Senior housing and care has attracted a growing amount of interest among investors who are are eager to capitalize on the industry’s favorable market fundamentals. Some of the top investors, health care real estate investment trusts (REITs), have been players in the space for years — but their growth strategies may soon be changing.
With a lack of big portfolio deals on the market, some say REITs are looking to smaller portfolios and single-asset acquisitions to move the needle, while others suggest more REIT spinoffs could be on the horizon.
Over the years, senior housing has seen increasing levels of interest, bringing to the space an abundance of capital from investors, and contributing to unprecedented acquisition activity.
In fact, activity hit a high point in 2011, when the senior housing and care sector saw 312 different deals totaling $27.6 billion in transaction volume, according to data from the National Investment Center for Seniors Housing & Care (NIC).
That year, publicly traded entities, including publicly traded REITs and operators, accounted for 94 deals totaling $24.5 billion in transaction volume — or about 30% of the year’s total deals and roughly 89% of the year’s total transaction volume. Given that so few deals accounted for such high volume amount, it’s clear that big portfolio acquisitions were a hot growth strategy for publicly traded entities in 2011.
Among those portfolio deals were Ventas’ $3.1 billion acquisition of Atria Senior Living’s 118 senior living communities; Health Care REIT’s $2.4 billion acquisition of Genesis HealthCare’s real estate assets; and HCP’s $6.1 billion acquisition of HCR ManorCare’s 334 post-acute, skilled nursing and assisted living facilities.
For years, massive portfolio acquisitions such as these have been a primary target for REIT growth, says Zach Bowyer, managing director at CBRE, a commercial real estate services firm.
However, the times they are a changin’, as large senior housing portfolio deals are becoming few and far between, leading REITs to target other channels for growth, some say.
“During 2011 and into 2012, there were some pretty major portfolio deals that stretched the multibillion-dollar plateau,” says Chris McGraw, senior research analyst at NIC. “There haven’t been as many of those recently.”
From the second quarter of 2014 to the first quarter of 2015, there were 609 different deals totaling $19.9 billion in senior housing and care transaction volume, according to NIC data. Of that, publicly traded entities accounted for 132 deals totaling $12.2 billion — or about 21% of the total deals and 61% of the total transaction volume for that time period.
A lack of large portfolio deals have led some to wonder what’s next for REITs. But McGraw says their investments won’t be slowing down anytime soon.
“There are still some large portfolios out there — whether they’re in play is the question,” he says. “According to the REITs, they have investments in the pipeline in the multibillion-dollar range. It should be a strong [year] given their guidance, and with everything we’re hearing on pricing and activity, there should be deals continuing to flow through. There’s nothing that would foreshadow any type of significant weakening in the market.”
For Ventas, in particular, there is no shortage of investment opportunities.
“The health care real estate market is a trillion dollar market and a very large percentage of that is held in non-REIT hands,” Lori Wittman senior vice president of capital markets and investor relations, tells SHN. “The market remains very active across all the asset classes — from large portfolio deals to single-asset transactions. … Our focus is on portfolios of all sizes; we believe that investments of any size can be accretive for the company. The markets are busy with lots of opportunity.”
Smaller Deals, Smaller REITs?
Still, a lack of big portfolio deals is shifting the investment landscape for REITs, at least for the time being, and could even lead to more spinoffs among them, some say.
Small portfolio or single-asset acquisitions, while not preferable for the multibillion-dollar companies, are one way REITs are continuing to grow.
“A $10 million acquisition is not going to move the needle for the Ventases of the world,” Bowyer says. “But if that’s all that’s out there — if these REITs are able to find 20 of those $10 million deals — then that may be their next best option.”
However, in purchasing a stabilized property at today’s prices, there aren’t many value-add opportunities for REITs, he notes, so they’re innovating.
“One of the ways they’re doing that is by purchasing the one- or two-property portfolios, or smaller assets, and aggregating those into a portfolio that can be sold off,” Bowyer says. “Not only are [REITs] able to bring to the table more operational efficiencies, but they’re capturing a really accretive portfolio premium when they spin it out. Ventas — and its spinoff, Care Capital Properties — is an excellent example of how REITs are finding ways to innovate, to get out there, and purchase the smaller portfolios or even single assets.”
As smaller, separate entities, McGraw says Ventas and CCP may be better suited for today’s investment opportunities.
“Once you get to a certain size, you need a fairly large deal to move the needle in terms of your FFO. In the case of Ventas, they will not require as large of a deal to move the needle now that they’re split,” he says. “Some of that chatter has been underway — splitting the [other] REITs into smaller REITs so they can go after smaller deals.”
Ultimately, Ventas’ spinoff will create two companies with separate focused strategies and higher growth profiles, Wittman said. But CCP will also drive growth by investing regionally and locally.
“We will deliver external growth by investing with quality regional and local skilled nursing operators to consolidate this highly fragmented $120 billion market,” President Ray Lewis said during the company’s first quarter earnings call with analysts. “We are already working on building a pipeline of transactions so that we can hit the ground running.”
Still, like many REITs, Ventas looks at all investment opportunities, regardless of size.
“We look at all sizes of investments,” Wittman says. “This year, for instance, we have acquired small portfolios, single assets, and then large [transactions], including Ardent Health Services, which moved us into the hospital sector — an asset class we have been interested in for a long time.”
Despite what some may define as a changing investment landscape, the senior housing and care industry is increasingly drawing attention from investors.
In a recent survey conducted by CBRE, 9% of investors reported that they are “currently invested” in senior housing, while another 15% say they are “actively pursuing” the sector. Additionally, 12% are invested in health care properties, while 17% are pursuing investments in that area.
“There’s a greater flow of capital coming into the U.S. and more and more of that is being allocated to real estate. On top of that, it’s going to senior housing,” Bowyer says.
Written by Emily Study