A shift in investor attitude toward senior housing is evident. While opportunity funds have been pursuing the real estate asset class for some time, core investors — those in search of stabilized assets — are now increasingly willing to step up to the plate. Case in point: Benchmark Assisted Living, a privately owned regional owner and operator of senior housing properties in the Northeast, recently entered into a joint venture with Kuwait Finance House (KFH). Specifically, KFH has invested $148 million in 11 properties through one of Benchmark's many funds. The deal is significant because KFH is a sophisticated international player whose holdings in U.S. real estate are valued in the billions of dollars.

Based in Wellesley, Mass., Benchmark owns and operates 38 senior living communities that include 3,800 assisted living, independent living and Alzheimer's units. The company employs 3,000 people and has a portfolio valued at $600 million. Over the past seven months, Benchmark completed about $250 million in acquisitions. NREI recently interviewed Benchmark's CEO Thomas Grape during the Assisted Living Federation of America national conference held in Atlanta.

NREI: What's the most significant aspect of Benchmark's joint venture with KFH?

Grape: We're KFH's first foray into senior living, and we took that as a nice compliment. To my knowledge, we're the first private company that's attracted a high-profile core investor into senior living, which is very good for the industry. The joint venture suggests that the investment community is recognizing senior living has reached a greater level of maturity.

NREI: Why is senior housing back on the radar screen of institutional investors?

Grape: With the compression in cap rates in other real estate asset classes, and with the amount of liquidity in the capital markets, there is a lot of equity that is looking for places to invest that will generate higher yield.

NREI: In what direction are cap rates trending in senior housing and why?

Grape: Twelve months ago, cap rates for senior housing were about 10%. Now, cap rates are in the range of 8%. There is still a premium over other asset classes, but the degree of premium has dropped. The cap-rate compression applies really to just the premier properties. Cap rates are several hundred basis points higher for the average property. But for the properties that are fully stabilized and in good markets, that's where the capital has been very aggressive.

NREI: What is the state of the industry today, following the overbuilding in the 1990s?

Grape: A lot of players that got into it in the mid and late 1990s really didn't have the operating expertise and knowledge, and even in a good market some didn't do a good job. There has been some consolidation in the industry. At one time, there were 16 public companies on the operator side; today there are four. In the top 30 MSAs, occupancy in assisted living is in the range of 92% to 93%. It's clearly recovered from the overbuilding that occurred in the late 1990s.

NREI: Which is the optimal model — to own senior housing or to own and operate it?

Grape: The jury is still out. There are some people who very clearly believe they shouldn't own, and they should just be the management company. We've been in the camp of wanting to retain ownership. We think that gives us greater long-term flexibility. The strategy that Sunrise Senior Living (NYSE: SRZ) and others have pursued might be right for the public markets, but whether the public markets are right for senior living isn't clear other than for Sunrise.