KKR has successfully exited two senior housing deals since it started investing in the property type in 2012. The firm saw a fivefold gain on its investment in Sunrise Senior Living in 2014, selling its interest a little more than a year after acquiring a stake in the management company. Last month brought another exit, as Florida-based Kayne Anderson Real Estate Advisors bought Sentio Healthcare Properties, which owns 34 properties, in a deal valued at $825 million. KKR backed the non-traded REIT with $150 million in 2013, using capital from its first real estate fund. In an interview with PERE, Billy Butcher, KKR’s co-head of real estate acquisitions in the Americas, details how the property type has evolved and what the future holds for KKR’s investment in the space.
PERE: What originally attracted KKR to senior housing?
Billy Butcher: Going back to 2012, we made a proactive decision to focus on the senior housing space for several reasons. The biggest one was the operational intensity of the asset class, which plays to KKR’s strengths not just as a real estate investor but also our corporate experience, broad toolkit and approach to the sector from a customer-centric point of view. We have now invested behind this thesis multiple times since 2012, including our since-exited investment in Sunrise Senior Living.
PERE: How has senior housing evolved over the last few years?
BB: The success of the sector has attracted a lot of new development. You’ve seen the effects of that new supply in the competition that’s created in a lot of these local submarkets, both for residents and for very good leaders of the local communities. That’s a challenge the sector is facing right now that will probably be here for the next year or two. Long-term, we think the secular trends will continue to be very strong. Everyone talks about the demographics, though that’s probably not a here-and-now event because the average move-in age for most of these communities is mid-80s. The fact that baby boomers are in their 70s will have limited impact over the next decade, but will eventually be a great tailwind. In the meantime, the key to growth is providing a superior customer experience.
PERE: How has institutional capital’s interest in the property type changed?
BB: If you rewind back to 2012, the primary source of competition for deals was the three largest healthcare REITs. Meanwhile, you’ve had the emergence of some private equity firms dedicated to the strategy as well as more firms like us who are looking at the sector as part of their broader real estate platform. Then you have the introduction, with great intrigue and uncertainty, of foreign capital. Chinese capital, which three to four years ago most thought was focused on trophy buildings, is now very active in the senior housing space.
PERE: What does KKR want to do going forward in the senior housing space?
BB: The thesis that was true in 2012 is still true today. If you have the right partnership with the right operators, you can make good investments at all points in the cycle. We have ongoing relationships in the space, and we’re continuing to look for new ones, both on the pure real estate side where we’re partnering with operators, and investing in operators that own real estate or need capital to help them grow. We can do that either as a 100 percent owner or as a provider of growth equity for a partial interest in the company. We’ve found some operators to be interested in a joint-control investment structure that allows the entrepreneurial team or company to control their own destiny while still benefiting from our capital and partnership.