Senior housing enticing to investors

  • Article by: DON JACOBSON , Special to the Star Tribune
  • Updated: March 24, 2011 - 2:32 PM

Publicly traded Real estate investment trusts are buying up senior housing around the country.

Investors looking for stable places to park their funds in shaky times are pouring more money into the relative safety of real estate investment trusts (REITs) that specialize in buying senior housing and skilled nursing facilities property assets.

In many instances, the REITs will buy the properties and then lease them back to the former owners to continue to operate or hire them as independent third-party managers. The deals can prove tempting to senior housing owners who are seeking to cash out their real estate holdings and generate liquidity to expand or for other reasons.

The number of such deals picked up considerably last year and are continuing to rise. Senior housing REITs -- a subset of broader health care REITs -- are sitting on investor cash accumulated during the economic downturn and are now making aggressive moves to deploy it into the senior housing and nursing home markets, which they see as being poised for growth as baby boomers age.

Some of the recent deals have featured eye-popping numbers, showing how popular senior housing and health care REITs have become in an era when investors are still cautious about putting their funds into other types of real estate.

A few of the transactions have been outright purchases of troubled or underperforming facilities For instance, a year ago, a joint venture including the Blackstone Real Estate Advisors trust paid $1.3 billion for 149 senior housing facilities owned by bankrupt operator Sunwest Management.

Two of those facilities were located in the Twin Cities -- the Champlin Shores Senior Living Community and the Minnetonka Senior Living Community.

Many others have been "sale-leaseback" or joint venture transactions in which a REIT will purchase the buildings while the sellers continue to operate and manage them.

A prime example of this kind of deal happened in October when Chicago-based Ventas Inc., one of the largest health care REITs in the country, bought the real estate assets of Atria Senior Living Group for $3.1 billion. Atria, based in Louisville, Ky., then entered into a long-term agreement with Ventas to continue managing the 120 senior communities in 27 states.

In a recent change, the REITs are now also able to capture operating income from rent payments under these kinds of set-ups, making them even more attractive investments. Tax law changes enacted in 2008 allow them to profit from the rental income if they set up a "taxable REIT subsidiary" and hire expert, independent contractors -- such as the former owners -- to manage the properties.

And now, senior housing REITs are spending big money to buy each other. Ventas announced last week it had acquired Newport Beach, Calif.-based Nationwide Health Properties in a blockbuster $5.7 billion transaction.

According to filings with the Securities Exchange Commission, Nationwide owns 10 senior housing facilities in Minnesota, comprising 343 units worth $38.7 million, from which it derived $3.5 million of net operating income in 2009.

It also held three Minnesota nursing homes with a total of 510 beds, from which it garnered $2.4 million in operating income.

Ventas, meanwhile, owns nine senior housing communities with 617 units in the state, as well as a 140-bed nursing home and one medical office building.

REITs are so flush with eager investor cash their purchasing power is huge, said Angela Mago, a senior vice president and national manager for KeyBank in Cleveland who specializes in the health care market.

"The health care REITs have a valuable currency in their equity right now," she said, nothing they're trading at about a 35 percent premium to their consensus net asset value, or about 16.5 times funds from operations. "This means they can bid aggressively for deals."

Beyond that, unlike the broader real estate market, health care assets have "held up very well in the downturn," she said. Demographics and demand for senior housing also looks strong "into the foreseeable future."

Given the number of recent transactions, there seems to be no lack of willing senior housing sellers out there. The upside for them is cash to implement their future plans, said Tom Melchior, a Minneapolis-based senior housing analyst for LarsonAllen.

"The benefit for the selling entity is that they get cash they can use to do an expansion," he said. "For instance, if you're a senior housing or nursing home operator with one campus, and you want to build another one, selling your real estate to a REIT would be very enticing."

However, he added, that assumes the debt loads on the properties don't exceed their values, a situation that's fairly common at a time when property prices are generally depressed.

Don Jacobson is a St. Paul-based freelance writer.

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