The SeniorCare Investor: AL and IL Prices At New Highs--
Declining Cap Rates And Broad Interest Push Prices Up
During this decade, seniors housing has certainly come of age in terms of quality, in terms of investor acceptance turning into insatiable investor demand and, perhaps most importantly, the coming of age of a newly educated consumer who is both demanding and accepting of the various products. This last one may prove to be the most difficult in the future, because it will be difficult for investors, developers and providers to understand and predict what the next generation of elderly will really want, and that will go well beyond the type of real estate they choose to live in.
The seniors housing acquisition market also came of age in 2007, with new record average prices paid per unit set in both the assisted and independent living market. And like the skilled nursing market, this excludes some of the more high profile transactions, such as the sale of Holiday Retirement Corporation, which included other assets beyond the retirement communities. Holiday’s theoretical sales price was close to $185,000 per unit. Nevertheless, in addition to a record average price paid, new records were set for highest price paid, which certainly had a contributing impact on the average. Despite strong investor demand, there was a slight dip in the average price paid per unit in 2006 for both assisted and independent living facilities. This had everything to do with what was actually sold and little to do with any change in market conditions.
In fact, market conditions were still improving through most of 2006 and into 2007. In an ironic twist, the acquisition market was actually beginning to soften after the first quarter of 2007, with the quarterly transaction volume slowing, but the prices paid nevertheless rose. Once again, it’s all in what came to market and closed, and that is going to have a major impact on 2008 as owners of high-end properties may decide to wait out this current storm in the housing and real estate market and concentrate on increasing cash flow per unit for a sale another day.
The average price paid for assisted living units in 2007 increased to $159,100 per unit, or 20% higher than in 2006 but just 13% higher than in 2005. The median price, however, has declined slightly in each of the past two years, which reflects the impact of the highest priced sales on the average. The prices paid in the independent living market also increased by 20% from 2006 to $174,500 per unit, but the median rose by a much smaller 5%. So many of these IL properties have assisted living units (about 75% of the sales in 2007) that it is sometimes meaningless to differentiate them, which is one of the reasons why we also produce several statistics with both property groups combined. All of the results of our acquisition data will be published at the end of this month in our 13th Edition of The Senior Care Acquisition Report.
In addition to the quality of the properties sold last year, the other large influence was what happened to cap rates. For the entire seniors housing market, cap rates have been in a steady decline since 2002, and 2007 was no exception. According to our statistics, the assisted living market had the largest drop last year, with the average cap rate decreasing by 90 basis points to 8.3%, with independent living cap rates essentially remaining flat with 2006, although the median fell to about 7.6%. Readers must keep in mind that while the high-profile deals with the very low cap rates get much of the press, there are always a large number of transactions that come with cap rates that appear to be “above-market,” meaning high single digits and low double digits.
Speaking of cap rates, while it is still too early to tell what is going on in the market so far this year, primarily because almost all of the transactions closing are remnants of the second half of 2007 deal-making, it is safe to say that cap rates will rise in 2008, partly because of the liquidity issues in the capital markets and less aggressive bidding as a result of that, but also because sales of those high-end properties that tend to have the lowest cap rates will not be as prevalent as in the past three years.
We have already heard of at least two portfolios with expected prices well above $100 million, with expected cap rates well below the 2007 average, that have been pulled from the market because of pricing issues, but we don’t know when and if they will return to the market later this year or next. Despite the more conservative environment, there will still be some very expensive deals getting done this year, with cap rates in the 6% to 7% range, but we expect back-up bids will be fewer in number and wider in price.
The big unknown, of course, is what will happen in the housing market for the rest of the year and how much of an impact this will have on seniors housing values and investor interest. We have already heard anecdotal stories of residents moving out of independent living communities into the homes of their children, not to save money but to help their son or daughter with their mortgage payments. There are financing programs in place to tide families over until a house is sold, such as the product offered by ElderLife Financial, but depending upon how bad things get, the most likely result will be indecision on the part of the consumer, waiting for a better market, much like a seller in today’s environment.
We had come to expect about 35 to 40 publicly announced transactions in the seniors housing and care market each quarter during the bull market, but this came to an abrupt halt beginning in the second quarter of last year, when the volume dropped to an average between 25 and 30 sales a quarter. That being said, we may get a spike up for the first quarter of 2008, despite many market participants complaining about a dearth of deals, because we are seeing many of the delayed 2007 transactions now closing or being disclosed. These are mostly small deals, and that is what we expect to see for much of the rest of the year. Unless, of course, one of the large companies starts to sell some assets to raise some cash….