Capital Providers’ Real Estate Fixation is ‘Hurdle’ for Senior Housing

This coverage of the 2016 National Investment Center for Seniors Housing & Care Spring Investment Forum is brought to you by Mainstreet. As the nation’s largest developer of transitional care properties, Mainstreet specializes in real estate development, value investments and health care. With Mainstreet’s support, SHN brings this on-the-spot reporting from the NIC conference, which draws developers, providers and operators within the post-acute and preventative health care services space.

Senior housing capital providers are predominantly focused on real estate value—but that can, and should, change, according to some investment experts.

“The senior housing industry is transitioning from a real estate industry with a business component to a business industry with a real estate component,” said Zach Bowyer, managing director at Los Angeles-based commercial real estate investment firm CBRE (NYSE: CBG), at last week’s National Investment Center for Seniors Housing & Care (NIC) Spring Investment Forum in Dallas.


Senior housing is different from other real estate classes because the value of senior housing real estate is largely contingent on operations, Bowyer said.

Still, lenders and investors are most interested in the property itself when deciding whether or not to provide capital, Bowyer said.

“At the end of the day, it’s still going to come back to the real estate,” Bowyer said. “Getting over that hurdle is going to be a challenge.”


Getting over that hurdle is possible and must be done, according to Justin Hutchens, executive vice president and chief investment officer for senior housing and care at HCP Inc. (NYSE: HCP).

Senior housing operators are not thinking about real estate in the same way as capital providers, Hutchens explained. From an operator’s perspective, the real estate is “just the four walls where you do business,” he said, even though the largest tangible asset that health care operators have to trade is real estate.

Capital providers take into consideration how an operator compares to other operators in the market, as well as whether or not an operator understands what is going on with reimbursements, Bowyer said. But the business side of things is not ruled out.

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“It’s our role to understand in great amount of detail all of the factors that impact patient care delivery,” Hutchens said. HCP is looking for operators that are patient-centered, he explained.

“If the patient is the top priority, we can determine if the property is in for long-term success,” Hutchens said.

When underwriting Brookdale Senior Living (NYSE: BKD), for example, HCP is going to be mindful of and interested in the business the company is doing outside of its facilities, Hutchens said. The nation’s largest senior living provider, Brookdale also generates revenue through its ancillary services, such as home health care—which becomes “very important” from a pure credit standpoint, he explained.

“We’re underwriting their ability to compete in their marketplace,” Hutchens said. “We’re asking, ‘what have you done to position yourself to reach your prospective market outside of your four walls?'”

Higher Acuity, Greater Business Value

There’s no industry-standard way of calculating real estate value versus business value of senior housing assets, said HealthTrust Managing Director Colleen Blumenthal, in a separate NIC panel. Analysts at HealthTrust—an appraisal, valuation and advisory services firm—typically employ three common methods and then average them when doing calculations for deals that they are involved in, she noted.

Generally speaking, business value is weighted more heavily in assets dealing with higher patient acuity levels, Blumenthal determined after she recently analyzed how valuations are calculated for different types of senior housing assets, including independent living facilities, assisted living facilities, continuing care retirement communities (CCRCs) and skilled nursing facilities.

The value of an independent living facility, for instance, is mostly in its real estate. More emphasis is placed on the business value of a skilled nursing facility than in the business value of an independent living facility, according to the data from more than 1,000 appraisals.

BV = Business Value, RE = Real Estate, FF&E = Furniture, Fixtures, Equipment

Written by Mary Kate Nelson

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