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Are Private Buyers Ready to Jump Back Into the Seniors Housing Market?

While Private Equity Firms Are Again Flocking To Industry Conferences And Bidding For Deals, May Have Missed The Party After REITs Snap Up Most Of the Large Portfolios
February 27, 2013
Global investment firm TPG’s agreement this week to acquire a 210-property portfolio of senior living residences for $278 million may be a sign that private-equity players are sifting through potential investment options in the assisted living sector after spending the past couple of years on the market sidelines in the shadow of REITs.

Since 2010, real estate investment trusts have dominated senior housing and care investment through such transactions as HCP Inc.’s closing in November of the $2.4 billion purchase of 133 senior-housing communities in 29 states from a joint venture of Blackstone and Emeritus Corp. (NYSE: ESC), and Health Care REIT’s (NYSE: HCN) acquisition that closed in early January of Sunrise Senior Living.

The HCN deal, which included the $130 million sale of Sunrise Senior Living’s management business to a group of private-equity buyers that includes KKR & Co. and Beecken Petty O’Keefe & Co., is expected to reach $4.3 billion in value by this summer as Health Care REIT buys out various joint-venture interests.

The sale by Assisted Living Concepts came after the company began exploring strategic options last year when it reported losses in the first three quarters of 2012. TPG's capital could help stabilize the assets by taking on the added operating risk, making the deal more of a recovery play.

While late to the party, it's clear that private equity players are turning up in increasing numbers at senior housing conferences, such as last fall’s NIC National Conference in Chicago, which included many first-time participants from well-known private equity and institutional investment managers. That signifies the rising profile of the seniors housing among institutional investors and how quickly it is gaining widespread acceptance as an institutional asset class, according to James Milam, equity analyst with Sandler O’Neill Partners, L.P.

"Seniors housing definitely gained popularity in 2012 among private equities, pension funds and other types of institutional investors," Milam said.

While private funds have competed for many of the large deals, REITs have leveraged their low cost of capital to win the transactions. In fact, a significant number of the deals landed by investment trusts have been assets liquidated by private equity firms.

Because of all the heavy activity by REITs over the last couple of years, there are a lot fewer large portfolios on the market. On a deal-by-deal basis, Milam expects private firms to successfully compete for and win a few transactions.

"Private equity firms have probably been net sellers up to this point in the cycle, and now that they’ve been able to raise new funds, they’re back in the market looking to become investors again," Milam said. "Private equity and other capital sources have been looking at and competing for these other deals, but they just didn’t win them."

The investment market will likely remain strong for seniors housing properties over the next several quarters as private equity and other capital comes off the sidelines, with buyers focusing on top-tier or B+ properties in good locations, according to Marcus & Millichap.

CoStar tracked just under $12.7 billion in sales volume in assisted living, congregate senior housing, continuing care and skilled nursing facilities in 2012, including $4.5 billion in the fourth quarter, according to preliminary figures.

Assets with a dementia care unit are in greatest demand, with capitalization rates for assisted living facilities with dementia care dipping into the mid-7% range, Marcus & Millichap said.

Operators in the independent living sector continue to improve in step with the housing market, while skilled nursing deals remain muted.

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