Just like senior living communities that offer both assisted and independent living are more likely to attract wealthier residents from a greater distance compared to stand-alone IL/AL communities, the seniors housing industry attaches more value to the continuum of care model.
“The industry clearly values the continuum of housing options and services in the IL/AL format, with or even without memory care to retain residents as long as possible,” said Mel Gamzon, the president of Senior Housing Investment Advisors, during a webinar hosted by National Real Estate Investors.
This “phenomenon” has been evolving in the past 30 years that he’s been in the industry, Gamzon continued. “I think it’s fair to say, what’s good for the consumer is proving to be attractive also to the investors. That’s how it should be, and aging in place is alive and well,” he said.
With industry trends following the aging in place movement, some senior living companies have added services and offerings to stay in the game.
“As the industry evolved, so did we,” said Doug Schiffer, president of Allegro Senior Living, a developer and manager of luxury retirement communities headquarter in St. Louis, Mo.
Allegro Senior Living used to offer only independent living services, but because of aging in place has begun to convert some properties to include assisted living so residents could stay even longer, he said. The company is also adding memory care to some of its new properties.
“We’ve learned that multiple levels of care is really the best way to operate,” Schiffer said. “Often, people living in independent living are better suited for assisted living or memory care, and having both in a building allows them to find a place that’s the best living location for them.”
While investors are finding the continuum of care to be attractive, there are other factors that influence valuations.
Cap Rates and Valuations
“There is a chance we might witness slightly higher interest rates, with a slightly corresponding impact on cap rates,” Gamzon said.
Source: Mel Gamzon, Senior Housing Investment Advisors
Limited supply of institutional grade assets, either stand-alone or in portfolios, could result in median cap rates increasing slightly, thus “tempering” the market, he continued.
There’s also an increased availability of equity at sub-20% returns, and look for longer-term, off-shore capital to become more readily available and boost transaction activity as foreign investors become more interested in the needs-based sector.
Lastly, the emerging trend toward new development is causing some buyers of existing assets to more carefully evaluate markets to make sure supply and demand are in check, Gamzon said.
M&A Outlook for Remainder of 2012
If 2011 was the Year of the REIT Mega-Deals, then 2012 will be the Year of the Small- and Mid-Cap Transactions between $10 million and $200 million, according to Gamzon. Excluding large REIT deals, he expects M&A transaction activity to improve by at least 20%, while new construction slowly takes hold.
Despite domination on the part of health care REITs over larger deals last year, 2012 will be tempered by a more balanced outlook. Many core and value-add acquisition opportunities exist “below the radar screen,” and getting to the owners remains the challenge, said Gamzon.
“There is life under the $300 million threshold, and there are opportunities for acquisitions in major regions, not just in major markets,” he said.
Expect to see smaller deals completed by private equity players, pension funds and other institutional investors, off-shore capital, and owner/operators.
Occupancy rates are strong with upsides in most instances, and cap rates are “reflective of a generally stable marketplace,” he continued. “There has been reasonably aggressive pricing, which should induce current owners to monetize while the cost of debt is still at historically low levels,” he said, adding that owner/operators are beginning to look at monetizing their positions while establishing capital relationships for new acquisitions and development.