Senior housing is fast becoming an institutional-grade asset class, as an increasing number and variety of investors are seeking opportunities in the sector. As they gain a greater understanding of senior housing fundamentals, including the importance of operations, they also see a variety of exit strategies they can use to achieve a return on their investment.
The flood of new institutional capital in into senior housing was captured by the recent Emerging Trends in Real Estate 2019 report compiled by the Urban Land Institute and PwC. Private equity returns for senior housing properties have outpaced those of other commercial real estate asset classes over the past decade on both appreciation and income return performance, the report showed. Data from the National Council of Real Estate Investment Fiduciaries (NCREIF) for Q1 2018 showed the total return for senior housing on a ten-year basis was 10.52%, compared to the overall property index of 6.09% and apartment returns of 6.1%.
The ULI report also pointed out that investors see various potential exits down the road — a point that CA Senior Living President Ben Burke backed up in an interview with Senior Housing News. CA Senior Living, an affiliate of Chicago-based real estate holding firm CA Ventures, currently has 22 communities open or under construction across the U.S. — and it has had a very active last 18 months.
“Some of our investors are more knowledgeable than others,” Burke said. “They look to us as the specialist in this property type for around buyers, where values are, how valuations work, and the various structures of deals.”
That strong performance will continue for the foreseeable future, according to the report.
An exit for every investor appetite
Today’s senior housing investor pool is diversified, with good knowledge of industry fundamentals and how having a quality operator contributes as much, if not more, to a property’s value as the condition of the actual building, and its plant.
“Investors understand that, at its foundation, senior housing still works and functions like nuts-and-bolts real estate,” Burke said.
As with every other real estate class, there is an exit strategy for nearly every investor type. Interest rates, although they have been rising, are still favorable for owners looking to refinance a property in order to either pay down the debt load on a building, or cash out if an asset is performing strong.
Some owners enter the market seeking to be long-term holders in a stable product type, knowing an operator will provide steady revenue. These long-term holders also reduce their risk by negotiating triple-net leases with operators. And there are private equity investors looking to buy value-add properties, renovate them and lock in a quality operator, and flip the property for a quick return.
CA Senior Housing has a diversified investor pool and can provide opportunities across the risk spectrum, Burke said. The firm’s capital stack allows it to deploy funds for shorter term development and long-term acquisition/yield-driven opportunities. CA Senior Housing has completed over $200 million in acquisitions over the past 18 months, and has deployed even more on senior housing development. Last month, the firm started construction of Atria Westminster, a 137-unit assisted living and memory care community in Westminster, Colorado. The project is slated to open in 2020. Louisville-based Atria Senior Living, one of the largest providers in the nation with over 225 properties in 27 states and seven Canadian provinces, is slated to be the operator.
“We can underwrite and execute on deals across the risk curve and have the capital to do so,” Burke said. “We’re proud of that and have ability to move quickly on a wide range of opportunities.”
Still, there are challenges for investors to surmount.
The trend of mergers and acquisitions in senior housing means newer investors to the space are finding fewer prime opportunities, and pockets of buyer-seller disconnect. Investors are most interested in independent living opportunities, because the yields and ROI is similar to what they are achieving in traditional multifamily real estate, PwC Partner and Real Estate Practice Leader Byron Carlock told SHN.
“Cap rates are historically attractive,” he said.
The importance of the operator
The more educated investor pool recognizes the role an operator plays in a property’s NOI, just as tenancy drives value in office buildings, Burke said. Certain investors want to work with specific operators, and are willing to stretch a bit on pricing in order to make that happen.
Burke has observed recent deals where institutional buyers are pairing with high-quality operators to plug them into potential acquisitions, and the buyers are not tied to keeping the operator in place. This is driving value into the space and allowing for more efficient underwriting, when transactions occur.
CA Senior Ventures does the heavy lifting, working with operators and educating investors on all things operational, resident and employee experience and satisfaction, and financials, as well as the strengths and areas of improvement of a specific operator.
“We let (operators) know we’re here for them and will do what we can,” Burke said.
Benefiting from a prolonged boom period
The length of the post-Great Recession real estate recovery is a contributing factor to senior housing’s performance, PwC’s Carlock said. Developers and investors have taken the lessons learned from the real estate downturn to heart.
“We’re in month 120 of what is a slow and disciplined recovery,” he said. “There are only some pockets of overbuilding. Most markets still need independent living. Developers and investors have seen the multifamily industry do very well. Cap rates for senior housing and student housing benefited from that; they’re trading on the backs of multifamily.”
Carlock finds the discipline and length of this extended boom period impressive. New senior housing construction has mostly been kept in check, which has moderated liquidity.
Investors are conditioned to believe real estate runs in seven-year cycles, Carlock said. The last cycle he saw that had similar characteristics was interrupted by the September 11, 2001 terrorist attacks.
“The next downturn will not be real estate’s fault,” Carlock predicted.