Mel Gamzon, president of Senior Housing Investment Advisors, Inc., is a prolific dealmaker in the seniors housing business.
Based in Fort Lauderdale, Fla., he has orchestrated some of the largest and most complex transactions in this sector over the past three decades. APARTMENT FINANCE TODAY asks him about the outlook for seniors housing.
Q: What lessons are there from past downturns that can help seniors housing investors today?
A: It's been a long ride, and who would have thought we would be dealing with today's global financial mess. Our industry has been affected by the calamity of circumstances that have gripped the nation. But thank goodness, we're not overbuilt in most markets, unlike offices, hotels, and other commercial properties.
Over the past 30 years of ups and downs, we have learned many lessons. We've painfully learned that demographics don't buy, people do. In other words, one cannot rely solely on theoretical market studies or statistics. This is generally a need-based product where the senior consumer has a motivation such as health-related issues, socialization, or the need for a safer and more adaptable living environment. Those issues will impact one's desire to move or not.
Probably, the most painful lessons have been dealing with the ebbs and flows of the capital markets. Since the beginning of this decade, underwriting standards have gotten tougher. Inflated pro formas just don't work. We have learned that investments must be tailored to meet the real needs of the consumer.
Q: Why are several leading seniors housing companies failing?
A: A few of the most visible players are having issues. Many companies are over-leveraged with loans that will need to be paid off in a tough environment for finance. Publicly traded entities also have problems with pressure from investors to increase their quarterly earnings per share in a down stock market. We'll get through it as lenders and investors hopefully recognize the unique nature of these assets.
We are going to see restructuring becoming more common in the months ahead; not just for some of the big guys, but also the regional players. We have excellent companies who just got caught in the housing market meltdown with product either in construction or recently opened. The very good news is that the business fundamentals remain relatively solid for the industry, and with a severe cutback in new seniors housing production, the industry will likely only witness a modest hiccup in the year ahead.
Q: If over-leverage is an issue, how is the capital crisis making the problem worse?
A: No question, currently we are in a state of limbo as it relates to securing new debt. It's tough out there to refinance except with the agencies and the Department of Housing and Urban Development. Debt remains elusive, and equity is for the most part on the sidelines. Pricing for financing is being hindered by the fear factor that plagues the nation. But that won't last forever as astute investors know that this industry's story is well-founded, and pricing will begin to come more in line with deal fundamentals over the coming year.
Over-leverage is pass©, and the infusion of new equity, although not cheap, will begin flowing once the overall capital system is reenergized. Patience is what we are advising our clients who are in the midst of real estate transactions. Several of our clients are rethinking their positions and have opted to renegotiate with sellers.
Q: Given all of these issues, why do you think that seniors housing will hold its value relative to other commercial real estate?
A: It's pretty straightforward. We are just not an overbuilt sector. Once the housing markets stabilize in most regions, senior consumers who still have trillions locked up in their homes will accelerate their pace into our communities. Take a look at the other real estate sectors. It's a disaster out there with values in certain sectors in a free fall.
Industrywide, seniors housing occupancy rates are at approximately 92 percent. Yes, this is down about 200 basis points from a few years ago, but still respectable. Rent discounting, while occurring in select regions, is still not the norm. We're holding up for now. To be sure, however, if the nation's economic malaise goes on for several years, even our somewhat recession-proof business will not be spared additional damage.
Q: Where are the opportunities for seniors housing?
A: While transaction volume is dramatically down from the 2005-2007 period, the smart money today is loading up for what could be the best buying opportunity we have seen since the early '90s. With cash flows generally unaffected due to stringent cost control measures by most operators and cap rates drifting upward, many of these assets and companies could be well-positioned for acquisition. The spread between parties has changed in favor of buyers. Over the past year, cap rates have moved steadily upward about 200 to 250 basis points, depending on the type and caliber of the real estate.
The opportunities are in both acquisitions and new construction, which would come online in the 2011-2012 time frame. We anticipate the deal flow to heat up in the second half of this year as banks, undercapitalized owners, and land owners come to the table for solutions.