LOS ANGELES — Most seniors housing executives see this industry as a long-term play, according to panelists at France Media’s InterFace Seniors Housing West conference, held Feb. 20 at the Omni Los Angeles in Downtown Los Angeles. However, the industry “lifers” don’t necessarily see today’s investors taking the same approach to this product.
The comments came during a session titled “Investment Update: Should Today’s Investors Buy, Sell or Hold in the 2020 Market?”
“The investor community is focused on the quarter-to-quarter results and not thinking about the 10- to 20-year picture,” said Talya Nevo-Hacohen, a panelist and chief investment officer at Sabra Health Care REIT. “If there’s an overriding theme of this market, it’s a high level of demand and a lack of patience.”
Selling what they’re buying
One of the biggest red flags Nevo-Hacohen sees in this current trading environment is a disregard for the fact that baby boomers aren’t set to enter seniors housing anytime soon.
“I don’t see the investor community really thinking about what the longer-term arc is on this property type and operating business,” she said. “I have seen direct investors completely ignore that the boomer generation isn’t coming in [to seniors housing] for at least 10 years. I see investors who ignore that timeframe and say ‘all these people are getting old, so we have to build it now.’”
This sort of mentality has led to an active market, noted Tim Cobb, panel moderator and managing director with Berkadia.
“There is a significant amount of product on the market,” he said. “However, there is also a shift in the way people are making their disposition decisions. There is a much heavier scrutiny on markets, not just on the age of an asset.
“It used to be that you could have a great operator in a secondary market and that asset was great. Now, we’re seeing that it doesn’t matter to buyers if you have an operator who you think is great; they’re all about scrutinizing that market.”
Though there may be a lot of product on the market, M.J. Ritschel, panelist and chief investment officer of Kisco Senior Living, doesn’t believe that necessarily translates into a lot of opportunity for investors.
“We’re a very disciplined investor,” he said. “Our ideal community is a larger community with independent living or assisted living with memory care. We want high barriers to entry in high-quality markets, and we want to be in a market where we can concentrate, including California, North Carolina and southern Florida. We’re not seeing the kind of opportunities that fit with our criteria and portfolio.”
Nevo-Hacohen noted much of the for-sale properties are less than desirable in the current market, especially among some of the more established players.
“There’s a lot of assets trading,” she said. “The overwhelming majority of assets trading are REITs that are lopping off the bottom quintile of their portfolios because there’s so much capital looking to invest. There’s a buyer for everyone. It’s the broken stuff — the old assets, poor management, challenged locations.”
Panelist Michelle Kelly, senior vice president of investments for National Health Investors (NHI), noted her REIT had taken a similar strategy, analyzing the underperforming assets on a case-by-case basis.
“We haven’t been much of a seller,” she said. “We’ve grown our portfolio over the past 10 years. Most of what we own is what we want to be owning, but occasionally there’s a time to think about selling. This is usually driven by an operating partner that isn’t working, geography or an acuity level that doesn’t fit the operator’s platform.
“When we sell, it’s generally an underperforming asset that we can’t turn around or one that doesn’t have a good operator that we think can step in and turn it around.”
Buy, sell, hold
For Nevo-Hacohen and her REIT, the sell-off period came after a merger.
“We sold a large portfolio coming out of a cleansing when we merged with Care Capital,” she noted. “It’s a good time to be a seller, as there’s lots of capital. However, you see very few skilled nursing properties on the market.”
Nicholas Stahler, panelist and first vice president at Marcus & Millichap, believes the Patient-Driven Payment Model (PDPM), a new Medicare payment rule for skilled nursing facilities that went into effect in November, is having some effect on this product.
“Cap rates aren’t at historic lows in skilled nursing,” he explained. “The skilled nursing market has seen a lot of distress lately. If you’re trying to capitalize on a stable skilled nursing asset, you might be better off waiting to see how PDPM plays out in a year.”
Still, when it comes to the long-term investors, Nevo-Hacohen is bullish about this market. What she’s more skeptical about, however, are the short-term players.
“If you don’t want to be in this business long term, then sell now,” she said. “If you don’t want to be here for the next seven years, then I think it’s a good time to consider selling. If you’re in it for the long term, I think it’s great to hold. If you have the capital to buy, then there are opportunities to buy if you can effect change in those communities.”
Kelly shares a similar view as she looked to the future of this industry. This picture not only included the baby boomers who will eventually age into the product, but the challenges that may be on the horizon.
“My recommendation would be buy and hold for the most part, with the occasional sell when it makes sense,” she said. “If you don’t have the stomach for what’s coming with labor issues, changing technology and increased competition, then it’s a great time to sell because a ton of capital is chasing this industry.”
Stahler takes a more diplomatic view to the age-old investor question.
“It’s situational,” he said. “You have to look at capital partners, what expectations are, what returns are, at the competitive landscape and the age of your building and you have to compare all that to competitors.
Nevo-Hacohen noted the options aren’t simply buy, sell or hold; but buy, sell, hold or build, despite concerns of overbuilding.
“I can’t believe we’re seeing more development deals, but we’re seeing more development deals,” she said. “We’re at the place where I’m starting to wonder if there is something here we’re missing.”
— Nellie Day