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A specialist in 1031 exchange transactions, Inland PrivateCapital Corp. can offer investors exposure to almost any assetclass in the commercial real estate family. Recently it doubleddown on its existing healthcare real estate offerings revealing anew strategic relationship with the Spectrum RetirementCommunities, a private owner, operator and developer of seniorliving communities.

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This relationship marked the launch of IPC's newest investmentplatform, which is focused on acquiring, owning and managing seniorliving communities across the US.

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"When looking at the historic investment performance for thisasset class—its recession-resiliency, growing demand drivers—inaddition to the current supply and demand imbalance that exists, webelieve the senior living sector is well positioned to offer ourmarketplace a product that intersects healthcare and realestate—each nearly 20% of US GDP and growing," Nati Kiferbaum,senior vice president, head of investment product strategy of IPC,said when the deal was announced.

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IPC is hardly alone in its investment. In recent years there hasbeen an influx of new investors in the senior housing space intenton grabbing market share of what has become a very attractive CREasset class.

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There are various drivers behind this trend. For starters, thedemographics favor continued growth for senior housing as BabyBoomers retire with an eye on their next stage of life.

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Also, debt is very cheap and new sources of capital for seniorhousing is on the rise. "From a borrower's perspective, theavailability of transitional and permanent term loan financingremains abundant to support their needs," says Jim Seymour, seniormanaging director, Capital One Healthcare.

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One example is Cambridge Realty Capital, which is expanding itsprivate equity options for senior housing finance. "Cambridge isfocused on operators and managers that have plans to expand theirfootprint but not necessarily the capital," says SVP Brent HolmanGomez.

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All of this had led to investor sentiment for senior housingthat is very bullish, explains Adam Lewis, national director ofMarcus & Millichap's national seniors housing group. "More thanhalf of the owners we speak with are interested in buying more inthis category," he says. "We are even finding investors that don'thave any investments in senior housing want to get into it."

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Separate numbers from CBRE tell the same story. Investorappetite for senior housing remains strong despite higher operatingcosts, with nearly two-thirds planning to increase their buyingover the next 12 months, it said in its US Seniors Housing &Care Investor Survey. "Demographic trends are positive for theasset class, with the baby boomers nearing the traditional age forseniors housing and nearly 9,000 turning 70 every day this year,"says Jeanette Rice, Americas head of multifamily research atCBRE.

Who Are These New Entrants?

Many of these new investors are apartment investors that want tosell multifamily properties, which are currently at low cap rates."They like the idea of arbitraging into senior housing for higherreturns," Lewis says.

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Some of these investors already have a focus on needs-based realestate and are simply expanding their range. Access Industries, aninstitutional real estate investment firm, falls in that category.It recently partnered with JEA Senior Living, a senior careprovider, to acquire and develop seniors housing nationwide."Demand for our communities will rise in the coming years, andAccess is well-positioned to help us reach potential new residentswhile maintaining the high standards we have set for ourselves,"according to JEA Senior Living CEO Cody Erwin.

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The main characteristic, though, of these new investors is thatthey are private entities; or put another way, they are not REITs.In short, the investor profile has shifted for senior housing:private investors, followed by institutional investors, are nowleading the charge as REITs have pulled back significantly,according to Real Capital Analytics.

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Since 2014, private investment in the sector has ranged from$5.4 billion to $6.9 billion annually, according to RCA, and forthe last three years private investors were the largest investorgroup.

New Investors, New Risks

The influx of new blood into senior housing is undoubtedly goodfor the asset class. Yet, as these new companies enter the market,they are facing risks not seen in other CRE asset classes.

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Partnering with the right operator, for example is crucial,Lewis said. "If they don't have the right operator that will be acurveball. It's not enough just to have the capital lined up toacquire an asset—you need a partner to navigate the regulations andthe actual healthcare."  For an experienced partner, theseissues are just part of the day-to-day operations, Lewis continues,"but for new investors it can be a problem."

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There are also higher barriers to entry than some other classesof real estate, especially when dealing with the acquisition oflicensed facilities, such as a hospital, senior living facility orskilled nursing facility, says David Lari, partner at Cox, Castle& Nicholson LLP.  "If you're dealing with an on-campusmedical office building, many of them tend to be ground lease andyou need to navigate through those issues."

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Investment groups also need to understand their tenant mix andthe long-term desires of the local hospital system when theypurchase on-campus buildings, Lai continues. "In essence you'redoing a joint venture when you're buying an on-campus asset, whichhas restrictions with the hospital system. If you're not well awareof their short- and long-term plans and how you're going to fitinto those, you could get burnt quite easily."

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There are other issues these new investors must face, althoughthese are likely to be more familiar. As with other asset classes,costs are rising for senior housing in both labor and construction.Indeed, property operating and development costs remain the topconcern for investors (43%), increasing in relevance from a yearago, according to CBRE. Construction activity (oversupply) alsoincreased as a top concern for investors (22%).

The Forgotten Middle

Also the demographics, while indeed favorable, have a downside.Namely, while there will be strong demand for senior housing it isdebatable whether all of these new users will be able to pay forsenior housing facilities. The US, after all, is in the midst of aretirement crisis, with numerous studies showing that few Americanshave saved sufficiently for their golden years. Research releasedat the National Investment Center for Seniors Housing & Care'sHealth Affairs Forum earlier this year finds that by 2029, thenumber of middle-income Americans over 75 years old will nearlydouble to 14.4 million and 54% of those senior citizens won't beable to afford senior housing and care, even if they've committed100% of their annual financial resources. In short, while themarket for senior housing and care—including independent living andassisted living communities—has been expanding to address awide-range of complex needs, these facilities are often out of thefinancial reach of the 8 million middle-income seniors, 75+ yearsold.

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The study concludes that this new 'middle market' for the seniorhousing and care industry is going to require both the public andprivate sectors to preemptively act so that these seniors canafford the housing and care they will need. As for specifics, well,the report offers little. "The study hasn't created a solution asof yet, it is just putting a spotlight on it from a policymaker orlegislative issue," says Beth Burnham Mace, chief economist anddirector of Outreach at NIC.

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"As baby boomers age and want to remain sociable, there willneed to be innovative and interesting housing options presented inthe marketplace including increased co-living/co-housing options,"Mace says.

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Fortunately, there are glimmers of this beginning to happen. Forexample, along with new investors new operators are also enteringthe market, Holman Gomez says. "Within skilled nursing, forexample, there is a whole new generation of operators specializingin this category. They are not held back by legacy operating plansand they are pumping new life and energy into the business, whichis getting the attention of capital."

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As for the capital markets, he adds, they are realizing thatthere are various ways this business can be run well.

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Also these investors and operators are finding ways to mitigatesome of the current concerns of the space. "With new supplybeginning to taper, operators will leverage rent growth to helpoffset rising costs and maintain a healthy bottom line," says ZachBowyer, who leads JLL's valuation & advisory servicesfor senior housing. "We are beginning to see innovative designtrends, operating models and technologies take hold as potentialindustry disruptors," he adds. "It's a very exciting time to be inthis space."

New Medicare Rule Will Trigger More Healthcare M&AS

Medicare has always been a highly complex and intricategovernment program. So mammoth is its reach, in fact, that evenminor changes will have an outsized effect on the healthcareindustry, particularly skilled nursing. So it will go with a newchange in Medicare reimbursement rules, which Philip Krispin, thedirector of Eastern Union's Healthcare Group, argues will triggeran uptick in M&A activity in the sector.

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Briefly, the federal government has changed the way itreimburses skilled nursing facilities. Last summer, it revealed aplan to switch from a formula based on Resource Utilization Groupsand instead adopt a Patient Driven Payment Model system. The newPDPM system went into effect on October 1.

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Krispin explains that the outgoing system, which was notoriouslypaperwork-heavy, had been clustering patients into therapy paymentgroups based on the amount of therapy they receive, regardless ofthe individual's unique characteristics, needs, or goals. "Medicaresays that the new PDPM approach will now put 'the unique care needsof the patient first,'" he says. "It aims to focus on a patient'sindividualized needs and characteristics."

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The goal of PDPM is to improve payment accuracy andappropriateness, Krispin says. Medicare expects it to also reduceoperators' administrative burdens. "The industry agrees that thenew approach provides new opportunities for investors in terms ofprofitability,"—namely that PDPM is expected to reduce paperworkburdens and regulatory risks, while generally avoiding major cutsto operators.

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So how will this affect the mindset of owners or operators? Andwhy would such a change lead to more asset sales? Krispin'sresponse: Whenever there's a major change to the industry, it tendsto keep the volume going as far as M&A is concerned.

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"The most sophisticated owners and investors have long seen thechance to operate their skilled nursing facilities more profitablyunder the new system," he says. "Operators can't make this happenjust by snapping their fingers. The changes are fairly complex, andthey involve creating new administrative structures—with a numberof new clinical categories—to align themselves with the new PDPMformat. Owners and operators who've been properly adaptingthemselves to the new system will be in the best position to getreimbursed in line with the actual care they're providing."

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Investors and companies that have been sitting on the sidelinesare the ones likely to lose out, Krispin says. "The winners will bethose who have been figuring out ways to use the new system totheir benefit, and who make sure they're going to be reimbursed inline with the actual care that they'll be providing."

Acquisitions Versus Development

Seniors housing and long-term care executives are optimisticabout acquisitions, but are not so bullish on the development ofnew properties going forward, according to a survey by Capital One,which found that 36% of surveyed executives believe thatacquisitions present the most opportunity for growth, with 30%naming repositioning as the top option.

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However, the development of new senior housing and long-termhealthcare properties garnered only 14% of the vote in comparisonwith 24% who said the same in 2018, perhaps indicating a shift ininvestor appetite as the National Investment Center for SeniorsHousing & Care recently revealed that the seniors housingoccupancy rate reached its lowest point since 2011 during thesecond quarter at 87.8%.

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Either way, Capital One states that the quality of staff andcare was seen as far and away the best way for seniors housingfacilities to differentiate themselves from their competition, with74% of respondents stating so.

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"Providing the highest quality of care and service to residents,in the most cost-effective manner possible, will continue to be aprimary focus for owner/operators in the senior housing space,"says Chris Taylor, managing director at Capital One Healthcare.

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