Is Senior Living Even Real Estate?

/

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

/

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

/

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.

Senior Living Design Trends

/

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 Design Trends

Throughout my career, I’ve been fortunate to have toured hundreds of seniors housing communities in markets across the United States. Like many others, I can usually estimate the year the property was built when I first drive around the community. Seniors housing is a young industry, but there are some definite design traits and characteristics that have delineated each period and progressed through the years. In this article, I’ll examine the history of seniors housing design, as well as address some of the current and future design trends within the industry.

Seniors housing was really born in the 1980’s, but didn’t start to become a distinct and acknowledged industry class until the 1990’s. Still today, when I mention seniors housing, many people think of traditional skilled nursing facilities, or ‘nursing homes,’ with long corridors and semi-private units on either side. And, that’s exactly what you’ll find in the earliest seniors housing design. Communities built in the 1970’s to late 1980’s typically resemble skilled nursing facilities with long hallways, primarily semi-private or studio units, and limited common area and community space. As the assisted living product become more acknowledged, new development started to surge reaching a pinnacle in the late 1990’s. Most of these communities have a fairly similar design (think of traditional Brookdale or Holiday), but began to add more amenities like libraries and dedicated activity rooms, along with more options in unit types (although, still more skewed towards studio units). The prominent technology included pull-cords in the resident bedrooms and bathrooms.

The 2000’s refined the industry as it began to expand and become more sophisticated. Dedicated and secured memory care became a new product type, and additional amenities like movie theaters, fitness centers, larger lobbies and resident lounges began to emerge. The resident units also became larger with a greater selection of one-bedroom and two-bedroom unit types (with less studio units). The design still typically consisted of one-to-three story buildings with longer hallways on either side of a central dining room, but more resident lounges and courtyards emerged to add additional interactive space for the residents. New technology like building wi-fi and resident pendant call systems became standard.

So, what are the current trends in seniors housing? The main concept in today’s seniors housing design is to get the resident’s out of the units and engaged within the community. Instead of having the standard amenity rooms scattered throughout the community (library, computer room, game room, etc.) that are rarely used other than marketing tours, newer design trends incorporate a large, central community space that can be converted throughout the day (yoga, dance classes, cooking classes, movies, etc.). This creates a central, interactive hub within the community and helps provide interaction for the residents. Longer hallways are being replaced with connected ‘square’ designs to foster socialization and avoid isolation. Libraries are being replaced with ‘digital libraries’ that can be accessed through provided smart devices. Bistro’s and casual cafes are being added to the community to provide more dining options, as well as more social interaction meeting space for residents and families.  

And, the future is limitless and exciting for the industry. The focus will be on ‘lifestyle,’ so that residents want to move into a community for an upgraded quality of life. Technology will continue to be a main driver, which will include smart locks, digital records, new call systems, and interactive smart devices – all with the ability to be remotely accessed by the families. Virtual Reality is being introduced in memory care to help maintain and improve cognitive function. Also, modular design may help reduce the construction costs to cater towards a more affordable product. Overall, the industry has come a long way in a short time, and with constant innovation and improvement, the industry will continue to make a positive impact on the quality of life of residents and families well into the future.  

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

enhanceseniorlivnig.com | seniorlivinginvestments.com | srgrowth.com | generationalmovement.com