Construction for seniors housing is still very low, according to the National Investment Center for the Seniors Housing & Care Industry, but if the most recent round of quarterly earnings calls are any indication, it looks like some real estate investment trusts (REITs) are cautiously beginning to finance some development projects.
HCP, Inc.: Partnering with Brookdale for Senior Housing Development
Despite a primary focus on healthcare real estate acquisitions, HCP, Inc. realizes that now is a good time to also dip its toe into seniors housing development, considering current supply-demand metrics.
“From a senior housing standpoint, you’ve got some favorable tailwinds,” said Jay Flaherty, HCP’s chairman and CEO, during the REIT’s fourth quarter earnings call. “Those obviously include the aging baby boomer and the lack of new supply. It’s that point that our development platform is specifically targeted at.”
HCP is also delving into development from the perspective that “the worst is behind the skilled operators,” Flaherty continued.
The REIT has made a $100 million commitment for five projects, all of which will be managed by Brookdale Senior Living, but don’t expect development to replace acquisitions for the REIT, which had $7 billion of investments in 2011.
“[The development is] to supplement acquisitions of our senior housing projects,” said Paul Gallagher, executive vice president and chief investment officer.
He said the deals range in size from 75 to 100 units, and they’ll be primarily assisted living or Alzheimer’s. The five-year term loan was structured for up to 85% of the costs, with the borrower putting in the first 15% in cash.
“Our loans per unit is less than $200,000, and the interest—we receive interest payments, we participate in the value creation and we expect low, mid-teens types of returns on these,” said Gallagher.
That means that HCP is currently getting interest income from the loans, as opposed to a “drag from development” were it to have put the development on its balance sheet and ultimately done a sale-leaseback with Brookdale, according to Timothy Schoen, executive vice president and CFO.
And Brookdale, for now, is the chosen operator for these types of projects, as HCP said it’s not looking to build new relationships with operators.
“We’re concentrating– the five that we’ve got up and running, we’re concentrating with Brookdale,” said Flaherty. “We want to concentrate with partners, whether that’s in the acute care hospital space, the post-acute space, senior housing space– with operators that have quality outcomes, have efficient operations and have critical mass.”
Although HCP will have a purchase option after the development is completed, Gallagher said that right now the REIT is “just purely a debt investor.”
“It’s about an 18-month construction process,” he said. “We have the ability to purchase upon stabilization, for the outset after the fourth anniversary of the start of the project. And we also have a first right of refusal if they look to sell the properties. So we kind of cover ourselves on both sides.”
The program could be used as a way to expand the REIT’s RIDEA platform.
“We would look at that [possibility of the RIDEA structure] upon stabilization, and we’d make the same way we look at all these opportunities, triple net versus RIDEA,” said Flaherty. “If there’s a sufficient premium for a RIDEA structure, we would certainly give that serious consideration.”
Senior Housing Properties Trust: Expansion a Possibility
Another REIT, Senior Housing Properties Trust (NYSE:SNH), said in its earnings call that it does not plan to get into the development business in the foreseeable future, although expansion remains a possibility.
“We do have situations where I expect our funding will ramp up more on adding additional wings or units to buildings; we do know that there have been blueprints here and there of like an assisted living facility that would be built on the grounds of the campuses that we currently own,” said David Hegarty, president and chief operating officer of SNH. “So I think that I do see some opportunity there, but we are not going to it significantly in the near term.”
Ventas: Financing Development with Operator Partners
Ventas, Inc. (NYSE:VTR) has been involved with redevelopment, especially with operating partner Atria Senior Living, and it’s helped push up rates.
“As we do redevelopments, we’re adding reprogramming for Alzheimer’s and other high acuity space into some of the Atria buildings which could continue to push those rates up,” said Ray Lewis, president of Ventas. “And as we redevelop the independent living and assisted living buildings in the higher quality markets, we’re also seeing rate increases.”
The REIT’s CEO, Debra Cafaro, also said they’ve done some development that been “consistent with a structure that’s commonly used by health care REITs,” and again, the projects are done through existing operator relationships.
“We do those in the REIT itself as opposed to taxable REIT subsidiary where we’re kind of financing a ground up development for one of our operator partners who has a good track record,” said Cafaro. “And then that converts into a triple-net lease, but I’m almost sure that occurs within the REIT itself.”
Health Care REIT: Room for Development with Existing Operators
Health Care REIT (NYSE:HCN) started $150 million of development projects in the fourth quarter, according to its executive vice president of investments, and expressed an interest in ramping up development again, although it plans to be “careful.”
“On senior housing, there has been surprisingly little development and we would do some development of high-end facilities with our existing operators, with whom we have master leases and a great deal of confidence,” said president, CEO, and chairman George Chapman during the REIT’s earnings call.
Written by Alyssa Gerace