As the biggest players pull their foot off the gas, smaller groups are picking up some of the slack.
By Jane Adler
Back in 2016, foreign capital made a big splash in the seniors housing market as overseas investors inked blockbuster deals for U.S. portfolios.
For example, New York-based NorthStar Realty Finance Corp. entered into an agreement to sell a joint-venture interest in its healthcare real estate portfolio for $1 billion to the Chinese Taikang Insurance Group.
Meanwhile, the Canada Pension Plan Investment Board in a joint venture with Welltower bought a 97.5 percent interest in six Discovery Senior Living-operated communities in Florida for $555 million.
Chinese investor Fosun International also owns a 5.1 percent stake in Brookdale Senior Living, the largest owner and operator of seniors housing in the United States.
Fast forward two years and foreign mega-deals have become scarce for a variety of reasons.
Most notably, investment money from China has slowed. A government crackdown on risky financings by Chinese conglomerates is prompting a decline in property deal making.
The EB-5 visa program, used by foreign investors to fund new developments, has come under wider scrutiny and interest in the program is waning.
At the same time, some foreign investors, especially European funds, are wary of the U.S. market because of a perception of overbuilding.
Cyclical factors are having an impact too. Fewer big U.S. portfolios of seniors housing are available for sale now, sources say, since many large portfolios have already been sold.
The big deals, however, are being replaced by a relatively steady flow of significant, yet smaller transactions ranging anywhere from $2.5 million to $200 million.
The aging population is a big plus. Many foreign investors have a long investment time horizon. They have the patience, and the money, to tough out the next few years while awaiting the wave of aging Baby Boomers that will eventually need seniors housing.
Also, seniors housing still offers a relatively high rate of return of investment capital when compared with other commercial real estate categories. This calculation, of course, depends on a good operating partner that can fill a building amid increased competition.
“Foreign capital is interested in seniors housing if the opportunity is right,” says Ryan Maconachy, senior managing director at HFF, a commercial real estate services company. His office is in Dallas at the company’s headquarters.
Foreign activity falls
In the broader U.S. commercial real estate sector — including office, hotel, retail, industrial and multifamily properties — foreign investment dropped by 23 percent in 2017 to about $51 billion, according to New York-based Real Capital Analytics. The deal volume represented 11 percent of all direct acquisitions in the United States for 2017.
Canadian investors topped the list of buyers, followed by Singaporean investors. Despite the headwinds from new government restrictions, Chinese investors still accounted for the third largest cross-border investment group.
In seniors housing and care, foreign capital represents a relatively small portion of the acquisitions, currently about 6 percent of volume, according to Real Capital Analytics. Foreign buyers accounted for about $1 billion of acquisitions in 2016, and $900 million in 2017.
Aron Will, vice chairman, National Senior Housing at CBRE Capital Markets, Houston, says the global real estate services firm is bucking the trend. “We’ve had a tremendous number of transactions with international capital.”
CBRE has completed six sizable debt placements with foreign investors over the last 18 months, he adds. “We’ve seen more global capital flows lately.”
Much of the overseas investment money in seniors housing originates in the Middle East and Asia. The investors are comprised of high-net-worth individuals, institutions, sovereign wealth funds and private investment capital.
Foreign investors prefer high-quality seniors housing assets, mostly independent living and assisted living communities. They also like properties in large markets.
Somewhat typical of recent deals is the acquisition of a large portfolio of continuing care retirement communities in the Dallas area for $200 million by a joint venture between U.S. seniors housing property manager LCS and Aspect Investment Partners, an investment firm based in Dubai, UAE. The six-property portfolio includes 1,104 units. CBRE Capital Markets arranged the transaction.
Fortress Investment Group was the seller of the portfolio. CBRE’s Will arranged the acquisition financing, securing $120 million of debt from banks and agency lender Freddie Mac.
The deal is a good example of how foreign investors partner with U.S. operating companies such as LCS, says Will.
Foreign investors generally don’t have U.S. offices. Talented local partners with a solid reputation give foreign investors insights into the market, and are more likely to produce solid returns.
Also, foreign investors can be intimidated by the complexity of the U.S. seniors housing and care market. The stiff regulations and multifaceted payment systems are daunting, especially in the skilled nursing sector.
“They are amazed by the red tape,” says Ryan Haller, vice president of growth and development at Avamere Health Services, a large regional provider of elder care services and properties based in Wilsonville, Ore.
Avamere has a working relationship with Chevalier International Holdings Ltd., a large investment company based in Hong Kong. Avamere operates 51 properties, a mix of independent living, assisted living, memory care and skilled nursing.
About five years ago, Avamere was tapped to manage a defunct hospital in Portland, Ore., owned by Chevalier. Avamere assisted Chevalier in the conversion of the property to an assisted living and skilled nursing community called Laurelhurst Village. “It was a great success,” says Haller.
Chevalier has also purchased 20 seniors housing properties in North Carolina, and two in Michigan over the past five years.
This summer, Chevalier is scheduled to acquire 10 seniors housing assets owned by HCP Inc., a large healthcare REIT. Avamere will lease and manage the buildings.
Asian investors are looking for more than a healthy return on their capital, says Haller at Avamere. They also want to understand the senior living business in the U.S. where the private pay model has already been tested, and bring it back to Asia. Seniors housing represents a great opportunity in China where about 220 million people are over age 60. “They are learning,” says Haller.
China is expected to account for fewer U.S. seniors housing deals going forward. The Chinese government has instituted policies to curb foreign property purchases as a way to keep money from leaving the country in order to lessen downward pressure on the Chinese currency.
The crackdown is impacting companies that have purchased high-profile seniors housing and care properties here and in Canada.
In February 2017, Anbang, a giant Chinese insurer, purchased Vancouver-based Retirement Concepts with 24 communities in Canada for about $1 billion. The Chinese government seized Anbang in February. Since then, Canadian lawmakers have expressed worries about the ongoing operations of the communities under a changed ownership structure. Anbang announced in late February that it remains committed to its overseas investments.
In October 2017, a proposed $4 billion acquisition of Brookdale Senior Living by Beijing-based real estate firm Shonghong Zhuoye Group was scuttled. Some reports said the deal fell apart because of the difficulty the Chinese company encountered trying to secure financing amid increased scrutiny by Chinese regulators.
Not all deals have been impacted, however. In November 2016, two Chinese investors — Cindat Capital Management and Union Life Insurance — paid $930 million for a 75 percent stake in a portfolio of 39 seniors housing and skilled nursing properties owned by Welltower, a large healthcare REIT. Seniors Housing Business reached out to Cindat’s U.S. office for comment, but did not receive a call back.
“Capital restrictions on Chinese investors are having an impact,” says Mike Wolfson, associate director of capital markets research with Newmark Knight Frank based in New York. “The government is taking away their spending power.”
“It’s a big headwind,” says CBRE’s Will. However, he adds, it’s important to know where Chinese investment funds are actually located. “Some investors already have money domiciled in the U.S. or Europe, and those funds can flow freely,” he explains. “It can determine the viability of a deal.”
Another factor contributing to a slowdown of foreign investor interest is concern about the EB-5 visa program.
The program enables foreign nationals to receive a U.S. visa if they invest in projects that create jobs and meet other qualifications. Following the Great Recession, EB-5 funding, especially from China, became an important source of capital for developers.
The program has come under increased scrutiny and encountered other problems, such as charges of fraud, and lack of clarity regarding how EB-5 investments will be handled under the Tax Cuts and Jobs Act of 2017 that took effect in January.
Some seniors housing developers without access to traditional financing are still using the EB-5 program to partially capitalize their development pipelines, sources say. But use of the program is declining.
“We are looking for other opportunities to bring cash into the U.S.,” says Haller at Avamere.
While China is the biggest U.S. trading partner, Canada comes in a close second and has always been a steady source of capital for seniors housing here in the states.
Toronto-based Invesque (TSX: IVQ) owns a growing portfolio of healthcare real estate assets in the U.S. and Canada. The company changed its name in January from Mainstreet Health Investments.
Most of the company’s operations are based in Carmel, Ind. But the company was listed on the Toronto stock exchange to tap the Canadian capital markets, according to CEO Scott White.
Canadian investors account for about one-third of the company’s capital. “We intend to build a highly diversified portfolio,” he says.
Invesque recently completed the $425 million acquisition of Care Investment Trust, growing its portfolio to 87 properties. “We are just getting started,” says White.
Canada-based Réseau Sélection has its sights on the U.S. market. The company owns and manages 35 senior living buildings in Canada with 11,000 units. Eight new projects are under construction. By later this spring, the company will have 20 new projects with 3,500 units under construction, valued at $700 million.
Réseau Sélection has three product types: mid-rise buildings for suburban sites; high-rises for city settings; and master-planned communities that include active adult housing.
PSP Investments, the large Canadian pension fund, is a financial partner of Réseau Sélection.
About 80 percent of Réseau Sélection’s existing portfolio is comprised of independent living or what’s called “Montreal-style” apartments, according to Gaetan Cormier, senior vice president of international development at Réseau Sélection, Laval, Quebec, a suburb of Montreal. The remainder of the units is a mix of assisted living and condominiums.
Units have a range of pricing: affordable, mid-priced and high-end. All units have full-size kitchens. Services, including meals, are purchased a la carte by residents as needed.
“We have plans to branch out to the U.S.,” says Cormier. “We are identifying the best markets for us.”
The U.S. is appealing not only because of its proximity to Canada, but also because it has a relatively low penetration rate, says Cormier. About 10 percent of qualified U.S. seniors age 75 or older live in seniors housing. By comparison, about 18 percent of seniors in Quebec live in seniors housing. About 18 years ago, only 5 percent of Quebec seniors lived in seniors housing, says Cormier.
“We have developed a unique product oriented toward an active lifestyle,” says Cormier. He believes, with some modifications to the company’s “Montreal-style” product, that the U.S. market will embrace the concept.
The company currently has a 30-story high-rise under construction in Laval. Construction will begin on another high-rise in the Montreal area this spring. The buildings are comprised of 200 independent living units, 40 assisted living units and 40 condominiums for sale. “This is our prototype for urban environments,” says Cormier, an architect by training.
Réseau Sélection plans to first target the East Coast of the U.S. and then the West Coast. Cormier thinks it will take about three years to identify the best markets. He prefers cities where the company can build at least five projects. Says Cormier, “We want to make sure we can justify the time and energy required to build in an area.”