Spigot runs dry for Chinese senior-living acquisitions

Chinese investors showered the U.S. senior housing market with money in 2016 and early 2017, buying properties operated by companies like Brookdale Senior Living and Genesis Healthcare. Those investments dried up in mid-2017, and some experts say they’re unlikely to return to previous levels any time soon.

The Chinese government has in recent months been limiting real estate investments in other countries following its high-profile takeover of the Chinese insurance company that acquired the Waldorf Astoria hotel in New York City for nearly $2 billion. The government indicted the company’s former chairman for financial crimes.

That restricted dealmaking goes both ways, with some would-be buyers reconsidering their transactions in light of heightened government scrutiny, said Jim Costello, senior vice president of Real Capital Analytics, a real estate investment market data analytics firm. “The restrictions on further capital flows are going to be casting a bit of a shadow for a while on these groups,” he said. “They’re going to be cautious.”

Chinese private equity firms and insurers began investing in U.S. senior housing companies in 2015, according to Real Capital Analytics. There was a major spike in the fourth quarter of 2016, when Chinese acquisitions in the sector hit $493 million, or nearly 15% of all U.S. senior housing acquisitions that quarter, Real Capital Analytics found. That’s the quarter that the Chinese firms Cindat Capital Management and Union Life Insurance announced a joint venture with Welltower to own a 75% interest in its portfolio of Brookdale Senior Living and Genesis Healthcare facilities in a $930 million deal.

Brookdale’s stock value has fallen sharply since that deal. It was worth about $18 per share in January 2016, but has slipped to less than $7 per share. Genesis’ stock price hovered around $3.50 at the beginning of 2016 and is now worth less than $2 per share.

Chinese acquisitions in U.S. senior housing topped out at $629 million in the first quarter of 2017, more than 13% of total senior housing acquisitions that quarter, according to Real Capital Analytics.

Since then, though, Real Capital Analytics hasn’t recorded any Chinese acquisitions in domestic senior housing. The firm’s analysis, which includes assisted-living facilities and nursing homes, only counts deals worth at least $2.5 million.

Steven Shill, partner and national leader with the BDO Center for Healthcare Excellence & Innovation, said some Chinese investors are buying stock in those companies instead of acquiring assets. He said he’s working on such a deal in the $500 million range.

In March, for example, the Hong Kong-based firm Fosun International bought a 5.11% stake in Brookdale, according to a Securities and Exchange Commission filing.

Chinese investors are interested in U.S. senior housing for a number of reasons. Mostly they believe the sector will deliver a steady, stable yield over time, especially given the wave of baby boomer customers expected over the next 20 years, Costello said.

That was the reason Cindat CEO Greg Peng gave when his company announced its first U.S. healthcare investment in November 2016. “With aging demographics and U.S. healthcare trends driving the need for innovative healthcare infrastructure, we believe the sector represents an attractive long-term investment opportunity,” Peng said in a statement at the time.

Some experts say investors also hope to glean knowledge from their seniorhousing portfolios to inform similar development in China. The norm in China has long been for aging parents to move in with their children. The country’s long-standing one-child policy—which restricted couples to just one child until 2016—complicates that tradition, Shill said.

Today in China, there is an “enormous amount of interest” in building up the senior-housing sector, which isn’t as developed as in the U.S., Shill said.

Jason Dopoulos, senior managing director with the healthcare and senior-living financial advisory firm Lancaster Pollard, agreed Chinese investors are largely trying to learn how to operate senior-living facilities. When he visited Chinese facilities last May, many were not properly marketed, their staffing ratios were out of whack and they weren’t profitable.

In the U.S., it’s more culturally acceptable to place parents or grandparents in senior-living facilities, Dopoulos said. “Other countries haven’t gotten there yet,” he said. “I think that’s why they’re interested in seeing how it works because our demographics are huge for senior living, but theirs dwarfs ours by a gigantic magnitude.”

At the height of the dealmaking in 2016, the Chinese firm Union Life through a subsidiary bought 90% of the interest in a joint venture with Summit Healthcare REIT, which then owned 15 senior-housing properties. In 2016, Chinese insurer Taikang Life Insurance agreed to buy a $1 billion stake in NorthStar Realty’s healthcare real estate portfolio. And as President Donald Trump fans a trade conflict with China, there is talk of China potentially devaluing its currency. If that happens, Costello thinks Chinese investors with stakes in U.S. companies will hold on to them for a long time, assuming they’re not under scrutiny from the Chinese government.

Genesis spokeswoman Lori Mayer described Cindat and Welltower as her company’s landlords, with a lease that’s structured no differently than the firm’s other leases. A Brookdale spokeswoman declined to comment.

For senior-housing operators, that could be a good thing, since landlords like the Chinese investors—which are holding assets for capital preservation and to learn from them—likely won’t be as aggressive as, say, a U.S. pension fund, when it comes to negotiating rent, Costello said.

Some in the industry haven’t written off the Chinese as investors. Beth Mace, chief economist for the National Investment Center for Seniors Housing & Care, said at the group’s annual conference last month, that she hadn’t see any sign Chinese firms’ interest had waned.

Dopoulos attended the NIC conference and said he spoke with officials from several Chinese firms actively pursuing senior-housing deals. “I don’t think it’s going to stop,” he said. “I just think it went really fast for a while and now we’re just slowing down a little bit.”