EXPERT OPINION: A Conversation with Matthew Whitlock

January 19, 2011

In this "Expert Opinion" interview, Matthew Whitlock, Senior Vice President of CB Richard Ellis, discusses how the seniors housing M&A market is beginning to strengthen and draw the interest of financial investors and operators.

Matthew WhitlockWatch the video      Read the transcript

Mr. Whitlock, Senior Vice President of CB Richard Ellis, joined the Senior Housing Group in July, 2008. The 18-year senior housing industry veteran was Director of Acquisitions for a nationwide owner and operator of premier senior housing communities and was responsible for all aspects of the Acquisitions Division, acquiring over 28 communities valued in excess of $2 billion. Most recently in his capacity as Vice President and Director of Senior Housing for a major full-service commercial banking group, Whitlock originated over $3.5 billion in senior housing mortgages.
 

Contact Information:
Mr. Matthew Whitlock
Senior Vice President of CB Richard Ellis
203 Washington Street, Suite 312
Salem, MA 01970
(978) 740-0024
Matthew.whitlock@cbre.com 

 
Watch the video of the interview: 
 

 

Read the interview transcript:

Steve Monroe:
The seniors housing M&A is kind of heating up a little bit, and to talk about that, we have Matthew Whitlock, senior vice president of CB Richard Ellis. Matthew, you’re in touch with a lot of buyers and sellers of all different kinds every day. Are the buyers telling you the market’s beginning to strengthen?

Matthew Whitlock:
Yes. I’d say generally yes, Steve. We’re in touch with buyers on a day-to-day basis and we’re noting two things: their interest is picking up in transactions, but the constant complaint we’re hearing from the buyers is really that there’s a lack of available product for sale that’s meeting their investment criteria. So I would say that the market is—we are getting indications from the investment community that the market is picking up, but we haven’t seen enough transactions to really support that.

Steve Monroe:
How about the sellers? Are they watching things in some of the large deals and looking at them and saying, “Hmm, cap rates are coming down, I may get interested”?

Matthew Whitlock:
I think that’s absolutely right, and I think that generally from the last time we had a growth in the market from a transactional standpoint, the would-be seller has become much more sophisticated. They’re watching transactions. They’re talking to us about the intricacies of particular transactions that have been announced in the marketplace. But generally what we’re seeing is a much more increased velocity in conversations when investors are talking about the disposition of their assets.

Steve Monroe:
These are investors who are operators, or financial investors?

Matthew Whitlock:
Really it’s both. Over the last growth period in senior housing we saw a lot of strategic partnerships between private equity firms and operating platforms. Today, the folks that are sort of most active in talking to us about a potential disposition are folks who made investments in the seniors housing industry based on a return analysis as an investment, and those are the folks who are most active in talking to us about dispositions.

Steve Monroe:
Okay. I know it’s always natural for any seller to want to get the highest price they can, but what’s the damage done going out into the market with a property that goes out at a significant premium to reality? What happens with that?

Matthew Whitlock:
Yes. It’s a great question, because everyone I know, including myself, wants to get a little bit more for their property than what the market will bear. I think that there is damage that a seller who goes out with an overpriced asset suffers, and what that damage is, is primarily in reputation. The investment community looks at assets the second time around with trepidation. Something was hidden, the seller is unrealistic, and the motivation to conduct business or create a transaction dwindles.

Steve Monroe:
Dwindles?

Matthew Whitlock:
Yes. I think that there is damage to going out in an overpriced situation.

Steve Monroe:
Because you see that a lot and I’ve always kind of wondered, does that actually ultimately drop the price even lower from what it could have been because of bad feelings of buyers, that kind of a thing?

Matthew Whitlock:
A perfect example, not to belabor the point, but we represented the chief restructuring officer of the bankrupt Sunwest Management platform in the sale of a number of their distressed assets. There was one particular asset that we brought to market three different times. Each time, we felt like we had gotten the highest price in the marketplace. At the seller’s direction, we went back with unrealistic counter-proposals. We had to reintroduce the product to the marketplace. The third time we marketed that property for sale and got an acceptable offer that was the lowest price of the three marketing assignments.

Steve Monroe:
So, it proves the point.

Matthew Whitlock:
Yes, exactly.

Steve Monroe:
And from your perspective, who’s going to be the most active buyers next year in 2011? Is it going to be the big guys? Is it going to be the financial buyers? Is it going to be REITs? Who?

Matthew Whitlock:
That’s a great question because the availability of equity capital that the REITs possess right now is daunting. They are obviously very much in the marketplace right now. I think that particularly the REITs have a challenge, and that is getting their equity out at deals that are accretive to their earnings, and obviously their dividend yield. I don’t see REITs as being the only players out there. Private equity is on the side—or has been on the sidelines, and has a tremendous amount of equity capital that is earmarked for seniors housing, based on the return economics that can be experienced in senior housing and perhaps cannot be experienced in other real estate asset classes.

Finally, I would say that there are a lot of regional operators who, over the last three to five years when the transaction marketplace was reasonably dormant, have spent a significant amount of time managing their operating expenses, and so their platform has become more efficient. Those small to medium-sized regional firms are looking for acquisitions, and what my partners and I are noticing is that they’re actually exploring going out of their region and if they’re West Coast operators, moving east towards Salt Lake and Denver; if they’re East Coast operators, they’re moving west towards New York and Appalachia. So we do see expansions of smaller regional operators.

Steve Monroe:
And partly because they are not seeing the acquisition opportunities in their own backyards, I’m sure.

Matthew Whitlock:
That’s exactly right.

Steve Monroe:
Is there a risk, though, with the health care REITs? I mean, they have spent the last 18 months paying down debt, raising equity, and their balance sheets are the strongest they’ve been in several years. Is there a risk that they’re going to crowd out the rest of the market for the big deals?

Matthew Whitlock:
I think the operative part of that question is “the big deals,” because right now, absent an unknown new investor into the marketplace, I would argue that the REITs, the five big REITs, generally have an economic advantage to the larger transactions, and you won’t see some public owner operating platforms. You won’t see the folks who we all consider large players in the industry being able to compete with the public REITs.

Having said that, I would suggest that we may see someone from the outside come back in. I mean, our industry has remained stronger than other real estate classes. You may see investment from the outside.

Steve Monroe:
And finally, you’ve started doing some debt financing at CB Richard Ellis, and I know you do have that in your professional background. Are you doing that for deals you’re working on? Are you doing that for separate deals? How is that going?

Matthew Whitlock:
It’s a great question, and I would answer it this way: We’re doing both debt as it relates to—in the transactional marketplace, sellers that we’re representing. We’re also doing it on transactions—on debt financings outside of the transactional marketplace.

We have a primary fiduciary obligation in the exclusive listing property process to represent the seller. What we found is that an informed investor generally has the ability to offer a higher price. Knowledge is good. What we represent to our sellers in the marketing process is, let us analyze your debt. If appropriate, let us provide the data to the investment community what new debt may provide. We’re very respectful of the fact that a good portion of the investment community has established relationships in the lending community. We don’t threaten those.

What we’re trying to do is provide the most important data points for the investment community to make their decision. To the extent that they want to work with us on a debt situation, we feel that adds to the value of the property for the seller.

Steve Monroe:
So that’s going well, you’re going to continue that?

Matthew Whitlock:
To the extent that our sellers allow us to, we absolutely are.

Steve Monroe:
All right, I hope you have a good year next year. It just seems like there’s more buzz and activity, so hopefully everyone will be a little bit busier.

Matthew Whitlock:
Absolutely. We appreciate it.

Steve Monroe:
Thanks for sitting with us. 
 

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