Texas' Seniors Housing Sector: Just for Well-Capitalized Investors

And, they say that Texas trading is active in a market considered overbuilt by the industry and where returns are riding somewhere between 13% and 20%. Those tapping into the profitable segment, however, aren't the large corporations, Steve Mentesana, Dallas-based Malone Mortgage Co.'s commercial loan originator and health-care specialist, tells GlobeSt.com. "The buyers are small, regional players who are picking up the pieces for the industry," he says. The profit makers are those who didn't float an IPO and didn't build aggressively as the nation's Baby Boomers pushed past 50 years old.

The Texas market, says Mentesana, is a reservoir of opportunity, with buyers eyeing as much as 20% cash-on-cash return. At Malone, nearly 90% of the senior housing loans these days are going for acquisitions. More and more properties are coming to market as many corporate owners now look to funnel their wellspring of wealth into other industries.

Texas' prime example is Dallas-based Meditrust Cos., which has been selling off all health-care interests and channeling proceeds into its favorite son, La Quinta Inns Inc. As of April, Meditrust had reaped $441 million from the sale of 78 health-care facilities and was looking for buyers for the remaining 120 long-term skilled nursing facilities.

The 2001 report of the American Seniors Housing Association estimates there are 2,248,900 units in 20,335 properties nationwide. Of those, 529,000 units are contained in 7,090 assisted living properties. Leading the pack is congregate living, a teaming of assisted and independent units, with 709,200 units. Of the 28,946 seniors' units under construction nationwide, 38.7% are assisted living in comparison to 28.3% for congregate facilities. And, that new construction is taking place primarily in Southern California, Chicago, Los Angeles, Detroit and Baltimore-Washington DC.

"Texas has been overbuilding," says Mentesana. Texas, California and Florida each boast in excess of 18,000 units.

Jack Killough, a senior director with Dallas-based Holliday Fenoglio Fowler LP, tells GlobeSt.com that "the industry is going through some tough times right now." Lease projections have fallen short for many operators, resulting in a capital drain. "I think that's where most of the problems in the industry are coming from," he says. "Over time, good operations and good demand based on an aging population will help curb some of these problems."

Killough says he's hearing that lenders are favoring age-restricted apartment complexes because they can be financed through regular multifamily conduits. Independent living properties also fare better than assisted living and skilled care operations, he says. The problem is rooted in leasing. Fannie Mae and Freddie Mac require better than 90% occupancy for borrowers in the senior housing sector and most assisted living operations just can't meet that level.

Still, says Killough, there's money to be had for the right operator. "A well-capitalized company can find all the permanent capital that it needs," he says. And, the well-heeled operators, such as Prudential Realty Capital Partners, isn't looking at the distressed market for bargain basement specials. Prudential's pension fund clients like the returns of 13% to 14%, but they want stabilized properties, says Killough.