Battle of the Heavyweights: How Does Private Equity Match Up Vs. REITs?

Private equity and public capital drive the majority of senior housing financing transactions, but because of the different asset types each “heavyweight” generally prefers, there’s room in the industry for both.

It’s similar to comparing Oscar De La Hoya to George Foreman: Both were boxing champions in their respective weight classes, but you didn’t see them facing each other in the ring.

While the senior housing sector was dominated by REITS in 2011, that doesn’t necessarily mean private equity should be classified as a “lightweight.”

So far this year, private equity is playing a slightly larger role than public capital, according to data revealed at the National Investment Center for the Seniors Housing & Care Industry’s national conference held last week in Chicago. Through midyear, there has been about $3.2 billion worth of transaction activity, with private equity outweighing the public sector by a slim margin. 

Publicly traded REITs’ low cost of capital generally puts them at an advantage when it comes to senior housing acquisitions. However, they mostly only consider one type of property: Class A, stabilized communities well-suited for long-term investment. Non-REIT players, on the other hand, aren’t providing permanent capital.

“The REITs buy assets, by-and-large, for the useful life of the assets,” Aviv REIT’s COO and CFO Steven Insoft said. “They have the ability not only to raise permanent capital, but also to ride out the cycle, not to sell in five years.”

In most cases, REITs aren’t interested in distressed assets—and that leaves space for private equity, said Blackstone Real Estate Advisor’s managing director, David Roth, during a NIC session.

Private equity can find opportunity in properties with turnaround potential, agreed Billy Butcher, principal at Kohlberg, Kravis, Roberts & Company (KKR).

“We are not ideal buyers for stabilized assets,” he said.

Acquisition activity has been largely commandeered by the top-tiered folks who have capitalized on size and girth, said Health Care REIT’s executive vice president and CIO Chuck Herman during another session at NIC.

For REITs, deals worth several hundred million dollars are “pretty typical,” making for a “dramatic” structural shift, said Herman, whose company is in the process of closing the $845 million acquisition of Sunrise Senior Living.

“Larger REITs have come in, purchased assets, recapitalized, and tied up operators along the way,” he said. “It has changed the focus of a lot of private equity investors and other financiers; they are focusing on getting new business.”

Similar to the types of deals REITs are often involved in, size matters when it comes to investment strategy for private equity. There’s a relationship between scale and value, Butcher notes.

While his firm prefers deals sizes with a minimum price of $25 million, there will always be a role for local operators with a highly specified strategy in their market, Butcher said. “We believe on a national scale there is great opportunity for best-in-class operators, and we do think that scale is important for that.”

Consolidation is one way to achieve that scale and is a strategy that makes sense, he continued.

“We are comfortable with the operational intensity of senior housing; we like the fragmentation—there’s lots of opportunity for investment,” he said. “As a sector, it’s one of the more attractive ones.”

Written by Alyssa Gerace