A Discussion with Alan Plush, Senior Partner, Health Trust, LLC
In the latest in a series of dialogues with key players regarding the current capital environment in the seniors housing and care industry, Michael Hargrave, vice president of NIC MAP®, recently interviewed Alan Plush, senior partner at Health Trust, LLC.
NIC: Initial data from NIC MAP is showing that over $8 billion traded in US seniors housing and care real estate in 2012 [this does not include the recent operating company trades, the Sunrise acquisition by HCN or the HCN/Chartwell deal]. This figure is down roughly 70% from 2011 when we saw over $27 Billion trade. Do you sense volume is going to pick up from current levels in 2013 or do you think 2012 volume is more indicative of a “normal” year?
PLUSH: I am not sure I know what “normal” really is for our industry sometimes. The paradigm shift of assets to REITs in some ways is similar to the “go public” wave that washed over the industry in the early years. The industry has always sought cheaper costs of capital (as do all industries) and a perfect storm in 2011 of low capital costs via the REITs, coupled with reasonable performance in the sector compared to other asset classes, and a pent up demand for asset pools that needed to exit their existing structure, resulted in the $27b wave. The following year, 2012, while strong, in my opinion reflects the smaller asset pool that remains that would be “REIT worthy”. Not that there aren’t still some big portfolios out there. My opinion is that there are fewer and we will not likely see a return to 2011 levels unless public entities were to be taken private. What I do see is a likely return to more new development, noting that much of this will be in conjunction with operators that are aligned with REITs via RIDEA or traditional structures.
NIC: We have seen recent analysis of sales pairs where cap rates have compressed significantly. What have you seen with regard to cap rate compression in 2012 and is it consistent among property type, investors and portfolio/non portfolio?
PLUSH: As we all know, the industry from the outside is relatively homogenous but from the inside we see numerous sub specialties. In general, we have seen cap rates rather flat throughout 2012, the exceptions being large cap transactions that include an operating platform in addition to assets (i.e., Sunrise). There remains a substantial bifurcation between “REIT quality” and non REIT quality assets, with a cap rate range of 6.5-8.5% for IL and AL/ALZ REIT vs. 8-10% for non REIT. SNF has remained rather flat hovering around the traditional 13%. We have seen a rather predictable “portfolio premium,” a phrase appraisers hate as they tend to be very difficult to prove with precision but nonetheless are clearly evidenced in transactions. The presence or absence of a portfolio premium (50-150 bps decline in cap rate that translates to an increase in value) has always been an indicator to us of a healthy and active market.
NIC: In 2012 there were two large profile operating company trades with Sun to Genesis and Plum (from GI Partners to Baybridge). Do you see this as a trend in skilled nursing (and possibly AL)?
PLUSH: Hard to say. Op co trades are similar to portfolio premiums, and I used to say that we only saw these trades when the market was very active. However the capital structure de jour allows more effective segregation of prop co from op co given the economic incentives to do this, so as a result I think we could see more of this going forward.
NIC: In 2012, we saw a continuation of ready access to capital on the part of health care REITs. In addition, we have seen several regional banks become more active and take on slightly more risk. We also heard a great deal of chatter with regard to memory care construction. All the while, HUD was turning in a record year. What sorts of activity do you see for the seniors housing and care capital landscape in 2013?
PLUSH: Crystal ball time. I love watching the business channels when they ask the guest “so what was your prediction for 2012 and how close were you?” My hit rate is around 50% I fear. However I am a firm believer in the physics of economic inevitability, and the key drivers I see for 2013 that will shape the industry include continue lower costs of capital (via the groups you mentioned), availability of an ever increasing and ever more skilled operator pool, tempered by the back drop of an economy that just isn’t improving very fast. And that will continue to impact the savings of our consumer base and the affordability of our product. The stock of seniors housing and nursing assets is not being replaced as fast as it ages, our demand pool is increasing, land and construction costs in most market areas remains depressed, and the product is accepted by the consumer. I thus see continued and modest new development, continued albeit toned down consolidation, likely consolidation of some smaller REITs by larger ones, and industry fundamentals remaining strong.
Monitoring the Recovery in Housing
After several years of being a drag on the economy, the past few months have seen the for-sale housing market turning into a bright spot. This past year was the first since the recession that there was sustained traction in the velocity of home sales and prices. Existing home sales through November have risen 15% during the prior 12 months and are expected to strengthen during 2013 as buying conditions remain favorable. Aiding buying conditions will be the continuation of low interest rates, as the Fed has signaled it will continue its ongoing purchase of mortgage-backed securities. The 30-year fixed conventional mortgage rate was 3.35% as of December, which is near historic low levels. While home sales overall continue to climb, the share of distressed sales is falling. The share of distressed sales declined from 29% to 22% during the past year.
The shrinking share of distressed sales has contributed to a renewed traction in home prices. In October, the seasonally adjusted 20-city Composite of the “S&P/Case-Shiller Home Price Index” rose 0.7% from the prior month and was also up 4.3% from a year ago. While most metropolitan markets are experiencing moderate increases in home prices, there continues to be a great deal of variation. The Phoenix metropolitan market has seen the strongest rise, with prices having increased 22% during the past year. Aside from Phoenix which reportedly has experienced speculation, most markets tracked by S&P/Case-Shiller saw annual price increases between 4% and 8%. Chicago and New York seem to be the laggards, however, as both of these metropolitan markets experienced annual price declines.
4Q2012 Data Shows Strong Absorption, Continued Occupancy Gains and Slower Construction Activity
On Thursday, January 10, NIC MAP released its 4Q12 data and reports. The seniors housing occupancy rate continued its recovery in the fourth quarter of 2012, while the pace of annual rent growth remained unchanged and overall construction activity declined. Key findings this quarter include:
- Continued solid absorption drove occupancy for seniors housing up to 89.1% in the fourth quarter of 2012.
- Seniors housing occupancy rose 30 basis points from the third quarter of 2012 and is now 210 basis points above its cyclical low of 87.0%.
- The occupancy rates for independent living properties and assisted living properties averaged 89.0% and 89.1%, respectively, during the fourth quarter of 2012.
- Both independent living and assisted living occupancies showed improvement over the prior quarter, rising 30 and 20 basis points, respectively.
- The occupancy rate for nursing care properties in the fourth quarter of 2012 averaged 88.1%, rising 10 basis points from the prior quarter.
For a snapshot of current industry performance in the fourth quarter of 2012, visit the NIC MAP Key Metrics on the NIC MAP website. To learn more about individual market performance or how your property performed against your competition, contact John Blumer at jblumer@nic.org to schedule an interactive web demonstration.
2013 NIC Regional Conference Online Community is now open!
We are very excited to announce the opening of our exclusive online community for the 2013 Regional Conference.
Registered conference attendees will receive an email with instructions on how to set up an online community profile. NIC’s 2013 Regional Conference online community offers tools to network and connect before, during and after the event. Online community participants can:
- View the profiles and interests of other attendees
- Build a personalized schedule of sessions to attend and export to Outlook, iCalendar and print
- Use as an interactive scheduling tool for meetings to:
- identify the dates and times you are available
- request a meeting or respond to an invite
- already scheduled meetings display as “busy” on the calendar but meeting details are not disclosed (i.e. who you are meeting with and where)
- Download speaker presentations
- Participate in discussions on issues that are critical to our industry today
If you have questions about joining the NIC 2013 Regional Conference online community contact NIC’s registrar at registrar@nic.org.