In the next installment of Chatting with the Masters, I chat with seniors housing broker, Ross Sanders. Ross has been within the industry for many years, and spent numerous years as an institutional investor for a healthcare REIT. In this series segment, we'll discuss current seniors housing transaction trends, as well as some helpful questions to consider before selling an asset. If you have any segment ideas, or need help navigating the seniors housing growth and investment space, feel free to e-mail Scott McCorvie at scott@srgrowth.com.
Question: How would you describe the seniors housing marketplace right now? What groups are you seeing as the primary buyers of seniors housing real estate?
Answer: The senior housing market remains strong with plenty of capital in the space. There continues to be new entrants with fresh capital coming into the sector which has kept pricing competitive. Several new players have entered the sector, both from overseas and other US real estate sectors. Overall, buyer interest remains strong in the sector with acquisition activity expected to pick up dramatically in Q3 and Q4 of this year. The dominant buyers over the last 12 months have been private equity funds and the smaller REITs. Owner/Operators have also increased their acquisition activity by themselves, or with institutional partners.
Question: How have you seen the seniors housing transaction marketplace change over the past few years? How do you see this changing into the future?
Answer: Notably, the buyer profile has shifted in the current market, between 2013 and 2015 the public and non-traded REITs were the dominate players in the market place. These groups were taking down acquisitions “all cash” with aggressive pricing. The last 12 months have seen much less REIT activity with the prominent buyers being private and institutional capital that often place debt on their acquisitions. These buyers tend to be users of secured financing, which can cause transactions to take longer to close and possibly be an added contingency to a deal.
Construction activity has dramatically risen during the last few years with many new entrants developing in low barrier to entry markets. We are just starting to see several of these new projects not being able to reach stabilization due to poor site selection, design, operator, etc. With this inexperience, a number of markets have become oversaturated by this glut of development. We are starting to and will continue to see a few of these new developments fail to stabilize. Lenders have recently taken notice and construction loans for unqualified developers have become harder to obtain. This has slowed construction activity and may allow market demand to catch up to new supply.
Question: What qualities, acuity, or characteristics are you seeing in the seniors housing marketplace that are bringing the most aggressive pricing?
Answer: Location, location, location, is the most important factor in all real estate classes and senior housing is no different. Infill sites with high barriers of entry are always going to obtain the most aggressive pricing. The most attractive communities are those that have multiple acuity levels on the same campus and are larger in size - 100 units plus. Recently, I have seen communities with both independent living and assisted living in high barriers to entry markets obtain more aggressive pricing than other product types.
Question: Do you see the Big 3 healthcare REITs becoming more active in the seniors housing acquisition marketplace?
Answer: In general, the Big 3 are opportunistic and patient buyers that do not have extreme pressure to make acquisitions. I believe that part of the lower activity from these REITs is due to the lack of quality portfolios and single assets on the market. When these players were more active 3-5 years ago, the quality of available assets was much higher. Should more institutional quality properties become available, I believe the Big 3 will become more active again. I also expect that we will continue to see these large players shed non-core communities as they clean up their portfolios.
Question: Can you briefly describe the process and information needed for a seniors housing owner to list their asset with a broker?
Answer: lt is crucial for a broker to spend the time and learn everything they can about the asset they are selling prior to going to market. The first step is to compile a due diligence for the buyer and set up an online data file for sellers to upload their information. The most critical items are the last two years and year-to-date detailed financials and census, ideally by month. Other items include information on the current debt, regulatory surveys, operating license, current year budget, historical capital expenditures, site survey, rent rolls, etc. Once our team completes a thorough review of the information, we create a detailed proposal which includes pricing expectation, marketing strategy, likely buyers, fee, and timing. If both parties are on the same page, we move forward with a listing agreement and launch the marketing process.
Question: Is there anything an owner / operator can do prior to listing an asset to make the transaction more desirable to a buyer?
Answer: There are a few important items to consider. Just as you do when you would sell your own home, it is important to spend some money on a refresh. Common items include new paint, carpet and complete any deferred maintenance items. Secondly, tighten up your bookkeeping, be sure financials are consistent and accurate, and recently audited financials are a plus. Sloppy bookkeeping, limited details or delays in obtaining due diligence requests can raise concerns by buyers. We also recommend obtaining professional photography prior to approaching the market.
Question: Are there any questions or concerns an owner / operator should clarify before selecting a broker?
Answer: I think track record is important, whether it be on the brokerage or principal side of the table. If the broker completed a similar transaction that is always a positive. I also personally believe a broker should be willing to take the time to tour the asset/s prior to launching a marketing process. It is critical that the broker selected is knowledgeable about the community/ies, as they will be the face of the company when taken to market. A firm that has national platform will also ensure that the entire buyer pool will be canvassed, not just a segment.
Question: What timeframe are you typically seeing from the owner’s initial contact to closing an asset?
Answer: There are a ton of caveats in this question and the general answer is that deals never close as fast as the seller or broker would like them to. Licensure and debt are often the key drivers in the closing time frame. Those aside, it should generally take approximately 45 days from contract signing to closing.
Question: Besides price, what are some of the other transaction terms that you compare and review with your clients prior to proceeding with a buyer?
Answer: Some additional determining factors include:
track record of the buyer and motivation
who the operator will be and how much due diligence they have completed
deal structure (RIDEA/NNN/JV)
financing ability and type
amount of upfront due diligence completed
Prior to selecting a buyer, the seller and representative should always consider completing some level of due diligence on the purchaser.
Question: Like myself, you have ample experience in seniors housing acquisitions for an institutional investment group. How has this helped you in your current brokerage role?
Answer: I hope it provides me creditability from both sellers and buyers. I had the privilege to acquire many senior housing communities throughout the country from small single assets to larger portfolios. I was intimately involved with all aspects of each deal from the initial underwriting, touring assets, document negotiations and closings. I also transacted with most of the brokerage shops in the space and learned a lot about what styles and approaches work the best. When I agree to list a deal I am 100% committed to personally take that transaction from start to finish, just as I had done on the principal side. Having experience on both sides of the table provides me a unique perspective on transactions.
Ross Sanders, First Vice President, CBRE
Ross Sanders is the first vice president for the CBRE National Senior Housing and is based in St. Louis, Missouri. He joined CBRE from American Realty Capital Healthcare Trust Inc., a New York based non-traded real estate investment trust, where he led the seniors housing acquisitions team as vice president. Since the inception of the company’s first fund and two subsequent funds, Mr. Sanders sourced, valued, negotiated and closed approximately 150 senior housing and skilled nursing communities across 28 states, totaling nearly $2.5 billion in value. In early 2014, the REITs initial fund was listed on the NASDAQ exchange under the ticker symbol HCT. Mr. Sanders was later involved in the sale of the listed company(HCT) to one of the Big 3 publicly traded healthcare REITS. Mr. Sanders previously served as a senior housing broker for Chicago based Senior Living Investment Brokerage, where he valued, sold and consulted with owners of skilled nursing and senior housing assets across the country. Early in his career he was involved in the management and leasing of both multi-family and retail portfolios.
Scott McCorvie, President, Senior Living Growth Advisors
Scott McCorvie has over a decade of experience within the seniors housing industry, and has devoted his entire career to this exciting segment. From 2004 to 2012, Scott worked for one of the largest dedicated seniors housing consulting and advisory firms, where he completed hundreds of seniors housing valuation, feasibility, regulatory, and market analysis assignments in markets across the United States. From 2012 to 2017, Scott worked for two public, non-traded healthcare real estate investment trusts, and was actively involved in the full spectrum of the institutional investment process. In 2017, Scott launched Senior Living Growth Advisors to assist owners, operators, developers, and investors achieve their desired growth success. Scott has a strong passion for the industry, and strives to combine innovative investment strategy with strong knowledge of seniors housing market and operating fundamentals.