Senior Housing Distress Deals Dried Up, Not Dead

Opportunities to reposition higher quality distressed senior housing properties may be going the way of the buffalo for some investors, but for others it might be a matter of weathering the “lull.”

While those in the market say the “low hanging fruit” of distressed properties ripe for turnaround is largely gone, industry factors such as health care reform may also be leading to a new wave of distress and consolidation in the not-too-distant future.

For Capitol Seniors Housing, the lack of acquisition targets is leading the company to pursue other opportunities, namely new construction, according to Managing Partner Scott Stewart. Most of the distressed properties typical of the post-recession era have already been “dressed up and sold,” he says, leading the company to “go long” on development.

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One of the biggest factors influencing the company’s decision to invest in new development is due to high trades on “good,” high-quality properties in the range of 120% to 200% of replacement costs, Stewart says.

“We’ve been navigating the construction lending market,” he says. “If we we can find good opportunities that hit fundamental demographics, then we’ve got a good product that we have coming out of the ground.”

Though the opportunities to turn around properties that might be having occupancy or management issues appear to be lessening for the time being, those interested in the senior housing distressed market may actually start to see more opportunities created by healthcare reform, particularly the Affordable Care Act.

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“When it comes to distressed and turnaround opportunities in senior care, we believe that they are increasing and not decreasing,” says Bobby Guy, an attorney with Nashville-based Frost Brown Todd Law Firm who specializes in opportunistic mergers and acquisitions of healthcare companies.

The ACA is driving consolidation among numerous healthcare industries, and senior housing is no exception, Guy says.

Tracking Chapter 11 bankruptcy filings among healthcare companies, Guy notes that while overall Ch. 11 filings tend to be trending down since the Great Recession, filings for healthcare service companies appear to be trending upward—at about two to three times of what they were when the housing bubble burst in in 2006 and 2007.

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“Commercial real estate distress continues to fall, whereas healthcare distress continues to climb as operators are having difficulty finding out how to position for the future as a result of uncertainties related to the Affordable Care Act,” he says. “The opportunities may not show up in technicolor anymore. They may take more ferreting out and will continue to appear over the next few years.”

Many of these opportunities may arrive in the form of commercial real estate executives who might have entered the industry and who have underestimated the challenges of operating various senior housing communities, suggests Rick Shamberg, co-managing partner with Cerulean Partners.

“We may be in the calm before the storm,” says Shamberg. “With all the new developments across the country, there will likely be some deals that don’t work and that will lead to distress for opportunistic buyers.”

A company that maintains its headquarters in Wilmette, Illinois, Cerulean Partners sets its sights on investing in distressed senior housing properties that have issues related to occupancy, management or are outdated in their physical structures.

While the number of turnaround opportunities may appear to be decreasing for higher quality properties for the time being, they have the potential to pick back up again, especially as supply increases with more entrants into the industry.

“There have been a lot of distressed properties that have been swept up already and are limited today, but it’s a little bit of a roller coaster,” Shamberg says. “It’s going to go up and down, and soon we’re going to see another cycle further down the road.”

Written by Jason Oliva

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