Harrison Street: Billion-Dollar Fund To Target Senior Housing

Harrison Street Real Estate Capital, LLC (HSRE) is once again turning its attention to the senior housing space, having raised $1 billion for its newest fund that is seeking investments in the sector, in addition to health care, education and storage real estate.

The Chicago-based investment management firm’s newest fund, Harrison Street Real Estate Partners V, has raised $850 million, surpassing its original equity target, Michael E. Gordon, principal at Harrison Street tells SHN. In addition, the fund simultaneously raised a $160 million Fund V co-investment vehicle, bringing total capital raised for the “opportunistic strategy” to more than $1 billion.

With the assumption that the fund-wide leverage will be about 70% LTV, the fund will have in excess of $3 billion in purchasing power, he says. The investment period is three years from a final close. 

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Harrison Street is no stranger to the senior living space. Among its investments, the company snapped up a $520 million senior housing portfolio in 2014, and a $380 million senior housing portfolio in 2013. 

Gordon, who has been with the company since its inception in 2005, spoke with SHN about Harrison Street’s interest in senior housing, the newest fund’s investment strategy and why he expects to see an increase of institutional investors not previously in the space entering senior living.

SHN: Do you see a rising opportunity for senior housing investments? What attracts you to the space?  

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Michael E. Gordon: HSRE’s senior housing investment thesis has always been tied to favorable demographic statistics and trends and their impact on segment demand. In our underwriting, we consider these demographics, as well as the study of micro supply and demand to create a meaningful and predictable view on potential demand within submarkets and down to our properties.  

As we all appreciate, the aging U.S. population has largely driven demand in senior housing and the largest cohort of the aging population is at least a decade from requiring broad senior housing (and perhaps longer for assisted living).

We have always focused on higher-acuity residents (assisted living/Alzheimer’s care) as we believed, and still do believe, that this strategy would largely insulate our performance from a potential economic downturn. Our strategy was validated during the recession.

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As important, we’ve elected to maintain a consistent strategy of identifying great regionally-focused operating partners and focus on providing comfortable environments for staff and residents, as well as provide quality care to seniors.  

This sector creates the unique ability to benefit from the relationships between care givers and residents on a long-term basis, and this leads to an element of ‘stickiness,’ wherein a property can capitalize from annual rent increases that outpace other asset classes.

However, operations need to be executed flawlessly and reputation needs to remain stellar in order to benefit from this dynamic. This is why operator selection is so critical.

SHN: Within senior housing, are you targeting a specific product type? 

MG: While our focus has always been more oriented towards health care and the higher-acuity end of the spectrum, our target involves independent living, assisted living and memory care. We do not invest in age-restricted communities, and we have not been an investor in the skilled nursing space. We invest in private-pay rental communities.

SHN: The senior housing industry has seen Harrison Street accomplish multi-million dollar portfolio deals in the past. Does this investment mirror your past investments in senior housing? How is it similar or different? 

MG: Yes, our focus will be on generating opportunistic returns within segments of real estate tied to health care, education and storage.  

The vast majority of our transactions involve a single-asset. Of the 45 Opportunity Fund transactions that we completed in 2014, all but seven of them consisted of investing in either the acquisition or development of a single-asset. We anticipate the same to be true as we begin to invest our fifth opportunity fund in 2015.  

Our Core Fund has acquired two large senior housing portfolios during the past 24 months, but our opportunity funds has focused primarily on single assets. Overall, our funds across the risk spectrum focus primarily on single-asset transactions. Portfolios typically come into play when we pursue a recapitalization with our JV Partners. 

SHN: Will the funds being allocated to senior housing be used more for development or acquisitions?  

MG: Our opportunity fund series has always targeted opportunities to build great communities where more supply needs to exist, to reposition great assets that would be a better fit with the pool of demand through adjusting unit mix, levels-of-care, general programming or pricing strategies, to redevelop assets, requiring either tearing an existing asset down to its structure, applying lipstick to a well laid-out asset or expanding an existing asset, and purchasing an asset or portfolio, wherein we are able to deliver opportunistic returns without taking on opportunistic risk.  

The latter is becoming more difficult to come by.

SHN: Do you expect to see more interest from institutional investors who have not invested in senior housing before?  

MG: We have witnessed the senior housing sector gain broad acceptance among institutional investors.  This is not unique to investors, as we have also seen a tremendous uptick in lenders, developers, operators and fund managers in the space.

Interestingly, I have spoken with a number of domestic pension funds that are now internally classifying senior housing as a core asset class.  

Since our firm’s inception in 2005, we have been dedicated to the senior housing sector, and during the course of the past decade, we have aligned ourselves with more than a dozen best-in-class operating partners that provide us with a nationwide reach and access to great investments across subsectors and strategies. The underlying common denominator is that they all view themselves as de facto staffing companies that provide the best environments and culture in which their property-level employees can form bonds and provide care to residents. We do what we can to accommodate our partners’ long-term vision.  

This is a very unique and complex asset class, and there are countless mistakes that can be made without a strong comprehension of operations, the physical plant, health care, programming and the supply/demand fundamentals of the space. I urge new investors in the sector to do thorough diligence and homework prior to making an investment in senior housing assets.

Written by Cassandra Dowell

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