Senior Housing REITs See Competitive Edge in Being Smaller

Much ado is made about the blockbuster deals made in recent quarters by the Big 3 REITs, but while Ventas, HCP, and Health Care REIT fight for the large, high-quality senior housing portfolios, smaller-cap REITs are quietly snatching up their own deals at more stable—and reasonable—cap rates.

Senior Housing Properties Trust (NYSE:SNH), for example, is the fourth-largest healthcare-focused REIT with a market capitalization of $4.83 billion. By comparison, Health Care REIT—the third-largest of the Big 3—has a market capitalization of $19.07 billion, nearly quadruple that of SNH.

In the first quarter, the REIT completed or agreed to make about $120 million worth of investments in the senior housing and medical office building space, with plans for future investments between about $300 to $400 million in 2013.


Acquisitions ranging between $10 million and $50 million are SNH’s “sweet spot,” said SNH’s president and COO, David Hegarty, during REITWeek 2013, held last week in Chicago.

“They’re small enough not to attract the Big 3, and we can very capably compete against other capital sources at this level,” he said.

The bigger REITs generally pursue large portfolios as opposed to small ones.


“There is definitely a portfolio premium,” Hegarty said, but it comes at a cost: “People [have to] pay to get [portfolios], down in the sub-7 [cap rate] level.”

Cap rates for senior housing transactions have been trending down in the last 12 months, according to the National Investment Center (NIC) for the Seniors Housing and Care Center, resting at 7.5% from January through the end of March. Larger-cap REITs can go much lower, though: The $4.3 billion acquisition of Sunrise Senior Living by Health Care REIT, announced last year and closed in early 2013, had an estimated 6% cap rate.

SNH is predominantly going after B+ or B-class properties that can be acquired at a 7.5 or 8% cap rate, and they’re usually one-offs.

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“Last year was a very big year for acquisitions,” Hegarty said, citing a strong push to get deals closed by the fourth quarter for tax reasons. “We are seeing that things have picked up, there’s  a moderate pipeline right now but it’s not as robust as a year ago at this time. We’re still seeing a number of one-off opportunities for our company.”

Similar to how Ventas, HCP and Health Care REIT generally don’t pay much attention to one-offs, they are also avoiding the skilled nursing sector, and that’s quite alright with Aviv REIT (NYSE:AVIV).

The Chicago-based REIT invests primarily in the $100 billion skilled nursing market and plans to deploy about $220 million into the market in 2013, mostly through its existing tenant relationships.

If institutions start paying attention to the skilled nursing sector again, it could drive prices up, said Craig Bernfield, CEO of Aviv, which has a $981.1 million market cap.

“There are only a few companies including ourselves that are intensively focused on the [skilled nursing] space,” Bernfield said during an investor presentation. “We haven’t really seen competition for assets. The cap rate we can buy at is still very attractive.”

Sabra Health Care REIT (NASDAQ:SBRA), with a market cap of almost $986 million, is planning $150 million to $200 million of acquisitions in 2013. Most of the REIT’s acquisitions have had a cap rate of 7% or above, according to Matros, generally around 8% for assisted living deals and about 10% for skilled nursing facilities.

“The Big 3 REITs are competing against each other [for the large portfolios, while] we deal with different guys, more mid-size operators,” he said. “The REITs we compete with—Aviv, Omega Health Investors (NYSE:OHI), National Health Investors (NYSE:NHI), LTC Properties (NYSE:LTC)—all value the same way. We’ve been really rational about that, and as a result, we’ve seen stable pricing.”

Ed.’s note: A previous version of this article mistakenly stated that Aviv REIT would be making $600 million of investments in 2013, when in fact the company’s earning guidance expects $220 million of investments. 

Written by Alyssa Gerace

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