Large senior housing owners are offloading assets—and smaller, regional providers are gobbling them up.
There appears to be both rhyme and reason as to why, and where, this is occurring. The larger offloading trend can be attributed to the acquisition spree that REITs, in particular, have embarked on over the last few years, said Jason Smeck, managing director of seniors housing and health care at RED Capital Group. In many cases, the offloaded properties may be fledgling or struggling parts of acquired portfolios—properties many REITs aren’t interested in dealing with.
“There’s a lot of potential in these underperforming properties if you can focus on what that property needs,” Smeck told Senior Housing News.
When it comes to these offloaded properties, smaller, private buyers have an advantage most REITs do not.
“Private owners can buy a broken toy,” Mark Myers, an executive director at Institutional Property Advisors (IPA), explained to SHN, noting that it is “pretty difficult” for REITs to make small purchases. A division of Marcus & Millichap, California-based IPA specializes in providing advisory, investment and transaction services for all types of seniors housing real estate.
“REITs truly do need cash flow,” Myers said, noting that underperforming, fledgling properties can’t always provide it.
A Growth Opportunity
The move to sell off assets presents an opportunity for private operators to grow in their local markets or beyond.
“The buyers are buying what’s in their footprint, what makes sense, what they want to expand to,” Smeck added.
To that end, when a seller is offering a multi-property portfolio—say, in the 20-asset range—the buyer may or may not purchase all assets. The properties might be scattered across six states, with only select locations matching the buyer’s market needs.
In some cases, smaller providers recognize an opportunity before it is formally presented to them.
“I’ve seen smaller regional players come in and approach that REIT for rural properties that are off a REIT’s radar,” Smeck said. “They are willing to do renovations that REITs may not do.”
Private equity firms might also be interested in offloaded assets if they can group multiple assets together into an acquired pool of properties and if they have the right operating partner that they think can turn properties around, Smeck told SHN.
HCR ManorCare is among the more well-known sellers right now, as it has been “offloading a very sizable portfolio of properties,” said James Scribner, another managing director for seniors housing and health care at RED Capital Group.
HCR ManorCare currently has more than 500 skilled nursing and rehabilitation centers, outpatient rehabilitation clinics, assisted living facilities, and home health care and hospice agencies. More than 330 are owned by HCP Inc. (NYSE: HCP), which has agreed to market for sale 50 of them deemed “nonstrategic” — and 12 have sold so far, according to HCP’s third-quarter 2015 earnings.
Such offloading transactions are not limited to skilled nursing. Between October 2014 and October of this year, IPA has seen private buyers acquire either continuing care retirement communities (CCRCs), independent living facilities, memory care facilities or assisted living facilities — or a combination of these, at times with a skilled nursing facility — at least 10 times.
And the trend is not only being seen in specific parts of the country, either, Scribner said. Instead, it seems to have more to do with secondary and tertiary markets considered out-of-the-way or inconvenient for REITs to maintain business.
Just as the activity is not limited to a specific geography, it is not expected to slow down, Smeck and Scribner agreed.
“It’s a bit of a reflection of the capital coming into the space,” Scribner said. “There’s more private equity that allows [regional senior housing players] to grow.”
Written by Mary Kate Nelson