The Big Three healthcare real estate investment trusts (REITs) continue to feed their growing investor appetites in 2014, sating their hunger with several billion-dollar portfolio deals in the senior housing sector. But even as these investors place a high value on senior housing, the “next big thing” for them may not be so obvious.
Chief executive officers from three major publicly-held healthcare real estate investment trusts gathered Thursday in Chicago to discuss how their strategies have evolved within the senior housing industry’s changing landscape, current competition for future investment and the next big thing for healthcare real estate.
Senior housing has become a widely accepted asset class for healthcare REITs within the last decade, especially for billion-dollar investors like Ventas (NYSE: VTR); HCP (NYSE: HCP) and LTC Properties (NYSE: LTC), the CEOs of which spoke during a discussion panel at this year’s National Investment Conference for Seniors Housing and Care (NIC).
The three REITs have been responsible for $7 billion of transactions year-to-date, said discussion moderator Mercedes Kerr, senior vice president of marketing for Health Care REIT (NYSE: HCN). Last year, the firms were responsible for about $8 billion and approximately $10.5 billion in 2012.
“We see much greater sophistication levels in the sector,” said Ventas Chairman and CEO Debra Cafaro. “There’s a lot of consolidation on the REIT side as well as on the operating partner side.”
Collectively, the four firms own more than 4,000 health care properties across the U.S., Canada and the United Kingdom with total enterprise value of nearly $90 billion. Also of note is the fact that each of the firms represented during the discussion are all headed by female leads—a rare occurrence among NIC’s attendance base, which often skews more toward the male side. Nonetheless, the main topic of conversation was senior housing.
“It’s an accepted asset class,” said HCP President and CEO Lauralee Martin, who noted senior housing’s transformation from a property type that had previously resembled something close to apartments but is now a “complex delivery of care.”
Investor interest in the burgeoning senior care sector has undoubtedly kicked up since the turn of the 21st century. As of July, there are currently 13 healthcare REITs, compared to 2002 when these types of investors weren’t included as part of the REIT index—including those not listed on any of the exchanges, but still present considerable competition to their publicly-traded counterparts.
Non-traded REITs, which still report their financials to the Securities and Exchange Commission but aren’t traded on the major stock exchanges, have raised approximately $11 billion year-to-date, compared to the $16 billion raised by public REITs.
“It gives you a sense that there is a market niche out there at this time for the non-traded REITs,” said Cafaro. “They’re serving a niche in the marketplace that has grown significantly.”
Not to discount their non-traded competitors, the REIT leads did express concerns regarding the operating models of the firms, suggesting that the private equity model may work currently in a rising market, but may fail in a falling market.
“It will become easier to gauge how they compare with this particular market and prove whether it’s a sustainable model,” said Kerr.
When asked what assets have the potential to become “the next big thing,” responses varied from technology to more underserved healthcare property types.
“There’s going to be a lot of experimenting and the technology world is great at it,” said Martin. “They don’t need the next big thing, just a little tweak that gets the energy going.”
On property types, one area that could see more attention in the future as demand grows is for psychological health care services and facilities.
“Maybe the next big idea in terms of a new line of business is the psych area,” said Wendy Simpson, chairman, CEO and President of LTC Properties. “There’s a lot of geriatric psych that needs to be taken care of, and there’s going to be a need for bricks and mortar facilities. I challenge our people to go out and look for these types and look into capital to get it.”
The next big thing might not even be born at the national level, but by smaller, regional operators shifting their delivery of care in tune with their locales.
“The local regional operator is an astute business—we think the next big idea is going to come from them,” Simpson said.
As for Ventas, the next big thing may already be on the company’s radar, though it did not explicitly comment.
“I’ll have to tell you after we do it,” said Cafaro.
Written by Jason Oliva
Companies featured in this article:
