The SeniorCare Investor: Deal Market Strengthening--
First Half of 2010 Outpacing 2009 Acquisition Volume
After hitting a transaction volume peak in 2006 and 2007 with $22.6 billion and $16.6 billion, respectively, of publicly announced acquisitions in the seniors housing and care market, the volume of deals quickly plunged to lows not seen since 2002. The bottom was in 2008 with just $1.8 billion of announced transactions, and then it picked up in 2009 with $3.2 billion after a very slow start in the first half of that year.
In the first half of 2009, there were just 28 announced acquisitions with a dollar value of $615.5 million. That represented 31% of the full-year number of transactions and just 19% of the full-year dollar value. The market obviously picked up steam in the second half of last year, and we expect to have a healthy volume again in the second half of 2010. The difference, however, is that the number of acquisitions in the first half of this year has already increased by 50% over the first half of 2009, while the dollar volume has tripled, thanks mostly to the formal agreement by Blackstone Real Estate Advisors to buy the Sunwest Management portfolio. True, a lot of the increase came from the one-off sales from Sunwest this year, and that “mini-market” didn’t start to gain traction until the second half of last year, but there is a growing sense that the deal logjam is about to break, partly because everyone wants it to break.
The acquisition-minded companies and investors are growing increasingly tired of sitting on the sidelines waiting for the debt markets to improve so they can acquire with reasonable leverage. In addition, there is cash that needs to be put to use, and that may be the most important spark to light the acquisition fire. There seems to be more talk about a turn back into recession or, at best, very modest growth for at least a few more years, with some economists now talking about the potential for a “lost decade.” What this means is that interest rates are more likely to remain low for quite a while, and at some point that is going to have an impact on cap rates, especially when (and if) the debt markets improve.
It will also have an impact on return expectations in general. As “risk-free” rates head into historically low territory, it is going to be harder and harder to find those investment opportunities that yield an 18% to 25% annual return. As long as we stay on the current track, investors will most likely start settling for lower returns, whether they like it or not, because they will still look good in comparison. And if this happens, cap rates will start to decline. Some would say they have already started to drop from the depths of the recession when the acquisition market ground to a virtual halt. The implied cap rate for the Health Care REIT/Merrill Gardens joint venture was somewhat low compared with other recent transactions, and there are rumors of a similar deal coming along with a much more aggressive cap rate. Sellers will be taking notice, but so will buyers as “the market” decides that higher valuations may now be appropriate given the lack of better investment alternatives combined with the development slowdown.
It is the combination of a lack of better investment alternatives and the fact that seniors housing has continued to perform well throughout this economic downturn that has resulted in this opinion. That said, outsized returns may be made in those areas of real estate that suffered the worst valuation declines, simply because the current purchase discount is so large. This is one reason why we are seeing some big bets outside of seniors housing. But, given everything we hear about the prospects for the overall economy in the next several years, who’s to say those “other” real estate sectors and their values will actually climb out much from their recent troughs. As long as seniors housing continues to strengthen operationally—and it looks as if it is—investor demand will start to increase for what will be perceived as an increasingly safe investment. Our bet is that at some point, seniors housing will be considered one of the safest of the real estate sectors, and that may even be before “demographics” is on the lips of every investor worth his or her salt (even though the D word, meaning aging boomers, will not have any real impact on seniors housing for many years). Want to read more? Click here for a free trial and download the current issue today