EXPERT OPINION: A Conversation with Mark Myers and Jacob Gehl
Senior VP Investments/
Marcus & Millichap
Marcus & Millichap
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In this "Expert Opinion" interview, Mark Myers and Jacob Gehl of Marcus & Millichap discuss the turmoil in the seniors housing acquisition market in 2009, what happened with the buyers and sellers, and what we can expect for 2010.
Mark Myers is a Seniors Housing Specialist with Marcus & Millichap of Chicago, one of 75 offices nationwide. Over his
15 years in the business, Mr. Myers has become a leading broker in the industry selling all types of Seniors Housing
Properties including congregate care, assisted living and skilled nursing facilities.
Jacob Gehl is a Seniors Housing Specialist with Marcus & Millichap of Downtown Chicago. With over 10
years in the industry, Jacob has become a leading broker, selling all types of seniors housing properties
in any condition, including distressed assets.
The Marcus & Millichap National Senior Housing Group
8750 West Bryn Mawr, Suite 650
Chicago, IL 60631
Main Office: 773.867.1500
Office: (312) 327‐5437
Mobile: (312) 282‐4839
Fax: (312) 327‐5410
Watch the video of the interview:
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The seniors housing acquisition market has really had kind of a year of turmoil in 2009. And there's been some problems, buyer and seller disconnect, financing disconnect. And we're hoping things are going to improve, but to talk about the market, I have here with me Mark Myers and Jacob Gehl of Marcus & Millichap. These guys have been working as brokers in the industry for many years and have closed many transactions and pretty much have their pulse on the market.
So we want to figure out what's going on, what happened last year and what can we look forward to in 2010. Mark, most of us are pretty glad that 2009 is behind us. It was a tough year in the acquisition market. What was the worst part of it for you?
I think the biggest challenge for Jake and for me was having only a few qualified bidders for each transaction, whereas in the past you might have 8 or 10 or 12 bids on a particular transaction. In this marketplace, for certain acquisition opportunities, you might only have two or three bidders and at times only one of those bidders was qualified, particularly for turnaround assets or assets that had occupancy problems and cash flow problems.
So I think it was just in many cases the lack of being able to create a competitive bidding war. Certainly for trophy assets, the bidding wars were still there and will be in the future, but it has been somewhat difficult to generate that bidding war with only a few bidders in a deal.
I thought when you had a good deal, one of the problems was there were a lot of buyers for a higher quality ones. Wasn't it the financing that was the bigger issue?
There certainly was a withdrawal from the capital markets on the part of the lenders. There were also a lot of buyers during the bull run who were using other people's money. There were a lot of people that were pushing on cap rates, using 1031 exchanges, guys raising funds. So I would say that people were looking to the capital markets for both debt and equity, and I'd say the withdrawal of both of those factors simultaneously made for arguably fewer buyers than people maybe were leading on to.
You can't have your acquisition staff doing nothing, so people were out there looking. I don't know at the end of the day that people were necessarily able to raise both the debt and the equity as easily as they had been able to in the past. In a number of situations, we were actually bringing transactions to the finish line, only to find that either the debt or the equity couldn't come through. But it was really the buyers that had low leverage and lots of their own equity that were able to really effectively close. But moving people like all the 1031 exchange buyers out had a big negative impact.
Yeah, that business I assume is going to be gone for a while.
I think so.
Mark, in a perfect world, what is the buyer looking for in today's market? Is the buyer looking for the really good property, the A, A- property? Or is the buyer you're talking to looking for a bargain?
I think it depends on the buyer. Obviously, the institutional buyers are looking for something different than some of the smaller, private companies. Although even in the institutional side, you might bifurcate that between folks that are looking for the higher IRRs, turnaround situations, and those that are looking for the lower IRRs but high-quality properties.
But I think in general, what buyers want is certainty. And then that certainty being priced accurately in the transaction. So they don't care so much if a property is a B property, but they just want it to be priced as a B property. And one of the challenges we have had in this marketplace is that there's been a spread between the buyer's expectations and the seller's expectations, and that gap has been difficult to bridge at times.
Well, let me ask about that. That's what everyone refers to as the so-called pricing disconnect. Jake, had that narrowed at all by the end of 2009? Or is that still as wide as it was at the beginning of last year?
I think after the collapse of the capital markets in late 2008, there was a perception in the market that there were going to be some tremendous deals out there, and I'd say that prices have come down. I think that buyers' expectations got ahead of what the realities were, and I think that those real steal deals that people were expecting to find, I don't think that they've ever really materialized.
I think that people that were not distressed were able to take their assets off the market and off the table. I think that all the liquidity that the Fed pumped into the debt markets also helped to prevent a lot of distressed lenders from being forced to sell. And I think the combination of relatively high occupancy, relatively stable markets, as an asset class, I don't think that those huge distress sales are out there. We've had so many people call us since the crash, looking for that Class A building that's full that they can get at a 14 cap or something like that. And that just never happened.
So do I think that the disconnect has finally come to an end? I'd say that buyers are sort of realizing that those great steal deals are probably never going to be there, and that if they want to come into the market, I would also say there's specific opportunities on a one-off, individualized basis here and there, especially for transactions that involve litigation or bankruptcy. There are certain isolated opportunities for a real well-priced transaction. But your garden variety, normal transaction is really not going to have as much distress priced into it as the market would like.
Mark, how about the seller? Has the seller kind of accepted the new cap rate environment?
I don't think that they've had to in many cases, due to the fact that—and I know this may be an overused phraseology, but the "amend and pretend" mentality is there on the part of many lenders and borrowers in the sense that if a loan can be amended, paid down to a certain extent, the risk, the LTV lowered a bit, lenders are more inclined, at least they have been in the recent past, to extend that loan for another 12 months.
We've seen that in the case of Sunrise and some of the other larger players that have been able to hang on, extend their loans in certain situations, to not sell properties that otherwise might be sold. And good for them, that they're able to hang on and wait for possibly an uptick in the market as opposed to selling at a deep discount, or in lieu of a lender writing down a loan and taking out a short sale.
So I do think that sellers have had the capability of not selling properties that otherwise might have been sold because the lenders are working with them. I think part of that's because many of the lenders are under pretty close scrutiny, and I don't think that they can afford to, or certainly don't want to, write down assets to a great extent.
Especially if it's performing. And, you know, in the first half of 2009, there was just an absolute dearth of deals. In the second half, it really started to pick up. Jake, what was the change? Was there a change, or was it just a pent-up demand to both buy and sell?
I think that in mid 2009, Armageddon kind of came off the table. I think Mark and I saw most of the transactions that we were working on in 2008 come unwound, if they weren't already very far along in their gestation period. I agree with you, everything sort of ground to a halt. And I think people were so terrified.
I had read that $4 trillion of money was moved into essentially zero percent interest T-bills, CDs, and that represented people waiting for the possibility of Armageddon. And I think when that was taken off the table, people began to dip their toe into the market. And I do agree that there's a lot of pent-up demand. I think you'll see that continue in 2010. I think you can only earn a zero percent return for so long before you start to get bored.
And I also think that buying and building senior housing portfolios is something that there's some ego involved, and I think people like to build empires. I think that you can only not buy for so long when you see yourself as an empire-builder of a person.
And Mark, 2010, do you think that with the more stable environment and more money coming into the market, do you think more sellers, particularly sellers of the higher quality properties, that have been holding back and waiting for higher values, are they going to start putting some of their properties on the market?
I think it depends on the situation, again going back to the lender mentality for a given asset. If a loan is coming due—and I believe there's close to $1 trillion of loans that were done two or three years ago, either CMS or paper or other forms of financing that are out there, that are going to come due between 2012, 2013. And as that debt grows closer to maturity and starts to expire or near expiration, there's going to be some pressure.
Right now, there might be an ability to amend the loan to a certain degree, or the interest rate might be at a below-market interest rate, but once that loan is reset or once a refi is subject to an LTV constraint and put under the microscope a little bit better, I think you're going to see some lenders that are just willing to either pressure the borrower to sell the asset or to put in more capital. If they don't have it, then possibly to sell.
So I think you're going to see more disgorgement of assets down the road in 2010, 2011, in anticipation of a lot of these loans coming due.
Jacob, let's make the assumption we're going to have more M&A activity this year. Do you think it's going to be more on the assisted living side? More on the skilled nursing side? More even?
You know, the skilled nursing business correlates less with the commercial real estate market in general from a macro stance. And we found that given the liquidity that is provided by HUD, and the fact that the nursing home business didn't get as over its skis as assisted and independent living did, as far as over-capitalization in the space, that I would expect things in the nursing home business to remain pretty constant. I think you'll see some uptick in velocity, but I think you saw a big boom and then a real withdrawal from IL and AL product types, which correlated more with the macro market. And I think you will see a larger increase from a velocity standpoint in assisted living. A lot of it depends on Sunrise and Sunwest and some of these other stories.
And Mark, what about the CCRC market? I've been hearing for 12 months now about all the distressed CCRCs and how there's going to be a huge number of them, particularly not-for-profits, coming on the market. Do you think we're going to see that in 2010 and 2011? Or is that overblown?
Well, again, it depends on a number of factors. One of the tremendously important underlying factors is home sales, of course, because seniors tend to utilize the equity in their homes, sell their homes, and put the money into an entrance fee if it's an entrance-fee model. And with home sales having been stagnant for many months of '09, although there's been improvement in the last two quarters, there was a difficulty in convincing them to put up money that they didn't have.
And so I think it will depend on home sales. Now, with the increase in velocity of home sales, I think you'll see a change in that. Although I believe that a lot of the home sale activity has been in distressed homes, so the seniors that have 100 percent equity in their homes might not be so readily willing to sell their home at a 20, 30 percent discount, whatever it takes to get it sold. They might just hold on to their asset and bring in home health care, or the adult children might take care of them until they really see the need to move them into a facility.
I do think that CCRCs are faced with some challenges. I think there have been some situations that we've seen where entrance fees have not been repaid, particularly in bankruptcy situations where the entrance fee holders have been deemed to be unsecured creditors.
And we all know which deal you're talking about on that one.
And Jake had some personal involvement with his grandparents in that transaction, and we were involved in the transaction side, too. So we're very close to that transaction. And we've seen it in others, though, as well. And it's a trust factor. If the seniors’ community and the adult children caregivers are not feeling comfortable that the money's going to be returned, I think there's going to be a question.
And then there might be more questions in the future, more than there have been in the past, as to where are you putting Mom and Dad's money if you're taking it for an entrance fee? And is it being escrowed? Is it being used to pay down debt? Is it being used for marketing costs and things that are not going to be there in the future to be returned if you're not able to sell the property or if it goes in bankruptcy and it has to be converted to a rental community.
So that will be a real concern for people. I do think there will be plenty of successful CCRCs, and they will be the ones that maintain a good reputation, maintain a good occupancy, use good principles to make sure that that money's there, so they can continue to fund that out when there's a move-out.
Well, I think we are all hoping that we're going to have a robust 2010, so let's hope we do. And good luck this year.
Thank you, Steve.
We're a fan of The SeniorCare Investor, and we appreciate the opportunity to come on.
Glad to have you here.