The Billion Dollar Senior Housing Opportunity for Non-Traded REITs

American Realty Capital Healthcare Trust II, Inc. (ARC HT II) recently closed its $2.1 billion non-listed public offering, with senior living a core component of the AR Capital, LLC-sponsored real estate investment trust’s (REIT) portfolio.

AR Capital is well known in the senior housing space, previously making headlines when its first sponsored health care REIT, American Realty Capital Healthcare Trust, Inc. (NASDAQ: HCT),  was acquired by Ventas, Inc. (NYSE: VTR) for $2.6 billion — a transaction which closed Jan. 16.

AR Capital’s third, and newest non-traded health care REIT is American Realty Capital Healthcare Trust III, Inc., with its capital raising efforts now underway. All three REITs were distributed through Realty Capital Securities.


“We continue to be bullish on the sector and think there are a lot of attractive acquisition opportunities out there,” Todd Jensen, chief investment officer of American Realty Capital Healthcare Trust II and III, tells SHN. Jensen also served as the chief investment officer of HCT prior to its sale to Ventas.

Senior Housing News recently caught up with Jensen to discuss ARC HT II and III’s investment strategy, why health care REITs are going after the post-acute sector, and the biggest opportunities — and wild cards – for health care REITs in 2015.

SHN: Is ARC HT II on track for deploying the capital as planned by end of first quarter 2015? 


Todd Jensen: Yes, we expect to be fully deployed by end of first quarter 2015.

SHN: How much of your current portfolio consists of senior living assets? 

TJ: For ARC Healthcare Trust II, our nontraded REIT that we just finished raising capital for in October, of the about $1.9 billion in assets about 44% of net operating income is derived from senior housing. Our real focus when we build this portfolio is to try to have 75-to 80% invested in senior housing and medical office buildings. Our target is about 40% for each of those segments. So, we would expect senior housing to be 40% to 44% of the portfolio when it is complete.

SHN: Does the investment composition planned mirror a similar mix in terms of property types that you’ve pursued in the past? Is it any heavier on senior housing properties? 

TJ: It’s very similar to our first health care REIT [American Realty Capital Healthcare Trust, Inc. (NASDAQ: HCT), which was acquired by Ventas]. In that REIT we had more medical office buildings (47% of NOI) than senior housing (34% of NOI), and the balance (19% of NOI) in acute care and post-acute care properties. Now in ARC Healthcare Trust II there’s currently slightly more senior housing (43% of NOI) than medical office buildings (35%) and more post-acute and acute care hospitals (22%).

Our overarching objective is to have 75% to 80% of the portfolios invested in senior housing and medical office assets with the balance being invested in acute care and post-acute care facilities and expect to invest consistently with that in ARC Healthcare Trust III for which we have just started raising capital.

SHN: What is the timeframe for raising capital and deployment of that capital for AR Capital’s third-sponsored REIT, American Realty Capital Healthcare Trust III, Inc.?

TJ: We just started raising capital. We have to raise $2 million to break escrow, and that should be any week now. We have a property under agreement to purchase and have declared our distribution rate of 6.25%, so with those steps complete we expect the capital raise to begin in earnest. [The REIT’s offering size is $3.125 billion, excluding $625 million registered under the company’s distribution reinvestment plan.]

SHN: Some REITs in senior housing are making big plays toward the post-acute sector in light of some new property types that are providing a new take on the traditional model. Do you see post-acute care as a growing investment opportunity? 

TJ: It is in a number of ways. You see some post-acute providers repositioning themselves; they’re going for short-term rehabilitation, in which the patient is primarily Medicare reimbursed versus long term custodial care, which is Medicaid reimbursed.

By virtues of the ACA, we see tightening linkages between the most effective post-acute care providers and the general acute care providers as the general acute care providers seek to reduce or eliminate re-admissions to the hospital. We’ve done sale/leaseback transactions with some of those progressive post-acute providers.

We also believe that we will see more development in the post-acute care space, particularly with these more progressive providers who can secure referrals for the Medicare rehabilitation patients, which should create additional investment opportunities for REITs.

SHN: What are some of the biggest opportunities for health care-focused REITs in 2015?

TJ: There’s still a lot of opportunities for health care-focused REITs, particularly if interest rates remain low throughout 2015. Health care real estate is a large but very fragmented industry. The amount of health care real estate in this country is valued at about $1 trillion, and only 10% is owned by REITs, which are the most efficient long-term owners of commercial property, including healthcare related property.

We believe we are going to see a continued migration of assets from fragmented private ownership into the hands of REITs, so there’s still plenty of room for REITs to grow perhaps both in number and size. I would expect to see more publicly traded healthcare REITs come into existence and also see growth in the traded healthcare REITs, through both property and portfolio acquisitions as well as mergers.

We expect to see development activity pick up in senior housing and post-acute care facilities, also perhaps medical office, which create opportunities for REITs to acquire these properties. Generally, health care properties of all types can still be acquired at yields that are greater than the REITs cost of capital, which presents numerous attractive opportunities for health care-focused REITs to continue to consolidate assets.

SHN: 2014 was a big year for REIT to REIT acquisitions, do you think we will see more REIT to REIT acquisitions in the coming years?

TJ: Yes, I think we will. Publicly traded REITs need to demonstrate growth each year. They can accomplish this by acquiring properties, portfolios or other REITs. Particularly for the largest health care REITs — such as Ventas, Health Care REIT [NYSE: HCN] and HCP [NYSE: HCP] — it is difficult for a $30 billion company to grow by 10% or so each year by acquiring properties. They need to acquire large aggregated portfolios and REIT to REIT acquisitions can be a very efficient way for them to do so.

I also believe that we will continue to see portfolios assembled by non-traded REITs such as ours, which can make attractive acquisition opportunities for larger publicly traded REITs.

SHN: How has the investment landscape changed for non-traded REITs in the last year as it relates to health care investments? What are the biggest wild cards right now?  

TJ: I don’t believe the landscape has changed dramatically. It continues to be a very good time to invest in healthcare real estate. We’ve seen very strong performance in the senior housing sector over the last handful of years as some pent up demand was absorbed into existing inventory and not much new construction.

We have seen a modest upturn in the amount of development and construction in senior housing in the last year, but so far at least, it appears overall to be appropriate for the demand. However, this is an area where we are intently focusing, to see if we start to see overbuilding.

We’ve also seen some compression in the yields at which we can buy properties. We’ve seen 15 to 30 basis points of yield compression over the last few years — which isn’t dramatic. However, we can still acquire high quality properties at attractive yields. For instance, our second healthcare REIT has an average current yield above 7.0% and a GAAP yield approaching 8%.

We buy assets one at a time. We typically don’t do large portfolio transactions. We buy single properties or small portfolios of two to three communities. So long as we can acquire properties at yields above our cost of capital, and sell aggregated portfolios at yields that are substantially lower, we think it’s a good time for us to continue to raise and invest capital on behalf of our shareholders.

Written by Cassandra Dowell

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