It’s no secret that 2014 was an eventful year for senior housing. Brookdale Senior Living made waves when it positioned itself as an industry giant following its merger with Emeritus Senior Living Corp., and that deal was just one example of the industry’s record-breaking merger and acquisition activity that generated headlines this year.
And much of that activity can be attributed to one simple fact: the climate is right for both buyers and sellers. And players in the space have been eager to capitalize on current opportunities, especially as interest rates in the future may give way to a less welcoming M&A landscape.
“We’ve been very active,” says Jeffrey Davis, chairman and CEO for Cambridge Realty Capital Companies. “There are a lot of people selling and buying. It’s a very frothy market.”
Low interest rate environment
Interest rates are at an all-time low, which directly correlates to low cap rates, says Jeremy Stroiman, co-owner and CEO of Evans Senior Investments.
For the four quarters ended Sept. 30, assisted living cap rates were down 70 basis points from 8.7% to 8%; down 60 basis points from 8.5% to 7.9% for independent/assisted living; and down 70 basis points from 13% to 12.3% for skilled nursing, according to a supplemental quarterly report for The 2014 Senior Care Acquisition Report, which is published by Irving Levin Associates.
“Owners that are sophisticated see the writing on the wall that they must get to 1,000 units/beds to leverage economies of scale and simply diversify their investments, such as from one or two assets to nine or 10 assets,” he says. “Because of this they are aggressively growing to get to 10+ facilities before interest rates increase.”
Investors who anticipate the growing need for senior housing have been eager to grow their portfolios, says Bruce Gerhart, Midwest regional director at Love Funding Corporation.
“Big investors are seeing that there is plenty of demand, and that need is only going to grow,” Gerhart says. “[Investors are thinking], ‘Let’s get in now, even if we have a few off years. If we buy a good enough facility we can improve it, grow it or change it. Let’s buy at today’s dollars, which will be much cheaper than tomorrow’s.’”
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In fact, closed property sales volume exceeded $6 billion during the third quarter, according to the National Investment Center for Seniors Housing & Care (NIC).
Rising demand for all senior housing types
A current trend in seniors housing and care has been the rising acuity levels of residents across the care segments, NIC data show.
And those in the post-acute segment are heeding pressure from the federal government to strengthen their relationships with health care providers to provide both better and faster care, with the government providing financial incentives to do so.
“People going after skilled nursing facilities [SNFs] are smart,” Gerhart says, noting that SNFs have undergone a huge shift in quality compared to a decade ago. “Ten years ago you still had many four-bed and even some eight-bed wards in inner cities and some suburbs. States have worked hard to upgrade or more often, replace these units. Now the preference is for one and two bed units. Most skilled nursing units built today are single occupancy.”
But overall, senior housing experts agree that not one senior housing product type is more desirable right now than others.
“We haven’t seen any asset class that isn’t actively being traded — whether it be independent living, assisted living, memory care or skilled nursing,” Davis says. “It’s a very robust environment.”
Signs of caution
If interest rates begin to change dramatically, “all bets are off,” Davis says, adding, “That’s the big yellow caution sign that people react to quickly.”
But more pressing in the short-term than interest rate changes, which he predicts will not change drastically in 2015, is the quality of assets that are available.
“Buildings become old,” Davis says. “You can’t look at a building with an obsolete physical plant in a third-tier market with, for example, semi- or shared bathrooms and view it no differently than a brand new state-of-the-art building. Certain sellers might be looking at their [assets] that way and buyers [new to the space] don’t know the difference. You can’t throw caution to the wind just because there’s a lot of money in the system.”
Written by Cassandra Dowell