Non-traded REIT sells off industrial assets in order to invest heavily in seniors housing
By Jeff Shaw
Summit Healthcare REIT survived the Great Recession, but the event caused the company’s executives and board to take a long, hard look at their plans.
At the time, Summit was involved exclusively in industrial real estate, which was particularly hard hit during the recession. The decision was made to shift the company’s focus from industrial properties to seniors housing, which the company saw as a more reliable and stable sector.
“During the downturn, the industrial space included a lot of flex space and manufacturing. That sector got hurt pretty badly,” recalls Peter Elwell, Summit’s chief investment officer of the non-traded real estate investment trust. “To recover lost value to shareholders, the decision was made to transition to what was seen as a better real estate alternative.”
Summit, which was founded in 2004 and is based in Orange County, California, began its conversion to seniors housing in 2012. Elwell, along with president and chief operating officer Kent Eikanas, were brought in to assist with the transition.
Summit has now divested its entire industrial portfolio and has officially entered the acquisitions mode in seniors housing. The company invests in all levels of care except independent living.
Making a big splash
November 2015 proved to be a momentous month for Summit. On Nov. 4, the company announced that it had purchased interest in a portfolio of four skilled nursing facilities in Texas for $27 million in a sale-leaseback transaction. The transaction was made as a joint venture with the company’s capital partner.
The very next day, Summit announced the acquisition of four assisted living and memory care communities in Wisconsin for $18.4 million. The communities were leased to Compass Senior Living, which will operate the properties. Compass already operates another community in Summit’s portfolio.
Two weeks later, the REIT bought Riverglen House of Littleton, a 50-bed assisted living community in New Hampshire, for $8.5 million. “It’s in great condition and is one of the only seniors housing communities in the market,” notes Elwell.
Both the Wisconsin and New Hampshire transactions represented Summit’s first entry into those states. Following the three transactions, Summit now owns 26 seniors housing properties.
Elwell described the $53.9 million in acquisitions in November as the “first wave” and the beginning of a new norm.
“I know $53.9 million in one month seems like a lot for us, but expect that to be the new normal,” says Elwell. “I’d expect to see more of that going forward.”
Also in November, Summit named industry veteran Suzanne Koenig to its board of directors.
Koenig owns and operates seniors housing communities at all levels of care and is also CEO and founder of SAK Management Services LLC, a consulting firm that helps turn around distressed healthcare properties including seniors housing.
“Summit really wants to start expanding and doing big transactions,” says Koenig. “They wanted somebody from the industry that could be a liaison on the board — somebody who understood what was going on day-to-day in seniors housing communities.”
While the seniors housing industry may see Summit as an acquirer of properties on a one-off basis rather than a buyer of portfolios, Koenig says the company is ready to become one of the big players.
“This group is aggressively going out there looking for big deals,” says Koenig. “The confidence has grown over the last few years, and they’re ready to take more on. They’re a great player and great addition to all the well-established REITs.”
Sale-leaseback deals drive growth
Although Summit has gravitated toward larger transactions, its recent history of buying single properties has allowed it to stand out from the larger REITs, which prefer to acquire big portfolios.
“Summit really prides itself on being a REIT that is a good capital partner and easy to work with,” says Eikanas. “We’re very flexible and willing to make one-off acquisitions for the right operator.”
The existing operator is the key to a smart deal for Summit. Sale-leaseback deals are the company’s “bread and butter,” says Eikanas.
Summit prefers the sale-leaseback structure as opposed to replacing the operator following an acquisition. It allows Summit to partner with top-quality operators. This strategy also gives residents and employees some assurance that new ownership won’t result in major changes.
“With a sale-leaseback, there’s no dip in operations and you don’t have to go through a full-fledged CHOW (change of ownership) procedure,” says Eikanas. “Plus, the operators are in a position to be honest about the sale with staff and make them aware. That gives us more free access to the facilities during the acquisition process.”
Summit’s recent acquisitions have allowed the REIT to not only grow its portfolio, but also to diversify both geographically and with new regional operators. “We look for operators with a great track record in the region we’re planning to lease to them,” says Eikanas. “We’ll work with both regional and national operators, but we like them to have experience in the region.”
Summit has no plans to list the company on a stock exchange anytime soon. “We have a lot ahead of us, so that might be an option down the road,” says Eikanas. “But right now we’re keeping our eye on the ball, just looking for good transactions.”
Dealing with Wall Street and the extra regulatory burdens that public companies have to endure would also be a “hindrance” at this stage of Summit’s growth phase, adds Elwell.
Navigating in a frothy market
Versatility is especially important in today’s market with acquisition prices at or near record highs and capitalization rates at or near record lows.
Eikanas acknowledges that Summit would have been even more active on the acquisitions front in 2015 had it not lost out on some deals because competing buyers were willing to accept lower cap rates than Summit.
“We really try to stay disciplined and avoid the temptation of low cap rates,” says Eikanas. “In this environment, we have to turn over a lot of stones.”
“But the deals are out there,” Elwell is quick to add. “You can still find great opportunities.”
And Summit can be selective. Although the company has sold 23 million shares to more than 5,000 shareholders, it is not currently taking in new capital that must be deployed. Instead, the company expands its current portfolio with the help of a large institutional investor.
This releases the pressure to deploy capital, allowing the company to only pursue deals that meet its standards.
“We know what works for us and our institutional investor,” says Eikanas. “We’re disciplined enough to only pursue good opportunities.”
Summit’s portfolio includes assisted living, memory care, skilled nursing and continuing care retirement communities. Due to the cap rate compression occurring in the independent living sector, the REIT generally avoids that subsector of seniors housing.
The average cap rate in the independent living sector fell to a record low of 7.4 percent in 2014 and likely dipped even lower through 2015, according to Irving Levin Associates.
“The cap rates are so ridiculous, we don’t even compete in that space,” says Eikanas.
Although the costs and cap rates are obviously a consideration, Eikanas emphasizes that what really makes or breaks a deal for Summit is the company that it chooses to partner with.
“At the end of the day it really comes down to the operator,” says Eikanas. “That’s what we focus on most.”