While seniors housing gains acceptance as an asset class, international buyers are still learning the sector
By Jeff Shaw
Traditionally, foreign institutional investors with deep pockets looking to acquire commercial real estate in the United States have not shown much interest in seniors housing. Instead, they have looked to less operationally intensive segments, such as office.
However, as cap rates compress in other segments and seniors housing becomes more widely accepted as an asset class internationally, the senior living industry is starting to attract more money from those big, international investors.
In 2016, several big deals were funded by foreign capital:
• In November, a joint venture between two Chinese investors — Cindat Capital Management Limited and Union Life Insurance — paid $930 million for a 75 percent stake in a portfolio of 39 Welltower-owned seniors housing and skilled nursing properties.
• In February, a joint venture between Welltower and The Canada Pension Plan Investment Board bought a 97.5 percent interest in six Discovery Senior Living-operated communities in Florida for $555 million. The Canadian institutional investor owns 45 percent of the joint venture.
• In late November, Anbang Insurance Group, a Chinese insurance company, spent CA$1 billion (approximately US$744 million) for a stake in Canadian owner-operator Retirement Concepts, according to The Globe and Mail, a leading Canadian newspaper. Although Retirement Concepts does not have any U.S. communities in its portfolio, the transaction shows Chinese investors’ strong interest in seniors housing is on the rise.
• Over the course of 2016, Arcapita, an investment management firm based in the tiny Middle Eastern island nation of Bahrain, purchased six seniors housing properties totaling 506 units for nearly $200 million. The communities are located in the Denver, Atlanta and Washington, D.C., metro areas.
• In September, Mainstreet Health Investments — a Toronto-based seniors housing investment affiliate of Mainstreet, an Indiana-based developer of skilled nursing and rehabilitation facilities — spent $152 million for seven seniors housing communities and five development properties in Kansas, Texas, Illinois, Colorado, Arizona and Nebraska.
Despite a few large deals this year, foreign investment in seniors housing still pales in comparison to activity in other property sectors. Anbang, for example, made news earlier in the year for its bidding war against Marriott for Starwood Hotels & Resorts Worldwide, which at one point reached an offer of $14 billion. Acquisitions and new developments involving foreign capital in excess of $1 billion are fairly common in the office, hospitality and retail sectors, but exceedingly rare in seniors housing.
Unfamiliarity leads to hesitancy
Jim Fetgatter, CEO of the Association of Foreign Investors in Real Estate (AFIRE), suggests that the complexity of seniors housing keeps many investors at arm’s length.
“If you look at the portfolios of all foreign investors in the United States, 50 percent is in office,” says Fetgatter. “That’s because office is easy to manage from overseas. It has long-term leases typically, and you can invest a lot of money in one transaction, especially if you buy in a central business district.”
AFIRE, founded in 1989 by a group of Dutch pension funds, provides education and networking for foreign investors looking for opportunities in the United States. The key to increasing foreign investment in seniors housing might be a matter of making the sector more understandable to other countries.
“Seniors housing is a little harder to explain to committees and investors,” says Fetgatter. “It’s about exposure, as simple as that may sound, and raising the profile of the industry so that it doesn’t sound like such a foreign thing to investors.”
This lack of familiarity extends to operational partners as well. Fetgatter notes that some foreign investors “could name the top 20 asset managers for office buildings, retail or multifamily, but couldn’t name one operator of seniors housing.”
In a model that can’t succeed without a quality operator, this is a big hurdle for investors interested in seniors housing.
“If the investor has an operating partner, it will rely on the partner to find good opportunities in the U.S.,” says Edward Cheung, managing partner out of Brookfield Financial’s New York City office. “A lot of foreign investors are going through the larger [operators] that already have exposure to various U.S. markets.”
Brookfield is an international investment bank that frequently advises foreign investors regarding U.S. real estate. Although seniors housing does present unique challenges, the company’s partners note that foreign investors are studying the sector more and more.
Attracting the big fish
Not only are major foreign investors interested in seniors housing, Cheung suggests, but many are also already investing as silent partners.
“I think that the numbers reported related to foreign investment are potentially light,” says Cheung. “A number of these investors are doing it, but not making public announcements. They like to keep it under the radar.”
Signals are especially bright coming from Asia, China in particular. Industry conferences are seeing a spike in attendees from Asia, notes Owen Cartwright, a partner in Brookfield’s Toronto office.
“A good reference point is to look at the NIC conference attendee list and the spread of where people are from,” says Cartwright. “This year it was particularly evident there was a lot of Asian presence at the conference.”
Within China, the seniors housing model is changing. Many investors are interested in learning the U.S. model in order to bring it back home, according to Cheung.
This is partially due to 1979’s “one-child policy” under which many Chinese citizens were only allowed to have a single child. Although the policy is now being phased out, the consequences of it are still being felt demographically. There are now fewer children to house and care for their parents.
China’s over-60 population is currently 220 million out of the country’s population of nearly 1.4 billion, according to BBC News. By 2050, more than 40 percent of the country’s population will be over the age of 60, according to estimates by the World Bank.
“Finding a seniors housing solution will become increasingly more important as the Chinese population ages,” says Cheung. “We talk to a number of investors that have seniors housing operations in China, but it’s really early stages of the industry’s development. Many of these companies are looking to the U.S. for best practices and expertise from this part of the world where seniors housing is more established.”
Danny Prosky, founding principal of American Healthcare Investors, echoed this sentiment.
“We’ve seen more interest from China than any other country. They’re very interested in applying some of the healthcare solutions we have here to China.”
This trend has led to some complications of its own. Seniors housing companies in the United States must learn what Chinese investors want in a property and either accommodate their desires or risk losing that capital.
“We have a long-established record of what the U.S. REITs want and how long they want to own,” says Cartwright. “We don’t have as much clarity with the Asian markets. Once they’re on the ground here, what do they want to do?”
Cartwright cited a recent deal where a Chinese investor wanted to purchase a property, then fill the operator’s staff with at least 10 percent of employees brought over from China by the new owner, complicating the transaction. “That brought labor relations into the deal. These are the things that have to be considered.”
Foreign capital’s future
Relatively high returns on investment will continue to keep foreign capital coming into the U.S. seniors housing market, according to John Stasinos, former executive vice president with HCP, a healthcare real estate investment trust.
“Foreign investors are seeing really low yields and weak economic fundamentals in their home markets and continental Europe,” says Stasinos. “It’s natural for global capital to migrate to the U.S., especially in the healthcare real estate space where on a risk-adjusted basis yields are better than other asset classes. The U.S. is really the only safe haven left in the world.”
Capitalization rates for independent living and assisted living properties in the United States are currently about 7 percent on average, according to Marcus & Millichap. By comparison, the average for multifamily properties is 4.4 percent, according to JLL’s third-quarter 2016 report.
Expect to see continued interest in seniors housing from large foreign buyers due to this difference in return on investment, according to Brookfield’s Cheung. This is particularly true as it relates to smaller markets, where foreign investors are starting to see ways to unlock even more value.
“Healthcare assets are very unique in that the actual city it’s located in may have less bearing on the performance. As a result, it’s less of a requirement that investors get into the largest gateway cities,” says Cheung. “When they look at office, they’re only looking at New York, San Francisco, Washington D.C. It’s a drastically different philosophy in seniors housing.”
While there is plenty of opportunity for more foreign investors to enter the U.S. seniors housing market, attracting that capital will be a long, slow process, according to Mainstreet Health Investments CEO Adlai Chester.
Chester’s company is in a unique position. It is a publicly traded Canadian company, but 50 percent of its investors are from the United States and its parent company is Indiana-based skilled nursing developer Mainstreet.
The company participated in one of the larger foreign capital investments in the United States in 2016 when it bought 12 U.S. properties for $152 million (see table, page 31). “We’re targeting both sides of the border, but 70 percent of our properties will be in the U.S.,” Chester notes.
Although “we’re seeing a lot of foreign dollars flow into the U.S. market,” healthcare real estate is not getting its fair share, says Chester.
“You’re going to see foreign investment in seniors housing increase, and it’s going to happen through education. Investors are starting to understand triple-net leases, which are not that common outside the U.S. They’re also starting to see the stability of this sector,” adds Chester.
The reverse flow of foreign capital within the sector is helping to educate investors abroad about seniors housing, say sources. U.S. REITs and investors are acquiring and developing properties in other countries. Some large players — including the “Big Three” REITs of Ventas, Welltower and HCP — have portfolios in Canada and the United Kingdom, which could pay dividends in the United States in the future.
“You’re starting to see U.S. groups invest outside the U.S.,
so it will naturally make foreigners interested,” says Chester. “You have to have more people talking and investing in those countries to get them more interested in the space.”
“It’s going to happen over time,” adds Chester. “The question is can we make it happen faster? I’m not so sure. I think it’s going to be a long process.”
Brookfield’s Cheung takes a slightly more optimistic approach, noting that the investments from foreign countries so far are “seed investments” with the long-term goal of building scale.
“For most of the foreign investors we talked to, they have an intention to grow in U.S. seniors housing,” says Cheung. “It’s a unique time in the cycle. Everything’s coming together nicely. As we move into 2017, I can only believe that the demand for seniors housing investments will increase.”