In late January, the SLIB team attended the 2019 ASHA annual meeting (American Seniors Housing Association). While it was great to be away from the polar vortex that hit the Chicago and St. Louis areas, we didn’t enjoy the best of weather in Southern California, but it was better than the historical cold snap at home.
At the ASHA annual meeting, we sat in on some great roundtable discussions and met with a lot of groups. I wanted to share a few takeaways:
1. Should we be concerned about overdevelopment in the seniors housing space? Overdevelopment was a big topic at the ASHA annual meeting, and I think it is the biggest risk to the acquisition market moving forward. This is obviously a market-to-market (and sometimes, submarket-to-submarket) risk. If the area that an owner has a seniors housing facility becomes overdeveloped in the future, census levels will obviously suffer and valuations will go down.
2. Who are the active buyers and sellers in today’s market? While there is some skepticism on how new development will impact the current market, there is still a great deal of variety in buyers. REITs, private equity, owner-operators and even some “mom and pops” have been interested in purchasing properties and growing their portfolio. The sellers have been very diverse as well. “Mom and pops” are still very active sellers, but we have seen more regional and national owners look to take advantage of the market and either sell their entire portfolio or divest of a couple of properties that don’t match their strategic vision.
3. What are the most important metrics that buyers are using in today’s market? Cap rates, another big topic at the ASHA annual meeting, are the most important metric when valuing a cash flowing property. The difficulty comes in valuing a property that is underperforming. In those cases, a potential new operator will put together a pro forma and land on a rate of return that they’re comfortable with. Those deals typically see a wide range in offer prices.
4. Are there different buyers for different seniors housing asset classes? Yes, absolutely. Institutional groups typically chase larger, higher quality assets with consistent cash flow. Their low cost of funds has driven owner-operators down the acquisition spectrum to the smaller assets that may be underperforming.
5. What is the optimal size for acquisitions? Typically, the larger the offering, the better. Institutional groups have a lot of equity to deploy and if they can deploy it in ten $30 million transactions as opposed to thirty $10 million transactions, groups will typically prefer fewer transactions. One-off or small portfolio transactions have a different pool of buyers, which tends to be less institutional and requires a broker to have a greater knowledge of the individual market and its individual buyers.
6. With pricing strong in today’s market, why are some owners making a decision to hold? The current market conditions have hastened the time frame for owners that had a planned exit strategy in the next 12-24 months. That being said, some owners are trying to increase their portfolio’s profitability and increase value in that way. Even if cap rates see a modest increase, a major increase in profitability will still see the owner come out ahead by waiting to sell.
7. What does the increase in development do to cap rates moving forward? It adds a level of risk moving forward. Anything that adds risk – whether it be development, reimbursement or labor risk among others – will naturally push cap rates up.
8. Where do you see the market headed over the next 12-24 months? In the near-term, it should be strong – cap rates are still higher than most other asset classes, interest rates are low and institutional equity needs to be placed. Further into the future, overdevelopment, government reimbursement changes, interest rate increases, increased regulation, increased tax rates and the housing market could cause a bit of a pullback in pricing. That being said, I still think the seniors housing space is better equipped to handle this uncertainty than other asset classes.
If you have any questions on the topic of this post or would like a confidential valuation of part or all of your seniors housing portfolio, please contact Matthew Alley at 630-858-2501 ext. 225 or firstname.lastname@example.org.