Foreign Investors Play the Long Game

Overseas buyers take an increasingly measured approach to U.S. seniors housing industry by cultivating partnerships with seasoned operators.

By Jane Adler 

Cautious. Selective. Patient. These three words characterize today’s overseas capital sources seeking investments in U.S. seniors housing and skilled nursing properties.

While foreign investment in the sector here has slowed, even in the best economic times the decision-making process is typically lengthy. The “tire-kicking” phase can last several years, potentially extended by the recent coronavirus outbreak. 

Overseas buyers are also still quite choosy. They’re focused on the best properties with the best operators in the top markets. 

Meanwhile, U.S. companies are making some inroads overseas. They’re exporting the private-pay seniors housing model common in America. It was reported in early April that Welltower (NYSE: WELL) dropped its $3 billion  bid to buy Barchester Healthcare, a nursing home group with 200 properties in the U.K. Although the deal fell through amid COVID-19 concerns, it shows the interest level in bringing the American model overseas.

Foreign investors generally haven’t abandoned their long-term hold strategy either. They’re attracted by the relatively high yield of U.S. seniors housing compared with other real estate asset classes.

The five-year seniors housing investment return was 12.45 percent in the third quarter of 2019, according to the Market Insight Report by CBRE Senior Housing. But foreign investors are also willing to wait out the current rough patches here with an eye toward the exploding older population just over the horizon. 

“Foreign investors are well educated on the space,” says Chad Lavender, vice chairman of healthcare and alternative real estate assets at advisory firm Newmark Knight Frank. His office is in Dallas. “They are smart, thoughtful investors.”

By the numbers

Foreign investment in the broader U.S. commercial real estate market has recently declined. Cross-border investment in office, industrial, retail, hotel and apartment properties totaled approximately $46 billion in 2019, the lowest level in five years, according to New York City-based Real Capital
Analytics (RCA). The total volume was down about 49 percent from the previous year. The retail sector experienced an 86 percent decrease in transactions year-over-year, the largest decline of any property sector. Suburban office properties posted a 12 percent decline, the smallest year-over-year decline. 

Seniors housing and care comprises a small slice of overseas investment in the U.S. commercial real estate sector. Overseas investors accounted for a total of about $433 million in seniors housing and care transactions in 2019, a 33 percent decrease from the previous year, according to RCA. In 2018, the total was $645 million.

Putting the numbers in broader context, U.S. seniors housing and care transactions totaled $15.7 billion in 2019, up 6 percent from the previous year, according to the National Investment Center for Seniors Housing & Care (NIC), headquartered in Annapolis, Maryland. 

Tough act to follow

Foreign investment in the sector hit a 10-year high in 2015, totaling $2.12 billion, according to RCA. Big investors from Canada and the United Arab Emirates accounted for most of that total. In 2016 and 2017, investors from China bought seniors housing and care properties totaling $1.28 billion.

The Chinese government placed restrictions on foreign real estate investment in 2017, causing a significant drop in activity. There were no recorded transactions from China in 2018, though deal-making rebounded somewhat in 2019. 

“Foreign capital was aggressively pursuing properties from 2014 to 2018,” says Austin Sacco, first vice president, CBRE Capital Markets, Houston. “Foreign capital transactions are getting done, but they are less prevalent.” 

The most active foreign buyers in 2019 were from Bahrain ($165 million); China ($118 million); and Switzerland ($49 million). Other buyers active in the market include those from Canada, the United Kingdom and Hong Kong, according to RCA. 

Partnerships take time

Madison Marquette, a Washington, D.C.-based real estate services and investment firm, last July partnered with GFH Financial Group, a Bahrain-based investment group, to purchase a six-property seniors housing portfolio. GFH said in a press release that the deal was valued at more than $180 million. The properties are in California, Washington and Michigan, and operated by Senior Resource Group. 

Another large deal just closed in March. Singapore-based Keppel Capital Senior Living bought a 50 percent interest in Watermark Retirement Communities, headquartered in Tucson, Arizona. In a complex transaction, Keppel purchased a 50 percent interest in Watermark’s management company, and a 50 percent profits interest position in existing assets. The transaction was valued at $85.6 million.

Watermark owns and operates 59 communities. Four new communities are under development and expected to open in the next three to four months. Most of the Watermark properties are some combination of independent living, assisted living and memory care. 

Keppel Capital Senior Living is a part of the $9 billion Keppel Corp., a large conglomerate. Owned in part by the Singapore government, Keppel has capital investments throughout Asia.

The deal was three years in the making, an example of the perseverance needed to partner with foreign capital. The agreement required long negotiations and the approval of legal and regulatory entities, as well as lenders and current investors.

“We did not have any experience with foreign capital prior to this transaction,” says Bryan Schachter, chief investment officer at Watermark. The company has previously only partnered with U.S.-based REITs and private equity groups. 

Foreign investors often work through third parties to fund their acquisitions, sources say. But more direct investment is taking place lately as overseas investors gain more experience and knowledge of the sector.

Keppel worked directly with Watermark. The connection was made easier because Watermark already had a presence in Asia with its Watermark China division. It consults with Chinese seniors housing companies, providing training and operating systems. 

Investors from China have favored U.S. seniors housing, in part, because they want to learn how to run a private-pay model and export it to China, which has an aging population. The U.S. is considered to have one of the world’s most highly developed operating models of private-pay seniors housing.

Watermark has no real estate investments in China, though that could change under the new partnership with Keppel, notes Schachter. “There’s a huge opportunity in China,” he says. 

Keppel’s big presence in Asia could open doors for Watermark there. “Keppel could be a game changer,” says Schachter. But, he adds, “We are being cautious.”

In the meantime, Watermark is reshaping its U.S. portfolio to focus on “high-touch, high-
amenity” properties to appeal to baby boomers looking for a lifestyle-oriented housing option. “Keppel has a seat at the table,” notes Schachter.

Trust, experience matter

Foreign investors, such as Keppel, generally have a long-term hold strategy. As a result, they tend to look for U.S. partners that are established owners and operators with good reputations. 

“Overseas investment funds want to find someone they can trust,” says Charles Bissell, managing director of JLL Capital Markets based in Dallas. He explains that acquisitions are more often dictated by the operator/owner rather than a preference for a specific property type or location. 

Foreign capital also may invest in a Class B or C asset, but only if it has a best-in-class operator, adds Bissell. Overseas investors want a measure of security, considering their investments are thousands of miles away with many language and cultural barriers. 

Another requirement: U.S. partners should have an ownership stake in the investment. Far-away investors want to know their partners are motivated to perform.

U.S. seniors housing represents a long-term strategic asset for foreign investors primarily because of demographics, according to Rick Swartz, vice chairman of the National Senior Housing Capital Markets Group at Cushman & Wakefield in Boston. “They understand the baby boomers are coming.” He agrees that foreign investors are also motivated by the opportunity to learn more about American-style operations. 

A recent transaction demonstrates how relationships with foreign partners can grow over time. 

Last October, Capital One facilitated a $108.9 million loan to a joint venture owned by Sino-Ocean Capital and Meridian Senior Living. The loan is being used to acquire two senior living communities in Florida and to refinance another loan that was used to purchase three California communities.

Sino-Ocean owns 40 percent of Meridian, which operates more than 85 communities in 21 states. Meridian is based in Bethesda, Maryland. Sino-Ocean is a large, China-based real estate company. Meridian has also partnered with Senior Living L’Amore, a division of Sino-Ocean, to bring Meridian’s operations expertise and memory care programming to Sino-Ocean’s 24 properties in China. 

MBK Senior Living, based in Irvine, California, has continued to expand with the help of its overseas parent company, Tokyo-based Mitsui & Co., a global investment firm. In 2018, MBK acquired the WESTliving portfolio with nine senior living communities for $382 million. MBK owns and operates 32 communities in the western U.S.

America invests overseas

In a global economy, investment dollars flow in both directions. U.S. senior living companies are establishing beachheads in places with older populations. Between 2015 and 2050, the proportion of the world’s population over 60 years is expected to nearly double from 12 percent to 22 percent, according to the World Health Organization. 

“U.S. companies are not backing away from overseas investments,” says Lavender at Newmark Knight Frank.

An example is Columbia Pacific Management. The Seattle-based company is expanding in China and India. Columbia Pacific was founded by senior living veteran Dan Baty, who also has interests in Asian hospitals. 

Along with partner Temasek Holdings, an investment company headquartered in Singapore, Columbia Pacific owns and operates three senior living communities in China and another three properties are slated to open there in 2020. 

The properties operate under the Cascade Living brand and offer assisted living and skilled nursing. Cascade’s first memory care unit opens later this year, according to Nate McLemore, managing director at Columbia Pacific. One community is in Beijing, and the others are concentrated in Shanghai and the surrounding cities, referred to as the Yangtze River Delta. 

In 2017, Columbia Pacific launched its operation in India with the acquisition of Serene Senior Care, an established owner and operator there. Columbia Pacific now owns and operates nine properties in India under the brand of Columbia Pacific Communities. Most of the units are independent living with some assisted living. 

A new community under construction in Bangalore includes 150 for-sale units, a financial arrangement that appeals to Indian seniors. The project — The Virtuoso Club and Serviced Residences — was designed by U.S.-based Perkins Eastman. The Columbia Pacific Communities’ website promotes the project as “India’s first independent senior living community designed to international standards.”

Commenting on its overseas business, McLemore says, “We remain very optimistic about future demand for senior living in both India and China. It does, however, require skill to work through the challenges presented by the various real estate markets, marketing and staff training.”

Other U.S. companies are investing in foreign countries as well. 

Last year, the big healthcare REIT Ventas (NYSE: VTR) invested in a $1.8 billion Canadian portfolio of senior living properties. The portfolio includes 31 apartment-like seniors housing buildings in the Quebec market and four new developments underway. The investment was an 85/15 percent equity partnership with Le Groupe Maurice. Chicago-based Ventas is the majority owner. 

Like the U.S., Canada has an aging population. The number of Canadians 75 and over is expected to grow nearly 50 percent between 2018 and 2028.

Separately, Omega Healthcare Investors (NYSE: OHI), a healthcare REIT based in Hunt Valley, Maryland, formed a joint-venture with Beijing-based private equity firm Cindat Capital to purchase a portfolio of 68 seniors housing properties in the United Kingdom. The transaction closed in the third quarter of 2019 and was valued at $232 million.

The portfolio had been owned by the U.S. healthcare REIT Healthpeak Properties (NYSE: PEAK), based in Irvine, California. 

Negotiations took a year, according to Allan He, senior partner at Cindat Capital Management. “We had a cautious approach,” he says. 

Cindat also owns a portfolio of senior living properties with U.S.-based healthcare REIT
Welltower. Those properties are performing well, says He, adding that the company is looking for more investment opportunities in the U.S. He estimates the current value of Cindat’s U.S. and U.K. portfolios at $1.5 billion. 

The fragmented U.K. senior living market also represents an investment opportunity for future growth, says He, who like other investors believes the U.S. model of senior living can be exported to the U.K. “There is room for the addition of more services,” says He.

Operations must be tailored to the U.K. market, however. Properties have an average of about 60 units, about a quarter the size of a typical American property since land is scarcer. Rent is not all private pay. Some funding is available from the U.K.’s National Health Service. 

Looking ahead, He says the company’s team is in place in the U.S. and U.K. and seeking more investment opportunities. “We are thinking about how to integrate our current portfolio and how to create a bigger platform. We’d like to have a more diverse portfolio going forward.”