As publicly traded real estate investment trusts (REITs) have stood on the sidelines of more senior housing deals in recent years, private equity (PE) has jumped into the game. Major institutional PE players such as Kayne Anderson Real Estate Advisors (KAREA) and Bridge Investment Group have each raised funds in excess of a billion dollars to deploy in the senior housing space, and they are actively on the hunt for their favored types of projects.
Just last week, Los Angeles-based Kayne Anderson announced that it had closed a $1.85 billion real estate fund, with about 90% intended to go toward senior housing and medical office properties. In the third quarter of 2017, Orlando, Florida-based Bridge completed fundraising for its second senior housing fund, which also clocked in at more than $1 billion.
These firms share similar investment strategies, based on current deal flow and their evaluation of where the senior housing market is today and where it is heading in the future. They are bullish on projects in “gateway cities,” and see opportunities to build their portfolios as more distressed properties come on the market and as REITs go through a period of divestment. They’re also less inclined to bet on memory care, but in general are casting a wide net in terms of deal size and location.
Gateways are golden
Los Angeles-based KAREA is building a portfolio that will be “literally coast to coast,” Max Newland, leader of the firm’s senior housing real estate team, told Senior Housing News.
“In terms of geographic locations, we don’t have certain markets that we’ve redlined or that we’re only going to look at,” he said.
Similarly, Bridge Investment Group is looking across the contiguous 48 states, Robb Chapin, CEO of Bridge Seniors Housing Fund Manager, told SHN.
Both Bridge and KAREA are particularly interested in so-called gateway cities—large urban markets such as New York City, Los Angeles, Chicago, and Washington, D.C.
There are high barriers to entry in these locations, such as expensive real estate and complicated entitlement requirements, which constrain supply and limit new competition. In addition, evidence is mounting that the aging baby boomer generation is attracted to urban living in retirement, for reasons such as walkability and the high concentration of amenities and health care providers.
Boston, New Orleans and Atlanta were among the markets that Newland name-checked. He highlighted a $300 million project to convert a 16-story building in New York City’s Brooklyn Heights neighborhood into senior housing. That community is set to be operated by Watermark Retirement Communities.
Large private equity firms might have an advantage in seizing the urban opportunity, given that they are flush with capital, have well-established operator relationships, and possess the sophistication and resources to tackle complicated deals. That said, both KAREA and Bridge Seniors Housing acknowledge that urban projects are hard not easy to come by.
“Our deal in Brooklyn Heights is a perfect example—we spent three years looking for the right NYC deal,” Newland said. “It was worth it because NYC, like may other major gateway cities, has a significant supply/demand imbalance today (and a new construction pipeline that falls well short of what will be needed based on demographic trends).”
Bridge Seniors has made inroads in gateway markets; through its first senior housing fund, it acquired properties in Washington, D.C., Philadelphia, and the Los Angeles metro area, among other locations. But because urban opportunities are “few and far between,” and because they tend to have risk-adjusted returns that are both quantifiable and “well worth it,” Chapin looks at them in a different light than other deals.
“We might be willing to take on more of the upfront development costs that go into these types of deals, recognizing the complexity of them, than we would in a typical secondary or tertiary market,” he said. “In those markets, we would only consider new construction when it’s what we define as shovel-ready, fully permitted, fully licensed, with construction financing secured, so that we would not be exposed to typical development risks in those types of deals.”
Cautious on memory care
Another commonality between KAREA and Bridge: neither is going big on standalone memory care.
Kayne Anderson focuses mainly on independent living and assisted living, although it does have some memory care units at its AL communities, Newland said.
Bridge Seniors is drawn to rental communities that have a mix of independent living, assisted living and memory care, and on average are between 90 and 150 units total, Chapin said. The few standalone memory care properties in the Bridge portfolio have underperformed relative to properties with more of a continuum, he noted.
Standalone memory care is a “unique bird” from an operational perspective, he explained.
“For us, it’s almost like the difference between helicopters and fixed-wing planes,” he said. “They both get you there faster than a car, they both fly, but they’re very different to pilot.”
Among the challenges in standalone memory care, one is the difficulty in pre-selling units. This is relatively easy to do for a product like independent living, but memory care tends to be more needs-based, with a potential resident looking to move in quickly. Because these residents also tend to be in later stages of life, length of stay also is shorter. So the approach to maintaining stable occupancy levels is different than in a community with multiple levels of care, and only a few operators have really been able to figure it out, according to Chapin.
“Everyone wants to do standalone memory care” because they recognize the rising need for this type of care, Chapin said, but too few people are considering these unique challenges in running these buildings.
Foreign investment steady
In raising their large funds, KAREA and Bridge Seniors attracted significant interest from foreign investors.
Recent chatter has focused on a slowdown in Chinese investment activity in U.S. senior housing—in part due to the Chinese government’s changing policies regarding offshore real estate investments. However, there are plenty of other sources of overseas capital, Newland and Chapin said.
“Foreign capital has been flowing into seniors housing specifically and health care real estate in general in recent years,” Newland said. “I don’t see this trend changing anytime soon, as the supply/demand metrics are good now and will only get better as the greying of the United States continues.”
Germany, the United Kingdom, the Middle East, South Korea, Taiwan and Australia are among countries and regions actively funneling capital toward the U.S. senior housing market, Chapin said.
In particular, senior housing appeals to more conservative investors—for instance, those based in the Middle East—who saw how resilient the sector was during the last economic downturn, he added.
Dealmaking to accelerate
Bridge Seniors is aiming to deploy a total of $1 billion into the senior housing sector this year, and so far Chapin is pleased with its progress. But the “market is pretty quiet” at the moment, he added, particularly with regard to large portfolio opportunities.
Mostly, Bridge has been “hitting solid singles and doubles” and is open to small deals in the $25 million range—while noting that the fund’s ability to purchase a large portfolio is what “separates us from the pack.”
However, activity should start to pick up in the the second half of 2018 and remain elevated into 2019, Chapin predicted. One reason is that some markets became overbuilt during the recent senior housing construction boom; the fierce competition now is leading to distressed properties. These will be coming on the market in increasing numbers.
Another reason is that the public REITs have been looking at selectively selling non-essential assets from their portfolios, to right-size them after years of rapid acquisitions.
“They have not been really active acquirers in the sector for the last probably two to three years,” Chapin said. “We don’t anticipate that will go on indefinitely, there’s a finite window to this, but in the near-term, it will yield opportunities for us.”
Indeed, just 17% of senior housing and care deals in the first quarter of 2018 involved REITs as buyers, according to data from the National Investment Center for Seniors Housing & Care (NIC).
KAREA also expects to benefit from REITs’ disposition activity.
“It’s a pretty interesting time for us, because the public REITs of the world have traded off pretty significantly,” Newland said. “We’re more competitive than we have been in the past … that’s leading to some unique opportunities.”