In the 1990s, senior housing emerged as a darling of the multifamily industry, as the aging of the baby boomers spawned unprecedented growth in the assisted living properties. Then the bottom fell out. Unsophisticated operators and unchecked building activity spun the industry into a downturn that still has lingering effects today.
But, given the right operators, senior housing can be a stable and sensible investment, and conservative, traditional core investors are taking notice. Nowhere is this more apparent than a recent deal between Benchmark Assisted Living in Wellesley Hills, Mass., and its new foreign investor, Kuwait Finance House, which recently invested $148 million in 11 Benchmark properties.
“The fact that Benchmark was able to secure a core investor to its portfolio was a positive sign for the industry at large,” says Thomas Grape, founder, chairman, and CEO of Benchmark Assisted Living, which owns and operates 33 properties, representing more than 3,000 assisted living, independent living and Alzheimer's units in New England.
And the Kuwaitis know what they are doing. Overall, the Kuwaiti group has more than $11.5 billion in assets with real estate holdings in the United States, Europe, and the Middle East.
Here's how the deal got done:
The Seller: Marc Davidson, AEW Capital Management– Like many other investors in the mid-1990s, AEW looked at the demographics and wanted to get into senior housing in New England. “We thought we would get anywhere from 11 [percent] to 13 percent return on cost,” says Marc Davidson, principal and head of AEW's Partners Group of AEW Capital Management, an investment advisory firm based in Boston. “We liked New England because, while it may not be land-constrained, you are constrained from an entitlement standpoint.”
But moving into an industry in its infancy can be frightening. To soften the learning curve, AEW, an opportunity investor, wanted to partner with an experienced operator familiar with New England. Its choice:
Benchmark Assisted Living. Benchmark and AEW soon created an 11-property portfolio covering five states, thanks to new development and acquisitions. Unfortunately, when the senior housing market stalled in the late 1990s, so did the money. Institutional capital fled and so did the lower cap rates Davidson had anticipated.
But despite the shakiness in the sector, AEW still kept the portfolio about a year longer than planned. “It was a development venture,” Davidson says. “Maybe we thought we would exit a year earlier, but, because you're buying the land, entitling it, and developing it, you really didn't have your portfolio opening up until 2001. Then you want the benefit of stabilization.”
When senior housing did recover and those Benchmark properties opened, AEW knew it was time to sell its share of the business. “Cap rates compressed dramatically, and we executed our business plan,” Davidson says. “We created a significant amount of earnings.”