I've created a new web series, Chatting with the Masters, to gain valuable insight from some of the leading experts of different disciplines within the seniors housing industry. With this first installment, I chat with Anthony Stablein, Managing Director at HealthTrust, LLC to discuss seniors housing transaction and valuation trends.
Question: How would you describe the seniors housing transaction marketplace right now?
Answer: It’s been muted thus far this year. Transactions dropped off in the first quarter for both macro and industry reasons. On the macro side, we had the election and an uptick in interest rates. With regard to the latter you have new supply concerns for seniors housing and regulatory reimbursement headwinds for SNFs. Both are seeing labor pressures as well. Transactions have picked up more recently, and we continue to hear additional chatter out there. There are also a lot of larger dispositions where the market is looking for some resolution - Brookdale, QCP/ManorCare and Kindred.
Question: What groups are you seeing as the primary buyers of seniors housing? How has this changed over the past few years?
Answer: The public REITs, which kicked off this cycle, have gradually moved to the sidelines over the last two years, with “discipline” being the word of the day for them. This is a combination of the erosion in their cost of capital advantage, but also a pullback as they shifted to an asset management function. A lot of the void that was left behind has been filled by private equity, pension funds and foreign capital. There continues to be significant interest in seniors housing and healthcare real estate. Relative to other traditional asset classes, you have superior historical returns, continued resilient operating performance and a better story to tell in terms of demographics vs. disruption. Given the length of the cycle and the dominance by REITs at the outset, it’s reasonable that they would pull back and even become net sellers. There have been plenty of new entrants over the last few years that want seniors and healthcare real estate as part of their portfolio. Going forward, it remains to be seen how long REITs will stay on the sideline on the buy side.
Question: So far in 2017, are you seeing any movement in seniors housing cap rates? If so, what changes are you seeing?
Answer: On the seniors side, new, stabilized (or close to it) Class A assets in primary markets continue to see a significant premium in cap rates. We continue to see pro forma cap rates beginning with 5s and 6s on those types of assets. From there, you are starting to see an uptick on the Class B assets and more value-add dispositions as new supply disrupts some markets. For skilled nursing, the public markets continue to penalize the product, but there continues to be an appetite for skilled from both private equity and foreign capital. Additionally, owner/operators are more than willing to take on the turn-around projects. Also, I would add, there continues to be a portfolio premium, which was evidenced in the recent Sentio/Kayne transaction as well as the Welltower sale of the Genesis portfolio late last year.
Question: What qualities / characteristics are bringing the lowest seniors housing transaction cap rates within the industry?
Answer: As I touched on above, it’s the newly built, stabilized assets in a primary market. Generally they will have at least two levels of care and a proven operator. A strong operating partner in place can command a premium, as buyers will view it as a potential pipeline.
Question: Which acuity segment (IL, AL, MC, etc.) has experienced the most cap rate volatility over the past few years? Do you see this changing in the future?
Answer: IL only and MC only. On the stand-alone IL side, there are just so few properties out there that the sample size is going to lend itself to volatility. On the memory care-only side, the volatility is driven by the operations and swings in NOI it can experience. You have a higher acuity resident and the higher turnover that goes along with it. This is a significant operational challenge, which reflects itself in the cap rate. Overall, these properties had higher cap rates at the outset in the cycle, came down in parity with AL, and now we generally see them trading at a higher cap again. I should also note that you have to consider the per unit valuation in these scenarios. Where is it relative to replacement cost and how that can invite new competition and ultimately the sustainability of the cash flow.
Question: What are some of the primary factors you analyze in the seniors housing supply and demand market analysis? How does this impact the valuation?
Answer: Occupancy first and foremost, as that’s going to be your primary demand indicator. Then you have to look at the stock of the current supply (is it all 90’s era construction, how many Brookdale properties are there, what are rates trending at?). Next, you have to dig deep on the new supply coming online (where is it, who is the operator, what is the timeline?). Another factor often overlooked is defining geographically, what the market is and where are you really going to compete. And finally, while it tends to get a bad rap, penetration rates. Penetration rates are just the ratio of supply to demand, regardless of how you calculate it, you should make sure that you are filtering down the demand part of the equation to something that is sensible, be it age, income, net worth, acuity, etc. Penetration rates are useful in quantifying where the market is at, but also what can reasonably be expected going forward and whether or not supply will outstrip demand, or vice versa.
Question: Is there anything a seniors housing owner / operator can do to increase an asset’s valuation?
Answer: Valuation in this space is cash flow driven, so it really comes down to whatever can be done to drive the NOI and be efficient, which obviously comes as no surprise. On the seniors side; can you provide the appropriate care to extend the length of stay? Are the design and amenities such that you can attract a younger resident? Are you efficiently staffing the property and retaining employees, particularly the ED and department heads? For skilled nursing, is the operator adapting to the to the changing reimbursement landscape? Having to maintain or manage around a short-term census that has declining lengths of stay, requires lower readmission rates and continues to shift toward Managed Care.
Question: Are there any new design trends and/or technology that can impact an asset’s valuation?
Answer: I don’t know that I’ve seen anything ground-breaking or disruptive that the market would place a premium on. You sort of expect the newer properties to have multiple dining venues/options, therapy pools and engaging activity spaces. In terms of technology, you have the monitoring devices that help track resident’s movements and vitals, which provides peace of mind to adult children. Having an EHR platform has become essential, so lacking that, would certainly have an adverse impact on valuation. It will be interesting to see what comes out of the Aging 2.0 movement. Certainly anything that can effectively alleviate the labor and wage pressures will be highly sought after among operators and investors.
Anthony Stablein, MAI, Managing Director, HealthTrust, LLC,
Anthony Stablein joined HealthTrust in 2006 and has been actively engaged in the valuation of healthcare real estate for over ten years. He is a Designated Member of the Appraisal Institute (MAI) and a Certified Real Estate Appraiser in over 15 states. His industry experience includes valuation and advisory services for a broad spectrum of property types including seniors housing, skilled nursing and acute care. At HealthTrust, he specializes in implementing process initiatives, portfolio valuation, purchase price allocations and fair market value opinions.
Mr. Stablein holds a bachelor’s degree in Psychology from the University of Florida and resides in Lakewood Ranch, FL. In his free time he enjoys spending time with his family and is an avid sports fan, particularly the Florida Gators.
www.healthtrust.com