Health care REITs will continue to actively pursue senior housing assets in 2015, spurred on by low interest rates, attractive financing, solid returns and robust demand, according to market observers.
Data from the National Investment Center for Seniors Housing & Care (NIC) show that acquisitions of senior housing and care properties by public, private and institutional real estate investors stood at $17.4 billion in 2014, up nearly 20 percent from the previous year. In terms of the number of deals, 2014 was the most active year on record, with more than 500 senior housing deals closed.
Daniel Bernstein, analyst at Stifel Nicolaus & Co., said current market conditions suggest more deals are on the way for health care REITs. “Given the decrease in interest rates and the continued increase in capital availability, it’s very likely that the REITs are going to be very aggressive buyers,” he said.
Chris McGraw, senior research analyst at the NIC, agrees. “Those big REITs are hungry, and they are looking for high-quality portfolios,” he said.
Public Players Have Advantage
The low cost of capital has spurred activity among both public and private players in the senior housing market, Bernstein noted: “Cap rates have compressed enough that it’s brought out the sellers. There are enough portfolios for everyone to buy, for now.”
Yet, public real estate companies appear to have an edge over private players at this point when it comes to securing in-demand senior housing assets. According to NIC data, publicly traded companies accounted for nearly $10 billion in transaction volume in 2014, compared with around $5 billion for private companies and $1.8 billion for institutional players.
“There’s no doubt that the public companies have a distinct advantage on the cost of capital front,” said Michael Knott, a managing director with Green Street Advisors who covers the health care sector. “They are afforded very large premiums to the underlying value of their assets.”
Even so, as large senior housing portfolios become harder to find, public players may have a hard time matching their current transaction volume, according to McGraw. “To get to that level of volume [for publicly traded health care REITs], there needs to be some multibillion-dollar deals, and those are just getting harder to come by,” he said.
Supply Concerns
Looking ahead, analysts say they expect the current popularity of the senior housing sector to trigger an increase in supply. The NIC is projecting the total supply of senior housing to increase about 1.9 percent in 2015, versus a gain of 1.7 percent in 2014. Green Street is forecasting supply growth of about 3 percent in the coming years.
While supply growth has been flat recently, “there are a lot of new participants in the space interested in development,” Knott said. He cautioned that new supply could mean declines in NOI for some companies.
Bernstein, meanwhile, downplayed the potential effects of supply growth.
“We think there’s a lot of pre-development activity,” he said. “We worry about an increase in supply over the next two to three years, but we’re coming off historically low supply.”
Demographics, RIDEA Have Boosted Appeal of Senior Housing
Senior housing currently accounts for about half of the net operating income (NOI) of the three largest health care REITs, Ventas, Inc. (NYSE:VTR), Health Care REIT and HCP (NYSE: HCP), according to analysts.
Although the aging of the baby boomer generation has played a significant part in the appeal of senior housing assets, it’s not the only factor. REITs are also taking advantage of changes to the economics of the senior housing business resulting from the REIT Investment Diversification and Empowerment Act (RIDEA).
Passed in 2008, RIDEA enabled health care REITs to create taxable subsidiaries for their assets, allowing them to share both the risks and rewards at the operational level. Prior to RIDEA, the health care assets were operated solely within a triple-net lease structure.
“The wagers REITs made in RIDEA senior housing have proved to be winning bets,” Knott said.
Bernstein added that those REITs that have increased their exposure to senior housing assets due to RIDEA have been rewarded with higher valuations. “As long as they (REITs) get rewarded for being a little bit more aggressive on growth, and not penalized for risk, they’ll increase their exposure to senior housing,” he said.