Senior Living Portfolio Premium

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By Scott McCorvie | CEO, Enhance Senior Living

Learn about Senior Living Investment Brokerage and Senior Living Investment Advisory Services at Enhanced Senior Living.

Senior Living Portfolio Premium

During discussions with varying senior living owner/operators and smaller investment groups about their exit strategy, I hear the phrase, “portfolio premium” thrown around a bunch. But, I question if these groups really understand the methodology behind the portfolio premium, and how to truly maximize this premium within the senior living industry. So, in this article, I’ll analyze the methodology behind the premium, and discuss ways to maximize the premium.

The portfolio premium is really based on the economic theory of economies-of-scale, along with the acquisition and investment appetite of the larger, listed healthcare REITs. Each acquisition takes 60-120 days of negotiation, legal documentation, capital sourcing, and due diligence to close. The amount of man hours, energy, and dollars spent on a single-asset acquisition varies very little to a larger 10-asset portfolio acquisition. Therefore, the portfolio premium partially reflects all the time and energy used in developing and/or acquiring single assets to ultimately sell in a single transaction to a larger investment group.

Additionally, the acquisition appetite of the larger healthcare and investment groups can alter the premium. Investment groups grow through new acquisitions and development investments. However, when an investment group has $20-30 Billion in assets under management, they need to make larger portfolio acquisitions (hundreds of millions) to really move the needle. And, since the larger healthcare REITs have the lowest cost-of-capital of healthcare real estate investors (can create new equity and bond offerings), they can afford to pay the highest prices and obtain the same return hurdles as investment groups with a higher cost-of-capital.

Now, both proceeding theories are not unique to senior living, as they are utilized in all institutional commercial real estate investment strategy. However, senior living does have some unique attributes that can really impact the portfolio premium. Besides physical attributes like size, market, design, and quality of the assets, additional portfolio premium variables are geographic clusters, operator/management selection, and operating/legal structure. Healthcare REITs and investment groups typically already have relationships with operators/managers, and like the ability to change the management (if desired) post acquisition to groups already in their portfolio. And, since it’s not as efficient for senior living managers to operate a single-asset outlier to their geographic concentration, it’s most appealing to have clusters of 3-5+ properties in any given geographic zone. Additionally, since it’s always disruptive and risky to change management, having institutional-quality management/operators in-place, is always desired. Last, the portfolio premium can be impacted by the cross-collateralization of the lease and/or management structure.   

To learn more about ways to enhance our senior living industry, be sure to subscribe to the podcast, The Inner Circle of Senior Living.

Is Senior Living Even Real Estate?

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By Scott McCorvie | CEO, Enhance Senior Living

Learn about Senior Living Investment Brokerage and Senior Living Investment Advisory Services at Enhanced Senior Living.

Is Senior Living Even Real Estate?

I laugh sometimes when I talk with different investment groups trying to enter the industry. They rattle off all types of ad-hoc numbers and calculations from complex spreadsheets, and quote different terms and sophisticated verbiage from varying market studies. Now, I’m not saying that accurate investment proforma models and thoughtful market studies are not valuable tools, but I wouldn’t go “all-in” just because the investment model returns look good, or the calculated supply / demand analysis shows unmet beds. 

In fact, I sometimes question if senior living is even real estate? Sure, location is key, and building design, construction quality, and offered amenities are all very helpful, but to have a successful senior living community, you need to think far beyond typical commercial real estate metrics. I know some developers new to the industry think, we’ll just add any manager you want at 5%, and we'll lease it up in 12 months. Voila! Sure, this manager mentality may work for office, industrial, retail, multifamily, and even hospitality, but senior living is in a whole different class. 

Over the past 15 years, I’ve worked on successful senior living projects, and not-so-successful senior living investment projects. The single most important variable came down to one thing – the operator. The operator is so crucial for the overall success of any senior living investment. I can't stress this enough. I’ve changed operators on senior living investments without ever touching the real estate, and experienced almost immediate and dramatic financial results. This would not be the case for any of the other commercial real estate classes.

One very successful regional operator once told me during a property tour, “Scott, I wouldn’t let the real estate get in the way of a successful community.” And, this is so true! It’s way more than just ‘sticks and bricks,’ but it’s really about the resident care, programming, and overall reputation that drives a community's success. Strong word-of-mouth referrals are still the best and largest marketing source, and this does not cost one cent in the marketing budget. Overall, investment groups need to think beyond the real estate, and focus on successful operator partnerships that continually improve quality of care, create engaging programming, and cater to the overall resident satisfaction.

Learn more about ways to enhance our senior living industry by subscribing to the podcast, The Inner Circle of Senior Living.

The Greatest Competition in Senior Living

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By Scott McCorvie | CEO, Enhance Senior Living

Learn more about Senior Living Investment Brokerage and Senior Living Investment Advisory Strategies at Enhanced Senior Living.

The Greatest Competition in Senior Living

When most people think of the greatest competition for a seniors housing community, they think of the impressive new development being constructed down the street or a community nearby undergoing a large renovation project. However, this is inaccurate. The greatest competition for any seniors housing community is a residents’ own home. Seniors housing is still one of the only products where most of the end-users still don’t want to use the product, but are asked and suggested to use it by family and friends.

So, how do we change the negative image within the industry? How do we make seniors housing a preferred destination? The first part is changing the terminology. I cringe when I hear someone say A-L-F, or ALF. Facility, is the ugly F-word within the industry. When I think of a ‘facility,’ I think of long hallways with white paint, fluorescent lighting, and hospital beds. If you’ve toured a seniors housing community built within the past two to three decades, you know this is an inaccurate image. Replacing the word ‘facility’ with ‘community’ or ‘residence,’ is the first part in enhancing the image and overall brand of seniors housing. 

Next, is implementing thoughtful programming that creates a new and upgraded lifestyle for the resident. Unfortunately, studies show that residents still spend the majority of their time within their unit. This is no different than the residents’ own home, except for a much smaller living space. To make seniors housing a preferred destination, we must provide something their home cannot provide. This includes new connections and enhanced socialization and activities. New lifestyle programming now includes cooking classes, fitness classes, yoga, wine tasting, dancing lessons, and educational courses. We need to think beyond bingo and bridge.  

Overall, the industry has made great strides over the past few decades in enhancing the seniors housing image. However, there is still so much more we can do. With improved technology, a potential senior resident can now safely live in their home longer than ever before. To make seniors housing a preferred destination, we must first change the brand terminology, and then create a lifestyle upgrade that will be shared with family and friends. Positive word-of-mouth advertising is still the most powerful marketing tool a seniors housing community can implement.

Senior Living JV Investing

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By Scott McCorvie | CEO, Enhance Senior Living

Learn more about Senior Living Investment Brokerage and Senior Living Investment Advisory Strategies at Enhanced Senior Living.

Senior Living Joint Venture Investment

I get a lot of questions regarding different structures for seniors housing real estate investment. Most of you are probably aware of the traditional sale-leaseback, or sale-manageback (RIDEA) in seniors housing. But, with private equity groups dominating the transaction markets lately, there's a new focus on JV transactions. In this article, I’ll analyze the basic structure of the JV, waterfall cash flow distributions, and the pros and cons of the structure for seniors housing.

Just as the name states, a joint venture is a shared partnership between two or more entities within a single investment. The JV includes at least one Limited Partner (“LP”) and at least one General Partner (“GP”). The LP owns the majority position of the equity, and is typically an institutional investment group (REIT, Private Equity, Family Office, etc.). The GP will own a minority position in the equity, and is typically the seniors housing developer/operator. Together, the GP and LP will own 100% of the equity, with typical splits being 80/20, 90/10, or 95/5. This structure is frequently used for new development, but can also be used for acquisitions – especially when there’s material upside from improved operations, unit conversions, renovation, market reposition, etc.

So, why mess with the complexity of a JV structure for seniors housing? I’ll look at this from both the LP and GP perspective. For the LP, it creates less financial risk as they typically take a preferred position to the cash flow distribution (discussed later) from both operations and future sale. It’s also beneficial to the LP as it creates favorable alignment for the operator to be fully invested in the overall operations and bottom line (compared to a management fee arrangement). For the GP, it creates higher compensation for improved operations and value creation. It also gives the GP more control over major decisions like renovations, conversions, capital expenditures, management decisions, financing, and dispositions.  

However, there are some things to consider before jumping into a JV arrangement. First, on both sides, the legal fees are much larger and can be much more time-consuming negotiating the documents. Also, the GP will need to provide 5-20% of the equity, which will be illiquid for the life of the investment. The GP, as partial owner, is also typically bound by the covenants and guarantees of the financing. There are also things to consider on the LP side. The LP, although majority owner, does not have absolute control over the investment and any future capital decisions (refinancing, disposition, etc.). Also, the LP typically cannot quickly change the operator if the performance goes south (assuming the GP is the operator).

And, the biggest question is how does the LP and GP split the cash flows from operations and value creation? This is the biggest risk mitigate for the LP and incentive for the GP. The JV documents will list out how the cash flow is distributed for both groups, and is typically structured as a “waterfall” with multiple tiers based on pre-determined financial metrics (“hurdles”). Each JV is unique, but the LP typically has a preferred position “pref”, and will receive all cash flow, or pari-passu (pro rata share) of cash flow until a predetermined investment hurdle is achieved (i.e., 8% equity return, 12% leveraged IRR, etc.). After the first hurdle is achieved, the GP will start receiving an unequal (larger) portion of the cash flow compared to their equity investment. This unequal distribution is referred to as their “promote” and will continue to increase as the financial performance increases. The waterfall usually contains multiple hurdles, with the GP receiving larger portions of the cash flow upon meeting each hurdle.  

Overall, JV structuring is present in all commercial real estate investing, but is predominant in seniors housing. This is largely due to the strong operational nature of the industry, and how critical it is to have the right operator (and fully aligned operator) to achieve maximum financial success.

To learn more about ways to enhance our senior living industry, be sure to subscribe to the podcast, The Inner Circle of Senior Living.