Private Investors Chase Senior Housing Deals Under the REIT Radar

While real estate investment trusts (REITs) are known for being long-term asset holders, some private investors are pursuing a shorter term, value-add strategy, often in the hopes of attracting REITs’ deep pockets.

Rather than hold senior housing properties long term, another strategy is to make one-off acquisitions that may be undesirable to or overlooked by REITs, find ways to increase the community’s income, then sell at a profit—sometimes nearly emptying an entire portfolio—before doing it all over again.

TJM Properties, based in Clearwater, Fla., recently sold about 80% of its senior housing holdings valued at more than $200 million to Fortress Investment Group, the owner of Holiday Retirement Corp. Many of the 15 properties had been acquired separately in the past several years before being sold as a portfolio at an undisclosed premium for TJM, which has since set up a real estate fund with plans for more senior living investments.

Senior housing assets packaged as a portfolio generally sell for more than if they were sold as a standalone, according to a survey conducted in early 2012 by Integra Realty Resources. Portfolio premiums were estimated to be about 5% or more at the time, but that’s changing as many of the large Class A portfolios have been snapped up by the major healthcare REITs and private equity firms.

“The large REITs are now competing aggressively on select single asset sales—generally Class A assets in major metro markets,” says Charles Bissell, national practice leader at Integra Realty Resources’ Seniors Housing & Health Care Speciality Practice. “Thus, these assets are being bid up and selling at very low cap rates, [and] single Class A assets are now selling in the low to mid 6 cap rate range.”

While portfolio premiums still exist, Bissell says, a portfolio of Class A assets might not bring the premium that it once would have, although Class B portfolio are still garnering 5-10% premiums depending on size.

In recent months, certain portfolios have commanded as much as a 30% premium, Scott Stewart, managing partner of private equity firm Capitol Seniors Housing, says he’s heard.

“We buy one-off properties that stand alone and are stabilized and opportunistic, rather than go after entities or portfolios,” says Stewart, whose firm has logged significant transactions with REIT buyers. “What we’ve found, the best exit [strategy] has been to group them and present them in a portfolio basis. Lots of first and second tier REITs are looking for scale, so we aggregate the properties [for them].”

Capitol Seniors Housing’s strategy is to seek stabilized properties below market value and then tweak operations to make the community run more efficiently. Operating in the private equity model with joint venture partner Harvard Management, Stewart says his firm typically holds assets for 5-10 years and seeks returns in the mid-teens for stabilized assets on a levered basis, and higher teens for opportunistic properties.

“The opportunities are usually ‘half broke’ and we want to fix it somehow. Sometimes it’s a management change. Sometimes it just requires additional resources in terms of cap-ex, or a new marketing push,” he says.

Similarly, Madison Realty Companies, a private real estate firm, typically looks at properties that are stabilized and can be financed while avoiding ones that are truly “distressed,” as it can be difficult to obtain financing, says senior managing director Gary Langendoen. The company tends to buy properties in the 50-80 bed range with a goal of increasing the income through upgrades, expansions, or unit conversions, typically to memory care.

One example of a typical acquisition is a Florida assisted living and memory care community that has about 55 beds. Madison Realty Companies is adding an additional 60 beds.

“It’s too small for a REIT to look at, and it’s in a slightly secondary market they might not [consider],” Langendoen says. “Once it’s expanded, someone might find it more attractive.”

The company is “especially” interested in communities where it’s possible to increase income through added occupancy or changing the use of certain units. It can take several years to upgrade properties, and Madison Realty companies generally holds them for about 5-7 years and looks for an internal rate of return of 15-25%.

“We’re a buy and hold, not a quick flip,” Langendoen says. “But we’ve been in this business off and on. For senior housing properties, we’ve been involved with some for over 20 years.”