Major buyers have been more cautious to invest in large senior housing portfolios due to high prices, raising the question of whether the market has peaked. Some top executives say that it has, and that 2016 could see the completion of bigger deals.
Despite a record-high transaction volume in the senior housing sector, real estate investment trusts (REITs) across the board cited a dearth of larger deals during their third-quarter earnings calls. Such an investment drop-off is typical at the end of the year, but REITs say skyrocketing prices and low cap rates are to blame for the absence of significant portfolio acquisitions, meaning the deal environment overall may very well have reached its inflection point.
“Comments from the REITs are pretty spot-on,” Chris McGraw, senior research analyst for the National Investment Center for Seniors Housing & Care (NIC), tells Senior Housing News. “We have seen a slowdown in some deal activity, mainly on the larger deal side—the type of deals that usually public REITs or private equity would be bidding for. Those are a little harder to find.”
During the third quarter of 2015, the average price per unit for seniors housing hit $175,000, according to NIC data. And REITs are feeling that uptick, with Welltower Inc. (NYSE: HCN) stating that soaring price tags have sidelined the REIT on major deals and Rick Matros, CEO of Sabra Health Care REIT (NASDAQ: SBRA), commenting that deals have been brought to the table and later withdrawn.
“People don’t want to pay where the prices have been,” Matros tells SHN. “We’re seeing recycled deals and thinking, ‘Wait, have we seen this before?’ That’s an indication that pricing has peaked.”
From Peak to Plummet?
Just how quickly pricing will turn around remains to be seen. HCP, Inc. (NYSE: HCP) President and CEO Lauralee Martin believes it’s too early to tell how senior housing asset prices and cap rates might adjust in the coming months, and NIC’s McGraw agrees that the direction of valuations—and the timing—is uncertain.
“You can never tell how long the peak is going to last, or how quickly the dip will take hold,” McGraw says.
Matros, on the other hand, predicts a 75 to 100 basis point expansion in cap rates, adjusting prices back to what was seen in 2013 or 2014. His view is mirrored by survey responses gathered by NIC and the National Real Estate Investor in August, in which commercial real estate investors in the organizations’ respective databases indicated that they expect an increase in cap rates within the next year.
“That pricing will still be good for sellers, but not as great as it has been in the last 15 months,” Matros tells SHN.
In the third quarter, transactions volume of portfolio deals reached just $2 million as compared to $7.1 billion in the prior quarter, according to NIC data. Meanwhile, single-property sales totaled $1.2 billion, up from $957 million during the second quarter.
“That side of the market hasn’t shown a slowdown,” McGraw says.
Back to Normal
While Sabra’s pipeline ballooned to $1 billion and Matros expects to finish the year with $550 million in investments, he says the “seller’s market” has exhausted itself. As a result, Sabra’s pipeline is slated to scale back to $400 million, a figure that more closely resembles the REIT’s typical target spending.
Matros says he thinks the slowdown in deals will run into early 2016, given that each year tends to get off to a slow start. Even so, he expects transaction volume to eventually pick back up.
“There’s no reason to think that next year won’t be a healthy year,” Matros says. “It may not be as robust, but I don’t see this slowdown as long-term.”
Written by Kourtney Liepelt