Cap Rates, Prices Constrain REIT Deal Flow

Constrained deal flow due to low cap rates and sky-high prices has been a recurring theme among senior housing real estate investment trusts (REITs) as they report their earnings for the third quarter of 2015.

After Welltower Inc. (NYSE: HCN) stated that soaring price tags have sidelined the REIT on major deals, both LTC Properties Inc. (NYSE: LTC) and Omega Healthcare Investors (NYSE: OHI) on Tuesday pointed to pricing and cap rates for slowing portfolio growth, as well as their more conservative attitudes on development.

“We have done so much development in the last couple of years, and I’m not able to say we’ll start development if we see overdevelopment and prices going so high,” said LTC President and CEO Wendy Simpson during the REIT’s quarterly earnings call Tuesday.


LTC Properties reported that normalized funds from operations (FFO) increased to $26.6 million, up from $22.5 million in the third quarter of 2014. In total, the REIT completed $74.3 million in new acquisitions and commitments.

Despite these positive results, LTC Properties isn’t anxious to jump on further investments in the immediate future.

“As I sit here right now, I don’t see the pipeline in 2016,” Simpson said. “… I don’t predict that we’re going to do another $400 million or anywhere near that for 2016 until we see our pipeline improve or increase during the year. And because I don’t see it right now, I don’t see a huge need to go out and give additional liquidity, but if the need arises, I think we have the liquidity and the opportunity to get the capital that we need.”


Even deals the REIT had previously been interested in that may go back on the market would require some price adjustments, said Clint Malin, executive vice president and CIO for LTC Properties.

“We have definitely seen and heard of deals that have fallen out, things that we’ve looked at…that have come back around, [but] sellers aren’t at a point where they’re willing to just reduce the pricing yet,” Malin said. “It’s likely to see some deals that will come back on the market, and our hope is that those will be better priced.”

Meanwhile, Omega acknowledged that deals naturally slow down around this time of year. Still, cap rates have prompted the REIT to change its approach to potential transactions, as it has seen other bidders go low.

“In terms of cap rates, I think you will still see deals at least for a some period of time, get done at lower cap rates,” CEO Taylor Pickett said. “We’ve seen non-traded REITs dip down into the 7s and low 8s and that goes away. But from our perspective, in order for the transactions to make sense given our capital costs, that’s where it will be priced going forward.”

Over the course of the third quarter, Omega completed six transactions totaling $216 million of new investments—one made up over half of that total, at $111 million, to construct an assisted living and memory care community in Manhattan. Historically, Omega has focused on skilled nursing facilities, but this year, the REIT began acquiring assisted living and memory care, and analysts were quick to ask about a slowdown in skilled nursing transactions.

“There was a little bit of dearth in the second quarter, although we still have some time left in the year, and there was also some increased competition we’ve seen with the deals,” Omega COO Dan Booth said.

Moving forward, Pickett said he’s unsure how deals will unfold for the REIT.

“On the assisted living facility side, we generally price transactions at 7.5% and higher,” he said. “These pricing changes reflect our increased cost of both debt and equity capital. At this point, it is unclear what, if any, impact this will have on our acquisition volumes in 2016.”

Written by Kourtney Liepelt

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