Merrill Gardens, a seniors housing developer based in Seattle, found an unusual buyer this March for 26 of its seniors housing properties: a real estate investment trust (REIT) in Canada.
Chartwell Seniors Housing REIT, based in Mississauga, Ontario, paid $346 million for 2,374 assisted-living and independent-living apartments in Texas, Florida, and six other Southern states. That works out to about $168,000 per unit, an above-average price for a portfolio of mid-market properties.
But the high price Chartwell paid for Merrill’s portfolio is nothing compared to the $453,000 per unit that the same REIT paid for the Bristal, a package of five high-end seniors properties in Long Island, N.Y., in February. Engel Burman Group, based in Massapequa, N.Y., sold the five assisted-living communities at the unusually low capitalization rate, for a seniors property, of 6.5 percent. A cap rate represents the income from properties as a percentage of their sales price.
Strong demand and a shortage of new construction have attracted new institutional investors both inside and outside the United States who are paying increasingly high prices for seniors housing properties.
The average price of assisted-living and independent-living properties has nearly doubled in the last four years, from $72,700 in 2002 to $139,300 in 2006, according to a report by Irving Levin Associates, Inc., a Norwalk, Conn.-based research firm.
As prices rise, cap rates for seniors properties have dropped nearly 200 basis points over the last three years to reach an average of 8 percent for independent-living properties and 9.2 percent for assisted-living properties in 2006.
Portfolios of properties earn even higher prices. “Almost all of the portfolios sold with cap rates of 8 percent or lower,” said a report by Irving Levin Associates.
Cap rates for the best portfolios of seniors properties have dropped nearly 300 basis points over the last three years, and now typically range between 6 percent and 7.5 percent for independent-living properties, and between 7 percent and 8.5 percent for assisted-living properties, according to Alan Plush, senior partner of North America for HealthTrust, a San Jose, Calif.-based firm that appraises seniors properties.
These rates have gotten about as low as they can reasonably get, according to the experts at Irving Levin, given the unavoidable risks that come with seniors housing, like providing some level of food and medical services.
The seniors housing business was wracked with overbuilding and poor management in the late 1990s. Many projects failed, frightening investors away from seniors housing.
But today, tighter lending standards and a shortage of buildable land have reduced the risk of overbuilding and kept weak operators out of the business. Most lenders these days will deny credit to seniors housing developers if their team does not include an experienced seniors housing manager.
“The seniors housing industry has finally gotten its act together,” said Mel Gamzon, president of Senior Housing Investment Advisors, the firm that helped arrange the Merrill Gardens sale.
Developers now finish roughly 30,000 units of seniors housing a year, less than half the number of apartments produced yearly in the late 1990s, according to reports from the American Seniors Housing Association.
The shortage of new properties has kept occupancy rates high for the industry. Occupancy rates in the Merrill Gardens portfolio averaged 95 percent.
The boom in buying and selling seniors housing properties, now well into its third year, shows no sign of slackening. “The parade of portfolios and high-quality single properties continues to come onto the market, with record levels of capital waiting to snatch up the next offering,” said Steve Monroe, managing editor of the SeniorCare Investor, a seniors housing newsletter published by Irving Levin Associates.
Investors are so eager to buy that they are willing to use unproven assumptions, such as income from proposed ancillary services or from tenants that have not yet moved into communities still leasing up, to justify the high prices they pay, Monroe said.
Overall, fewer super-luxury seniors properties sold in 2006 than in 2005—but not for lack of trying by eager potential buyers. A relative shortage of Class A communities for sale forced frustrated buyers to either pay extremely high prices for the few new luxury properties that traded, or settle for buying Class B seniors assets. The shortage of luxury assets actually drove the average price per unit of seniors housing down slightly to $139,300 in 2006 from $145,700 the year before as more Class B properties sold.
“The average price would have continued to increase if more high-end properties had come onto the market,” said Monroe.