Lack of Quality Operators Frustrates Senior Housing Buyers

Real estate investment trusts (REITs) and other prominent buyers are avidly on the hunt for senior housing assets, but other factors may constrain transaction volume in 2016. In particular, dealmaking may be slowed by a lack of top-tier operators to manage properties.

“There’s almost an insatiable demand for seniors housing assets right now that are high-quality,” Chad Lavender, senior managing director at HFF National Seniors Housing Group, said during a recent Senior Housing News webinar on the financing and investment outlook for 2016.

“There’s definitely an appetite out there for large portfolios,” he added, noting that most of the public REITs are still trying to grow their funds from operations (FFO), and a lot of new entrants are trying to come into the space with scale.

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Still, there isn’t as much demand for Class B portfolios unless they have a value-add component that could transform them into Class A assets, or they use specific operators, Lavender explained. The point was echoed by Beth Mace, chief economist and director of capital markets outreach at the National Investment Center for Seniors Housing & Care (NIC).

“It seems like there’s a little bit less of a frenzy for the Class B products,” she said. “The high-quality, high-demand product is still getting a lot of interest.”

So, what makes an asset “high-quality?” In part, really good operators, which have “become a more and more precious commodity,” according to S. Scott Stewart, founder and managing partner of Capitol Seniors Housing, a Washington, D.C.-based national seniors housing investment firm.

“I think the biggest risk with operators is that, in my opinion, there are too few really good ones that we want to bring into our communities,” he explained. “We have an expansive list of operators that we keep going back to.”

Good operators can identify good executive directors, hire them, and let them do their job — which, according to Stewart, is the key to a successful community that “is going to flourish.”

“There are a number of operators out there that are focused on growth and not the day-to-day,” he said. “I think that the really good ones that I’ve mentioned, they, alarmingly, are telling us they can’t take on a new opportunity because they don’t have the capacity. They don’t want to spread themselves too thin, they don’t want to lose their ‘secret sauce.’”

He likes that these operators are selective, and he admires the idea that they’re protecting their brand, Stewart explained.

“But on the other hand, it’s an impediment to our growth,” he said.

While the list of good operators is “finite,” he does acknowledge that his company has not yet poured through that entire list.

An executive from a top REIT also chimed in on this topic: Philip Kayden, senior investment officer for the Eastern region for Chicago-based Ventas Inc. (NYSE: VTR).

“In terms of investing and thinking about where we want to allocate our capital, we are highly selective, we’re disciplined,” he said. “We tend to focus on higher-quality, higher-producing assets with leading operators.”

Some of the factors that make operators high-quality include their ability to sell the value proposition in senior housing, having good sales and marketing efforts, and having efficiency across a national scale, Kayden said. He also stressed that in the next couple of years, it will be key to find operators who are on top of technology and sophistication.

All this talk about maintaining relationships with existing high-quality operators shouldn’t scare new entrants or up-and-coming operators too much: Ventas is constantly in the market for new operators, Kayden said.

“We certainly want to meet those operators and grow with them,” he said.

Written by Mary Kate Nelson

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