Where Fortress is Taking its Pure-Play Senior Housing REIT Next

With the backing of one of the nation’s major investment groups, Fortress Investment Group (NYSE: FIG), and a previous foray into senior living investing through its predecessor Newcastle Investment Corp. (NYSE: NCT), New Senior Investment Group (NYSE: SNR) has quickly risen in the market since its launch in late 2014.

After announcing last summer that Newcastle would spin off a pure-play senior housing REIT, New Senior has not wasted any time in bringing its acquisition tally up to $1.2 billion this year, not to mention two recent blockbuster deals: a 17-property Holiday independent living portfolio for $435 million in December and a $640 million, 28-property Holiday portfolio deal announced in late June.

But despite the magnitude of its recent portfolio transactions, New Senior says it is still seeking small, one-off deals and mom-and-pop targets across the senior living landscape. Contrary to some of its health care REIT competitors, the company says it differentiates itself in that way, among others.

We sat down with New Senior CEO Susan Givens to get New Senior’s take on its success to date, what’s in store for the fledging senior housing REIT, and why the REIT sees pure-play as a power play.

Since launching as a spinoff of Newcastle last year, can you give us an update as to New Senior’s acquisition progress? 

SG: We have been very busy. We started this business within Newscastle exactly three years ago. The thesis at the time was we wanted to use the institutional knowledge we have at Fortress across the senior housing business, as a result of our major investments in Brookdale and Holiday.

We saw there was a niche in the market where a lot of health care REITs have been successful, but none have been focused purely on senior housing. We thought we could go and adopt a different strategy.

There are small, off-market deals, and occasionally larger portfolio transactions. They are both very additive to our business and company. We decided to start buying assets into Fortress. At first, we had eight assisted living assets. Since the time of the spinout, we have been actively doing large transactions and complementing them with a handful of smaller deals. Last year alone we closed on $320 million of new acquisitions. So far this year, we have closed or announced $1.2 billion. So almost quadruple what we did last year.

What types of deals does New Senior seek given this pure-play strategy? 

We are doing the right kinds of acquisitions. We are very focused on just the senior housing space. We have set our strategy on finding and sourcing private pay independent living and assisted living assets. If you look at the deals we have done they are consistent with that strategy.

Most recently we did a deal with 28 assets, 100% private pay. These are exactly the types of assets we are trying to find in the market.

Is independent living then at the core of that strategy? 

We look at assisted living, independent living, memory care and CCRCs, but not standalone skilled nursing facilities.

The composition of our portfolio is 70% NOI from IL, 20% from AL and the balance from CCRCs. We are heavily weighted toward IL. We think this is a very attractive market and we like the characteristics: low regulatory oversight and higher margins. Also, there has been less IL to come online than AL and memory care recently.

What about smaller deals? Most of New Senior’s recent deals have been large portfolio transactions. 

We really like small, mom-and-pop assisted living and memory care properties where there have been opportunities to improve performance. We think there’s a good pipeline of opportunities that has been run by the mom and pop operators that hasn’t had access to tap into the institutional resources we offer through Fortress.

Given the two large acquisitions we have done recently… it doesn’t mean we are less interested in those smaller deals. There are lots of deals in our pipeline that are AL and memory care.

Why does New Senior favor independent living so strongly? 

There has been less new construction and development on the IL side. We looked at construction versus inventory across our markets and the numbers show IL has been less impacted by new development. It’s a little early to say now that people are developing IL, but what we have seen is to the extent new IL is coming online, it tends to be at a much higher price point with people developing on the high end. Rents are around $8,000 a month. The middle price point is an extraordinarily attractive asset and there hasn’t been a lot of new development to come online.

Should interest rates rise in the near term, how is New Senior positioned in the competitive landscape of publicly held health care REITs to withstand the change? 

We think we are very well positioned because we are all senior housing, which is more stable than other asset classes. From a balance sheet perspective, a majority of our debt is fixed. For example, 60% of our debt is fixed; the other 40% is floating-rate, but with caps in place. We have spent a lot of time making sure our balance sheet exposure is appropriate, and to the extent rates rise, exposure is capped.

From a macro perspective, a rising rate environment does generally mean the health of the economy is there, and that lends itself nicely to senior housing. Senior housing, relative to other asset classes, is more needs-based. Our view is that we are set up nicely in a rising rate environment.

Can we expect to see more large-portfolio transactions in New Senior’s future? Are there many of those deals remaining given many signs point to the heyday for large portfolio deals being over? 

We definitely think there is still a lot of opportunity out there. There have been a lot of deals over the last couple years, and we know there are still portfolios out there that will come to market. But there are also a lot of smaller deals. Close to 70% of assets across a $300 billion industry are owned and operated by the mom and pops. There will be some big deals and some smaller.

This year, we closed on our Hawthorne deal in March, which included 17 IL assets. Our second was $640 million for 28 assets. At the same time we have done $100 million in one-off acquisitions and have another $130 million in our in-contract pipeline.

How does New Senior see itself as differentiating itself from its REIT peers in the senior housing space?

When we first decided to build this platform, we saw there was an opportunity to develop a pure-play senior housing REIT. We have stuck to our guns. As we are growing and evolving and getting more research coverage and following, what we hear is they really like that we are a pure-play senior housing platform. There’s no other opportunity to invest this way. People like the characteristics, and that the majority of revenue and NOI comes from private pay sources. There’s less reimbursement exposure. People really like that.

Another thing is that we are smaller. While we are in a space dominated by much larger health care REITs, a big advantage is being smaller. Whether we are doing a $10 million to $20 million acquisition or $100 million, that moves the needle for us. Small deals can really be additive. That differentiates us.

With smaller deals, we are seeing higher cap rates and it makes sense for us to focus on those deals, where the competition may not want to look at those deals. It gives us an advantage versus the others.

Written by Elizabeth Ecker