Senior Housing Becoming Mainstream Asset Class for Investors

Senior housing is looking like the ‘flavor of the month’ for investment, its appeal increasing thanks to favorable demographic and performance trends that are expected to continue, investors say.

Private equity firm Kayne Anderson Real Estate Advisors has invested more than $700 million into senior housing assets in recent months and believes the sector is poised to transition from niche to mainstream as more investors gain interest.

“Senior housing will become far more of a core asset class going forward,” says Albert Rabil III, managing partner at KAREA. “Investors are well aware of the demographic trends. You’re starting to see cap rates compress within the space, generally speaking, and it’s getting more mainstream investor interest.”

KAREA is the real estate investment arm of Kayne Anderson Capital Advisors, L.P. In late September 2013, the private equity investor acquired a six-property portfolio of independent and assisted living communities in Florida for about $413 million.

As part of the deal, KAREA formed a joint venture partnership with Discovery Senior Living and bought out the former joint venture partner in the portfolio, GE Capital Healthcare Financial Services.

The investor then made a $290 million acquisition in February of the Conservatory Senior Living portfolio, consisting of five independent living communities in Texas. Again, Discovery Senior Living was the joint venture partner.

Combined, KAREA has about 3,000 units of senior housing, mostly independent living, and director of acquisitions Max Newland says there are a number of other acquisitions and developments in the firm’s pipeline.

“We’re recently very active in the space, and plan to continue to be active in the space,” he says. “We anticipate adding another 600-1,000 units by the end of 2014.”

Some of that growth could come from Discovery’s 900-unit pipeline of development projects in Florida.

“Our expectation is that we’ll be investors alongside them in those deals,” Newland says, adding that KAREA doesn’t have an exclusive arrangement with Discovery and continues to look at a “host of opportunities” nationally.

The timing of Kayne Anderson’s entrance has to do with the convergence of favorable demographics and supply/demand metrics.

“We’ve been looking for the right opportunity and right set of circumstances to enter both the senior housing and medical office spaces for an extensive period of time, and last year we found opportunities in both sectors,” Rabil says.

Kayne Anderson isn’t the only group looking to break into the senior housing industry, whether via acquisitions or development.

Imran Javaid, managing director of healthcare real estate for Capital One Bank, says his team has “definitely” seen requests from those looking to get into skilled nursing or assisted living.

While Capital One hasn’t done development financing deals with any newcomers so far, senior housing is looking like the “flavor of the month,” he says.

“Multifamily developers are looking to get into the senior housing space as they think it’s more attractive on a yield basis,” Javaid says. “We’re certainly seeing a lot interest from a lot of different parties.”

Much of that interest is coming from other private equity groups, from pension funds to asset management groups, along with nontraded REITs, he says.

But interest in the sector is expected to last beyond the short-term.

Long-hold investors, such as pension funds or institutional investors, won’t be able to ignore senior housing, according to Rabil. “Looking at the next 20 years of demographics and where to invest, [the question is] what has the wind behind its back?”

Considering the performance of senior housing and healthcare real estate versus other asset classes throughout the recession and economic recovery, Newland says, there are a number of factors in its favor, including a combination of high cap rates relative to other sectors, low volatility, and high growth returns.

Despite all the attention senior housing and healthcare is getting, there are enough deals to keep everyone busy, according to Javaid.

“There’s room for banks, large and small REITs,  and for Fannie, Freddie and HUD to play some role,” he says. “The market is large enough—and robust enough—that everyone has a role to play.”

Written by Alyssa Gerace