of nontraded [healthcare-focused] REITs,” said Brian Beckwith, CEO of Formation Capital, adding that his company will be keeping an eye on those investors and their activity in the market.
Despite their potential to come under more FINRA scrutiny per a recent Wall Street Journal article, Beckwith doesn’t think the possible new regulations will slow them down.
Written by Alyssa Gerace
Companies featured in this article:
Alvarez and Marsal, American Realty Capital Healthcare Trust, Formation Capital, Griffin-American Healthcare REIT II, NorthStar Healthcare Income, The Freshwater Group
