Seniors housing investors opt to sideline most investment
LONDON: The coronavirus pandemic significantly slowed the development and acquisition pipelines of large-scale investors, as the capital markets retreated to the sidelines and waited for some stability to enter the lending landscape.
Now, there could be as much as $12 billion in dry powder ready to deploy in senior housing, estimates Dustin Warner, director with Harrison Street Real Estate Capital.
Lenders are now returning to the space, but an imbalance between debt and equity providers persists, and debt funders will not fully return until occupancy rebounds show sustained momentum.
That’s according to Warner and Bridge Investment Group’s Blake Peeper, who shared their insights Wednesday during a webinar hosted by the National Investment Center for Seniors Housing & Care (NIC).
Despite ongoing uncertainty, M&A activity is gaining velocity, thanks to a rush of new money competing with seasoned investors for prime opportunities. As a result, seasoned buyers will do more due diligence and prioritize existing relationships with strong operating and development partners to execute deals.
Until then, owners will continue to assist operators in their pandemic response and exercise patience with pipelines and capital, according to the panelists.
The biggest lesson veteran senior housing investors learned over the past 14 months is that senior housing remains a local business, said Warner.
The Chicago-based real estate investment firm has a portfolio of 132 communities in operation across 32 states, and has relationships with 22 different operating partners. It began 2020 with a steady development and acquisition pipeline ranging between 15 and 20 properties, before Covid-19 tabled further movement. The debt markets rejuvenated somewhat by the third quarter of 2020, allowing some deals to move forward.
Harrison Street ended the year having executed $1.6 billion in new investments, and forged three new operating relationships.
“It’s lower than previous years, but a testament to our partners and our ability to be patient, [and] having partners that you can get creative with to [close deals],” he said.
M&A activity picked up in the first quarter of 2021. Sellers, in particular, are re-listing communities as the success of vaccine clinics leads to a corresponding uptick in move-ins and occupancy rates.
The pace of improving occupancy will play a sizable role in normalizing the capital markets, said Peeper, partner with Bridge Seniors Housing & Medical Properties.
Based in Orlando, Florida, Bridge’s senior housing portfolio totals 100 communities across 30 states, and the firm has operating relationships with several regional operators, as well as an in-house operator, Bridge Senior Living.
Peeper noted that occupancy is improving across Bridge’s holdings. Lead generation and tours of communities increased 30%, compared to pre-vaccine levels. Move-ins, meanwhile, are back to pre-pandemic levels in some areas, notably the Southeast U.S.
If other regions can match this performance, it will give debt providers still on the sidelines the confidence to return to the market, and narrow bid-ask gaps to a point where transactions can be reasonably financed.
“It all leads back to what the occupancy recovery outlook is going to be,” he said.
Peeper hesitated to predict when a full rebalance might happen. In the meantime, Bridge is actively rebuilding an acquisition pipeline that it put aside with the first wave of the pandemic.
After a robust 2019 and signs of promise in early 2020, the firm put the brakes on further activity to play a support role to its operating partners. The company did a one-off transaction in December 2020, involving a community in a submarket of a prime major metropolitan area, which performed well before Covid-19 with a local owner-operator.
Bridge was able to acquire the asset at below replacement costs and transitioned management to one of its existing operators. This is indicative of the type of deal that the company wants to pursue moving forward.
The imbalance in the capital markets is not deterring new equity players from pursuing senior housing opportunities.
Established firms such as Harrison Street, Ares Management, PGIM Real Estate and Kayne Anderson have raised or are in the process of raising funds to target senior housing. Warner believes the amount of dry powder ready to deploy in senior housing acquisitions ranges between $9 billion and $12 billion.
And buyers will find plenty of opportunities: there is a burgeoning pipeline of value-add assets estimated at $5 billion, with room to expand.
Harrison Street is looking at value-add opportunities, preferably assets recently acquired from new investors looking to exit the space. These communities might have been slower to lease-up before Covid-19 added pressure to the bottom line.
Warner believes that, as with Bridge’s one-off deal, these opportunities can be acquired below replacement costs, and Harrison Street is looking at a handful of these deals across the country. But the firm is doing more due diligence than it would have prior to Covid-19.
“The opportunity needs to check a lot more boxes than normal, given where we’re at with risk,” he said.
Bridge is looking for more value-add deals, as well. It is finding the pool of buyers is deeper than expected, and the pricing higher, Peeper said.
The firm will continue to be very selective in the opportunities that it pursues, and close acquisitions based on how it can underwrite future occupancy and net operating income growth projections.
“We’ll stay disciplined to find assets that fit our criteria. We’ve got a pretty refined view on what fits for us,” he said.
