Senior Housing Buyers Seek Yield in Relationship-Fueled M&A

Top senior housing buyers are touting acquisition strategies fueled by relationships rather than relying on marketed properties that are often characterized by low cap rates and fierce competition. 

While the strategy was initially born out of many healthcare real estate investment trusts’ desire to “lock up” the best senior housing operators and become their capital partners, analysts say, another benefit has emerged, considering interest and cap rate trends.

“The cost of capital has been very volatile in the past six months and we may continue to see that,” says Stifel Nicolaus analyst Daniel Bernstein, adding that yields for relationship-driven acquisitions are typically higher than for marketed transactions. “They’ve established these relationships, and in a time when interest rates are going up and the cost of equity is going up—instead of bidding very aggressively on marketed transactions, they’re tending to bring in some investments via their relationships.” 


In 2011 and 2012, many of the big-cap REITs formed relationships with specific operators, like Ventas with Atria, HCP with HCR ManorCare, or Health Care REIT with Genesis, Brandywine, Benchmark, and then Sunrise, among others. During that time period, a number of large portfolios were acquired as healthcare REITs provided exit capital for private equity investments, says Jeff Theiler, an analyst with Green Street Advisors.

Health Care REIT (NYSE:HCN) has taken the lead with this strategy, he says, as it has amassed a “large stable of high-quality operators” in the past couple years that continue to expand, both in the U.S. and internationally.  

“With the notable exception of Ventas’ $800 million acquisition of a portion of Holiday Retirement in the third quarter of 2013, this opportunity set has largely dried up,” Theiler says. “The healthcare REITs are now using existing operators to generate a consistent pipeline of acquisition opportunities.” 


Health Care REIT cited its strong relationships for its ability to close on $1.2 billion of new, immediately accretive gross investments in the third quarter of 2013, bringing its year-to-date total to $5.3 billion. HCN projects the quarter’s initial cash yield to be 8% with annual net operating income growth of more than 3%. 

“Absent material changes in the capital markets, we don’t see cap rates for widely marketed deals moving higher, but keep in mind that public auctions are not our focus,” said Scott Brinker, HCN’s executive vice president of investments, during the REIT’s third quarter earnings call. “Looking forward, we have active dialogue with more than 30 of our existing operating partners, for us, a powerful source of accretive deal flow in the U.S., U.K., and Canada.” 

Relationship-fueled activity isn’t limited to REITs.  Capital Senior Living (NYSE:CSU) is pursuing a similar strategy as one of few owner-operators bidding on properties as opposed to teaming up with an equity source. 

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“Fortunately, we’ve been very consistent in our acquisitions. We have an excellent relationship with a lot of smaller regional operators that like transacting with us that never get to market,” said CEO Larry Cohen during the company’s third quarter earnings call. “Most of the transactions we’re looking at for 2014 at this point are off-market transactions.” 

Around half of the communities CSU has or will purchase in 2013 are will sellers with whom the operator has completed previous transactions, Cohen said. Out of around 50 transactions the operator has reviewed year-to-date, around 70% were marketed by brokers with the remainder brought to CSU off-market.

While the company only made offers on around 30% of the broker-marketed deals, Cohen said, it submitted offers on 75% of the off-market transactions—three quarters of which were accepted. The operator plans to complete more than $150 million of acquisitions in 2013.

“Our robust pipeline and strong off-market relationships provide excellent visibility for our acquisitions during the first half of 2014, many of which will be will sellers [with whom] we have previously completed transactions,” he said.

Capital Senior Living’s strategy is similar to what some small-cap REITs are doing, says Bernstein: talking to smaller regional operators and see if any of them, for whatever reason, need to sell assets. CSU has a dedicated chief investment officer, he notes, who is able to do the same.

“The market is very competitive right now, and public and non-traded REITs and private equity have increased their allocations to senior housing, as have pension funds. Now they’re all going after marketed transactions,” he says. “For small cap REITs, etc., if you can do privately-negotiated transactions, you’ll get another hundred or so basis points on yield.” 

Written by Alyssa Gerace

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