Harrison Street ‘Handpicked’ 12 Former Atria Communities to Acquire from Healthpeak

The $312 million sale of a 12-property portfolio operated by Atria Senior Living was among the many transactions that Healthpeak (NYSE: PEAK) announced last week, as part of the real estate investment trust’s exit from rental senior housing.

The buyer of this portfolio was Chicago-based private equity firm Harrison Street. The properties were essentially “handpicked” in an off-market process, thanks to the strong relationship with Irvine, California-based Healthpeak, according to Michael Gordon, partner and chief investment officer at Harrison Street.

The dozen communities were attractive to Harrison Street for several reasons. One factor was their location in markets where the firm already has strong operator relationships, creating an opportunity to grow these operator relationships in California, Florida, New Jersey, Arizona and Illinois. Harrison Street plans to transition the properties from Atria — a company that is not part of the firm’s existing stable of 23 operators — to a handful of partners such as REDICO, LCB Senior Living, Kisco Senior Living and Dial Senior Living.

Several of the assets also recently underwent or are undergoing substantial renovations.

“The fact of the matter is that Healthpeak and Atria put a substantial amount of capital and effort into enhancing the physical quality of the communities and, in some cases, enhancing the value of the property through repositionings,” Gordon told Senior Housing News.

The timing of some of the renovation projects created a “double whammy” when Covid-19 hit, as they already had units offline as the pandemic began to further erode occupancy, he noted. Going forward, Harrison Street believes the renovated and repositioned portfolio has substantial upside that can be realized as the portfolio returns to historical net operating income (NOI) within Harrison Street’s hold period of roughly five years. The $312 million pricetag on the portfolio reflects north of a 9% cap rate on peak NOI over the last few years.

Harrison Street and Healthpeak already were in frequent contact and discussing potential transactions when the pandemic swept across the United States last spring, accelerating Healthpeak’s disposition plans and driving this deal as well as others that are set to close this quarter and next quarter, Gordon said.

“I couldn’t ask for a better counterparty than [CEO] Tom Herzog, [CIO] Scott Brinker and the Healthpeak team, and we’re exploring various ways to become more aligned,” he said.

For its part, Louisville, Kentucky-based Atria also believes that the transaction has helped smooth the path toward growth for the operating company.

“Atria has worked diligently for a safe and orderly transition of service providers for the new owners of the Healthpeak properties,” CEO John Moore told SHN. “In the meantime these transactions have afforded us the chance to refine our focus on growing our own portfolio. We feel like we’re in the best position for growth in our history.”

Building a pipeline during the pandemic

The Covid-19 pandemic presented daunting challenges in 2020, for Harrison Street and the senior living industry at large.

But the dislocated market also presented opportunities, which Harrison Street was able to pursue because the firm had a “good amount of dry powder” and believed that Covid-19 did not represent a long-term secular issue for senior housing, which will benefit from demographically driven demand, Gordon said.

“We were able to gain exclusivity on compelling opportunities,” he said.

In terms of its dry powder, Harrison Street raised a $1.6 billion fund in 2019 and is targeting $1.5 billion for a fund to close in 2021. Going forward, the firm is hewing to its longstanding strategy of investing in high-quality assets in core markets with defensive cash flow and well-aligned operating partners.

“There’s still a substantive bid-ask spread, but we’re discussing core opportunities that otherwise wouldn’t have been available, because of the pandemic,” Gordon said.

Some of these opportunities relate to ownership groups that are newer to the senior housing space and — understandably — were not anticipating a global pandemic when they entered.

“What has occurred in the senior space over the past year has been perceived very differently amongst a variety of players within the space,” Gordon said. “Based on the fact that we’ve been in the space for 15 years, we’re much more comfortable with the mindset that we’re going to get through this than a lot of newer entrants that are a bit shell-shocked.”

This is not to say that Harrison Street will chase distress-related yield. Too often, distress deals involve fractured markets and assets with fundamental problems that are difficult or impossible to ameliorate, such as being the wrong size, in Gordon’s view.

Rather, Harrison Street is being selective; one appealing prospect is working with certain operators and developers that the firm has been in dialogue with “for years,” and which now are seeing their previously consistent equity sources sidelined or pivoting away from senior housing because they no longer view these assets as core.

“We continue to view senior [housing] as very core and defensive, especially going into the future, given our supply-demand forecasts,” Gordon said.