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Rising Senior Health Care Demand Fuels Big Portfolio Deals

REITs, Private Equity Targeting Senior Housing, Assisted-Care Facilities In Demographic Play For Retiring Baby Boomers
March 19, 2014
In January, NorthStar Realty Finance Corp. recruited Jay Flaherty, former CEO of HCP Inc., and tasked him with bulking up its health-care property portfolio.

That decision paid dividends this week as Flaherty shepherded a $1.05 billion deal for New York-based NorthStar to buy a portfolio of senior housing and skilled nursing facilities from privately held Formation Capital, LLC and Safanad Limited.

When it closes, the portfolio -- comprised of 43 mostly private-pay senior housing facilities and 37 skilled nursing facilities -- will grow NorthStar's health-care portfolio value by about 65% to more than 160 properties totaling $1.6 billion in value.

NorthStar first mentioned the deal, its courtship of Flaherty and the company's strategy of partnering with leaders in CRE niche sectors, during its fourth-quarter earnings call last month.

In a recent filing, the firm disclosed that its health care properties are typically net leased to health care operators focused on mid-acuity facilities such as skilled nursing and assisted living with the highest concentration in private-pay assisted living facilities -- a business the company believes has the strongest underlying demographic trends and fundamentals.

Private-equity firms and health-care REITs have been buying up senior communities as the growing elderly population and improving economy drive up demand. Consider the following demographic and public policy projections:

  • According to a PricewaterhouseCoopers report, the number of people over 60 years old will exceed the number of people under age 15 for the first time globally.


  • A study by the National Investment Center for the Seniors Housing and Care Industry shows the average occupancy rate for senior housing properties in fourth-quarter 2013 was 89.7%, up from 89% a year earlier.


  • National health expenditures are expected to rise 6.1% in 2014 and 5.8% in 2015, with compounded annual growth rate of 6.2% over 2015 through 2022, according to the Centers for Medicare and Medicaid Services.


Those trends are the reason NorthStar brought in Flaherty. He led HCP Inc. (NYSE: HCP) from 2003 to 2013, during which the company's market capitalization grew tenfold from $2 billion to over $20 billion. HCP became the third largest U.S. REIT and the first health care REIT selected for the S&P 500.

Continuation of a Trend


The not-so-new year has brought a continuation of large consolidations and portfolio acquisitions in the senior care space, including last month's merger between Brookdale Senior Living and Seattle-based Emeritus Corp., two of the largest senior housing operators. The combination of Brookdale and Emeritus could re-acquire $2.3 billion to $2.8 billion of properties, principally by exercising tenant purchase options.

In the wake of that deal, analysts have speculated that publicly traded firms such as Health Care REIT Inc. (NYSE: HCN) or Ventas Inc. are eyeing the property of a shrinking pool of available operators, including Capital Senior Living Corp., a $715 million operator of communities for the elderly, according a recent note from JMP.

Also in February, Sabra Health Care REIT, Inc. (NASDAQ: SBRA) acquired six senior care properties in Nebraska for $90 million. The transaction with Nebraska-based Nye Senior Services, LLC, include 673 skilled nursing beds, 213 independent living units and 168 assisted living units.

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