Pricing senior housing properties is more of an art than a science—and today’s prospective buyers weigh different components in wide variety of ways.
That’s according to a panel of experts who spoke Friday at the National Investment Center for Seniors Housing & Care (NIC) Spring Investment Forum in Dallas.
“There’s a wider disparity in the viewpoints of an assets’ potential, now more than ever,” David Russ, managing director of private investment management firm Formation Capital, LLC, explained during the session.
REITs, for instance, are shying away from value-add properties, while private equity buyers may be drawn to them. Most buyers do seem to be in agreement about one thing, however: operations drive value.
REITs no longer ‘hungry, hungry hippos’
As senior housing buyers, real estate investment trusts (REITs) are nowhere near as active as they once were, panelists agreed. Currently, they’re acting more as sellers than buyers.
That’s because, for a few years, REITs were “hungry, hungry hippos,” Ross Sanders, senior director within HFF’s national seniors housing group, expressed during the panel. To put it plainly, REITs went on a buying spree, picking up a variety of assets that they then held on to for a while.
“Then last year and this year, they’re trying to figure out, ‘What did I buy during the binge?’” Ross said.
In 2017, he noted, REITs began selling off non-core assets, and numerous funds have been raised just to target these properties. Because these assets are non-strategic, they are more likely to be considered “value-add” by prospective buyers.
For this reason, Ross predicts much of the acquisition activity this year will involve communities that need a bit of repositioning.
“I think we’ll continue to see lots of value-add opportunities [in 2018],” Ross explained.
There will always be buyers for these properties, he suggested.
“There’s always a new buyer coming to the table,” Ross said. “Equity keeps recycling, and that’s what keeps value up in the senior housing space.”
Delve into the details (and the operators)
It’s become clear that multiple factors—including demographics, labor markets, geography and operators—play important roles in the ultimate price buyers are willing to pay for a senior housing community. In other words, buyers are buying more than just real estate.
“If you can clone a property, take the same exact property and put it in multiple markets… you’re going to come up with profoundly different pro formas,” Kelly Gill, CEO of post acute provider Diversicare Healthcare Services, Inc. (Nasdaq: DVCR), explained during the session.
In senior housing, a great operator can raise the value of a community immensely.
“We’re basically evaluating an operating company within that piece of real estate,” Ross said. “At this point in the space, real estate owners have realized that. Who is driving the value? The operator.”
Still, it’s inaccurate to paint all senior housing buyers with a broad brush.
“It’s more of an art than a science, clearly,” Russ added. “The value is really in the eye of the beholder.”
Written by Mary Kate Nelson