1031 Crowdfunding launches seniors housing REIT with initial all-cash acquisition plan

The Irvine, California-based manager will acquire properties on an all-cash basis before lining up debt when interest rates normalize.

1031 Crowdfunding this week launched a new private real estate investment trust focusing on the senior housing sector, with a plan to initially make acquisitions on an all-cash or short-term debt basis before lining up fixed-rate financing when interest rates normalize.

The Irvine, California-based real estate investment management company, which is targeted toward retail investors, structured the Covenant Senior Housing REIT to make it easier to move ahead with acquisitions when debt is more difficult to secure, Edward Fernandez, president and chief executive, told Real Estate Capital USA.

“We are favoring all-cash because the debt markets are so difficult today and it is delaying closing,” Fernandez said. “Lenders are participating in this market, but they are all participating with stricter requirements due to the higher rate environment. This has caused us to have to come up with a new approach. Our strategy is to write a check and buy a property with the understanding that when rates are more favorable, we can refinance and pull out that equity to use for acquisitions.”

The current interest rate environment is also affecting where the REIT initially is allocating capital. While cap rates remain low in the apartment sector, they have risen in the senior housing sector.

“If I buy an apartment building at 5.5 percent cap rates, but I’m borrowing money at a 6.9 percent interest rate, that debt is hurting my cashflow because I have negative leverage,” Fernandez said. “In senior housing, we were able to buy properties at an 8.5 percent cap rate and borrow money at 6.9 percent. That means I have positive leverage and can take down deals with positive cashflow.”

As a result, the REIT’s first acquisitions have been a trio of senior housing properties totaling $51 million. “We were able to put three-year debt on [the properties], so that we can refinance those assets when interest rates start going down,” Fernandez said.

Investment strategy

The firm is planning to build the REIT’s senior housing portfolio to about $100 million throughout 2024. The aim is to create a diversified portfolio of assets to mitigate any economic or other unforeseen risks, Fernandez said.

As a retail-focused investment manager, the firm is working to balance the needs of taxable individuals as well as mitigate the impact of a higher interest rate environment, particularly the ability for investors to be able to complete tax-deferred exchanges.

There is concern among individual investors that the popular 1031 exchange could ultimately be eliminated due to comments President Joe Biden made on the campaign trail prior to the 2020 election.

“In my industry, this has a meant a lot of companies focused on products for 1031 exchange investors are creating REITs that would satisfy the deferral of taxes in the same way that a 1031 exchange would,” Fernandez said.

This meant that although the company in the past invested through Delaware Statutory Trusts, which allowed for the completion of 1031 exchanges, it will now expand its focus and invest through REITS, which allow for 721 exchanges. “The theory was that if 1031s were removed, investors would be able to accomplish an exchange through a different structure,” he said.

There is an additional perk to investing via the REIT structure. Unlike with DSTs, the firm will have the flexibility to refinance or put into place new debt. “On a debt component, we have a lot of levers and flexibility to bob and weave, based on what the economy is currently doing today, and what it could potentially do in the future,” he said.