Senior Housing M&A Continues to Decline

Senior housing transaction volume continued to slow down in the third quarter of this year, following a sharp dip in the second quarter, according to recent data from the National Investment Center for Seniors Housing & Care (NIC).

Decreased activity among the majority of public real estate investment trusts (REITs) partly explains the downtrend, though less active public buyers in general played a large role, according to NIC. The continued drop-off among public buyers is partly due to the cost of capital increasing, which stemmed from a dip in the stock market at the beginning of 2016, noted Bill Kauffman, NIC’s senior principal, in a blog post Wednesday.

“I think the transaction market has somewhat slowed over the last year, and my main reason for that has been the drop in buyer volume from the publicly traded companies—mainly the three big REITs,” Kauffman told Senior Housing News. “Those three REITs have been a big part of the transaction volume over the last three years, but factors like cost of capital has made them pull back.”

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The “Big Three” REITs are Chicago-based Ventas (NYSE: VTR); Toledo, Ohio-based Welltower (NYSE: HCN); and Irvine, California-based HCP (NYSE: HCP).

Public buyers saw a 48% decrease quarter to quarter, from $866 million to $448 million. The decline was even more significant year over year, at 74%.

The private buyer group continues to drive more activity, showing a decrease of only 21% year over year, the report found.

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The stars of the third quarter were private REITs and private owners/partnerships. The private buyers continued to show consistency with a volume of over $1 billion for the 13th quarter in a row.

Though, the volume for this group of buyers did fall quarter over quarter by 7%, from $1.2 billion to $1.1 billion.

“For starters, there is a large amount of private capital searching for yield given the continual low interest rate environment, so commercial real estate, which includes seniors housing and care, has had its fair share of buyers coming into the market,” Kauffman wrote. “And compared to other commercial property types, seniors housing and, especially, skilled nursing properties have a larger cap-rate spread—higher expected investment returns—which presents a welcome opportunity for many private REITs, hedge funds, and other partnerships.”

There were 96 deals closed in total between public and private buyers in the third quarter. This was below the average for closings for the past couple of years, which averaged 105 single property deals and 29 portfolio deals per quarter.

In the third quarter, there were 72 single property transactions and 24 portfolio transactions.

Compared to the previous quarter, there was a decline of 18% in single transactions from 88, and a 14% drop in portfolio transactions from 28 to 24.

The third quarter was missing larger transactions $1 billion and over. The last deal $1 billion or more was in the fourth quarter of 2015 in the Griffin/NHI Trilogy deal.

Though, the numbers from the third quarter did not include the recent acquisition of a $1.15 billion portfolio by Welltower Inc. (NYSE: HCN), because the deal did not close in that quarter. The Welltower buy may be one sign of M&A heading for a comeback in the near future.

“Given the Welltower deal, which was pretty large, we could potentially see transaction volume picking up, but I can’t say that 100 percent,” Kauffman said. “If cost of capital continues to increase we will continue to see a lower level of transaction volume, but if cost of capital decreases, we could see transactions increase. But I think we’ll continue to see higher increased on the private buyer side for now.”

Written by Alana Stramowski

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