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.

Senior Living Design Trends

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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 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

Chatting with the Masters - Ross Sanders, CBRE

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Learn more about tailored senior living investment solutions at Enhance Senior Living.

In the next installment of Chatting with the Masters, I chat with seniors housing broker, Ross Sanders. Ross has been within the industry for many years, and spent numerous years as an institutional investor for a healthcare REIT. In this series segment, we'll discuss current seniors housing transaction trends, as well as some helpful questions to consider before selling an asset. If you have any segment ideas, or need help navigating the seniors housing growth and investment space, feel free to e-mail Scott McCorvie at scott@srgrowth.com.  

Question: How would you describe the seniors housing marketplace right now? What groups are you seeing as the primary buyers of seniors housing real estate?

Answer: The senior housing market remains strong with plenty of capital in the space.  There continues to be new entrants with fresh capital coming into the sector which has kept pricing competitive.  Several new players have entered the sector, both from overseas and other US real estate sectors. Overall, buyer interest remains strong in the sector with acquisition activity expected to pick up dramatically in Q3 and Q4 of this year.  The dominant buyers over the last 12 months have been private equity funds and the smaller REITs.  Owner/Operators have also increased their acquisition activity by themselves, or with institutional partners.   

Question: How have you seen the seniors housing transaction marketplace change over the past few years? How do you see this changing into the future?

Answer: Notably, the buyer profile has shifted in the current market, between 2013 and 2015 the public and non-traded REITs were the dominate players in the market place.  These groups were taking down acquisitions “all cash” with aggressive pricing.  The last 12 months have seen much less REIT activity with the prominent buyers being private and institutional capital that often place debt on their acquisitions. These buyers tend to be users of secured financing, which can cause transactions to take longer to close and possibly be an added contingency to a deal. 

Construction activity has dramatically risen during the last few years with many new entrants developing in low barrier to entry markets.  We are just starting to see several of these new projects not being able to reach stabilization due to poor site selection, design, operator, etc.  With this inexperience, a number of markets have become oversaturated by this glut of development.  We are starting to and will continue to see a few of these new developments fail to stabilize. Lenders have recently taken notice and construction loans for unqualified developers have become harder to obtain.  This has slowed construction activity and may allow market demand to catch up to new supply.

Question: What qualities, acuity, or characteristics are you seeing in the seniors housing marketplace that are bringing the most aggressive pricing?

Answer: Location, location, location, is the most important factor in all real estate classes and senior housing is no different.  Infill sites with high barriers of entry are always going to obtain the most aggressive pricing.  The most attractive communities are those that have multiple acuity levels on the same campus and are larger in size - 100 units plus.  Recently, I have seen communities with both independent living and assisted living in high barriers to entry markets obtain more aggressive pricing than other product types.

Question: Do you see the Big 3 healthcare REITs becoming more active in the seniors housing acquisition marketplace?

Answer: In general, the Big 3 are opportunistic and patient buyers that do not have extreme pressure to make acquisitions.  I believe that part of the lower activity from these REITs is due to the lack of quality portfolios and single assets on the market.  When these players were more active 3-5 years ago, the quality of available assets was much higher.  Should more institutional quality properties become available, I believe the Big 3 will become more active again.  I also expect that we will continue to see these large players shed non-core communities as they clean up their portfolios.

Question: Can you briefly describe the process and information needed for a seniors housing owner to list their asset with a broker?

Answer: lt is crucial for a broker to spend the time and learn everything they can about the asset they are selling prior to going to market.  The first step is to compile a due diligence for the buyer and set up an online data file for sellers to upload their information.  The most critical items are the last two years and year-to-date detailed financials and census, ideally by month.  Other items include information on the current debt, regulatory surveys, operating license, current year budget, historical capital expenditures, site survey, rent rolls, etc. Once our team completes a thorough review of the information, we create a detailed proposal which includes pricing expectation, marketing strategy, likely buyers, fee, and timing.  If both parties are on the same page, we move forward with a listing agreement and launch the marketing process. 

Question: Is there anything an owner / operator can do prior to listing an asset to make the transaction more desirable to a buyer?

Answer: There are a few important items to consider.  Just as you do when you would sell your own home, it is important to spend some money on a refresh. Common items include new paint, carpet and complete any deferred maintenance items.  Secondly, tighten up your bookkeeping, be sure financials are consistent and accurate, and recently audited financials are a plus.  Sloppy bookkeeping, limited details or delays in obtaining due diligence requests can raise concerns by buyers. We also recommend obtaining professional photography prior to approaching the market.

Question: Are there any questions or concerns an owner / operator should clarify before selecting a broker? 

Answer: I think track record is important, whether it be on the brokerage or principal side of the table.  If the broker completed a similar transaction that is always a positive.  I also personally believe a broker should be willing to take the time to tour the asset/s prior to launching a marketing process.  It is critical that the broker selected is knowledgeable about the community/ies, as they will be the face of the company when taken to market. A firm that has national platform will also ensure that the entire buyer pool will be canvassed, not just a segment.

Question: What timeframe are you typically seeing from the owner’s initial contact to closing an asset?

Answer: There are a ton of caveats in this question and the general answer is that deals never close as fast as the seller or broker would like them to.  Licensure and debt are often the key drivers in the closing time frame.  Those aside, it should generally take approximately 45 days from contract signing to closing. 

Question: Besides price, what are some of the other transaction terms that you compare and review with your clients prior to proceeding with a buyer?

Answer: Some additional determining factors include:

  • track record of the buyer and motivation

  • who the operator will be and how much due diligence they have completed

  • deal structure (RIDEA/NNN/JV)

  • financing ability and type

  • amount of upfront due diligence completed

Prior to selecting a buyer, the seller and representative should always consider completing some level of due diligence on the purchaser.

Question: Like myself, you have ample experience in seniors housing acquisitions for an institutional investment group. How has this helped you in your current brokerage role?

Answer: I hope it provides me creditability from both sellers and buyers.  I had the privilege to acquire many senior housing communities throughout the country from small single assets to larger portfolios.  I was intimately involved with all aspects of each deal from the initial underwriting, touring assets, document negotiations and closings.  I also transacted with most of the brokerage shops in the space and learned a lot about what styles and approaches work the best.  When I agree to list a deal I am 100% committed to personally take that transaction from start to finish, just as I had done on the principal side.  Having experience on both sides of the table provides me a unique perspective on transactions. 

Ross Sanders, First Vice President, CBRE

Ross Sanders is the first vice president for the CBRE National Senior Housing and is based in St. Louis, Missouri. He joined CBRE from American Realty Capital Healthcare Trust Inc., a New York based non-traded real estate investment trust, where he led the seniors housing acquisitions team as vice president. Since the inception of the company’s first fund and two subsequent funds, Mr. Sanders sourced, valued, negotiated and closed approximately 150 senior housing and skilled nursing communities across 28 states, totaling nearly $2.5 billion in value. In early 2014, the REITs initial fund was listed on the NASDAQ exchange under the ticker symbol HCT.  Mr. Sanders was later involved in the sale of the listed company(HCT) to one of the Big 3 publicly traded healthcare REITS. Mr. Sanders previously served as a senior housing broker for Chicago based Senior Living Investment Brokerage, where he valued, sold and consulted with owners of skilled nursing and senior housing assets across the country.  Early in his career he was involved in the management and leasing of both multi-family and retail portfolios. 

Chatting with the Masters - Anthony Stablein, HealthTrust

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Learn more about tailored senior living investment solutions at Enhance Senior Living.

I've created a new web series, Chatting with the Masters, to gain valuable insight from some of the leading experts of different disciplines within the seniors housing industry. With this first installment, I chat with Anthony Stablein, Managing Director at HealthTrust, LLC to discuss seniors housing transaction and valuation trends.

Question: How would you describe the seniors housing transaction marketplace right now?

Answer: It’s been muted thus far this year. Transactions dropped off in the first quarter for both macro and industry reasons. On the macro side, we had the election and an uptick in interest rates. With regard to the latter you have new supply concerns for seniors housing and regulatory reimbursement headwinds for SNFs. Both are seeing labor pressures as well. Transactions have picked up more recently, and we continue to hear additional chatter out there. There are also a lot of larger dispositions where the market is looking for some resolution - Brookdale, QCP/ManorCare and Kindred.

Question: What groups are you seeing as the primary buyers of seniors housing? How has this changed over the past few years?

Answer: The public REITs, which kicked off this cycle, have gradually moved to the sidelines over the last two years, with “discipline” being the word of the day for them. This is a combination of the erosion in their cost of capital advantage, but also a pullback as they shifted to an asset management function. A lot of the void that was left behind has been filled by private equity, pension funds and foreign capital. There continues to be significant interest in seniors housing and healthcare real estate. Relative to other traditional asset classes, you have superior historical returns, continued resilient operating performance and a better story to tell in terms of demographics vs. disruption. Given the length of the cycle and the dominance by REITs at the outset, it’s reasonable that they would pull back and even become net sellers. There have been plenty of new entrants over the last few years that want seniors and healthcare real estate as part of their portfolio. Going forward, it remains to be seen how long REITs will stay on the sideline on the buy side.

Question: So far in 2017, are you seeing any movement in seniors housing cap rates? If so, what changes are you seeing?

Answer: On the seniors side, new, stabilized (or close to it) Class A assets in primary markets continue to see a significant premium in cap rates. We continue to see pro forma cap rates beginning with 5s and 6s on those types of assets. From there, you are starting to see an uptick on the Class B assets and more value-add dispositions as new supply disrupts some markets. For skilled nursing, the public markets continue to penalize the product, but there continues to be an appetite for skilled from both private equity and foreign capital. Additionally, owner/operators are more than willing to take on the turn-around projects. Also, I would add, there continues to be a portfolio premium, which was evidenced in the recent Sentio/Kayne transaction as well as the Welltower sale of the Genesis portfolio late last year.

Question: What qualities / characteristics are bringing the lowest seniors housing transaction cap rates within the industry?

Answer: As I touched on above, it’s the newly built, stabilized assets in a primary market. Generally they will have at least two levels of care and a proven operator. A strong operating partner in place can command a premium, as buyers will view it as a potential pipeline.

Question: Which acuity segment (IL, AL, MC, etc.) has experienced the most cap rate volatility over the past few years? Do you see this changing in the future?

Answer: IL only and MC only. On the stand-alone IL side, there are just so few properties out there that the sample size is going to lend itself to volatility. On the memory care-only side, the volatility is driven by the operations and swings in NOI it can experience. You have a higher acuity resident and the higher turnover that goes along with it. This is a significant operational challenge, which reflects itself in the cap rate. Overall, these properties had higher cap rates at the outset in the cycle, came down in parity with AL, and now we generally see them trading at a higher cap again. I should also note that you have to consider the per unit valuation in these scenarios. Where is it relative to replacement cost and how that can invite new competition and ultimately the sustainability of the cash flow.

Question: What are some of the primary factors you analyze in the seniors housing supply and demand market analysis? How does this impact the valuation?

Answer: Occupancy first and foremost, as that’s going to be your primary demand indicator. Then you have to look at the stock of the current supply (is it all 90’s era construction, how many Brookdale properties are there, what are rates trending at?). Next, you have to dig deep on the new supply coming online (where is it, who is the operator, what is the timeline?). Another factor often overlooked is defining geographically, what the market is and where are you really going to compete. And finally, while it tends to get a bad rap, penetration rates. Penetration rates are just the ratio of supply to demand, regardless of how you calculate it, you should make sure that you are filtering down the demand part of the equation to something that is sensible, be it age, income, net worth, acuity, etc. Penetration rates are useful in quantifying where the market is at, but also what can reasonably be expected going forward and whether or not supply will outstrip demand, or vice versa.

Question: Is there anything a seniors housing owner / operator can do to increase an asset’s valuation?

Answer: Valuation in this space is cash flow driven, so it really comes down to whatever can be done to drive the NOI and be efficient, which obviously comes as no surprise. On the seniors side; can you provide the appropriate care to extend the length of stay? Are the design and amenities such that you can attract a younger resident? Are you efficiently staffing the property and retaining employees, particularly the ED and department heads? For skilled nursing, is the operator adapting to the to the changing reimbursement landscape? Having to maintain or manage around a short-term census that has declining lengths of stay, requires lower readmission rates and continues to shift toward Managed Care.

Question: Are there any new design trends and/or technology that can impact an asset’s valuation?

Answer: I don’t know that I’ve seen anything ground-breaking or disruptive that the market would place a premium on. You sort of expect the newer properties to have multiple dining venues/options, therapy pools and engaging activity spaces. In terms of technology, you have the monitoring devices that help track resident’s movements and vitals, which provides peace of mind to adult children. Having an EHR platform has become essential, so lacking that, would certainly have an adverse impact on valuation. It will be interesting to see what comes out of the Aging 2.0 movement. Certainly anything that can effectively alleviate the labor and wage pressures will be highly sought after among operators and investors.

Anthony Stablein, MAI, Managing Director, HealthTrust, LLC,

Anthony Stablein joined HealthTrust in 2006 and has been actively engaged in the valuation of healthcare real estate for over ten years. He is a Designated Member of the Appraisal Institute (MAI) and a Certified Real Estate Appraiser in over 15 states. His industry experience includes valuation and advisory services for a broad spectrum of property types including seniors housing, skilled nursing and acute care. At HealthTrust, he specializes in implementing process initiatives, portfolio valuation, purchase price allocations and fair market value opinions.

Mr. Stablein holds a bachelor’s degree in Psychology from the University of Florida and resides in Lakewood Ranch, FL. In his free time he enjoys spending time with his family and is an avid sports fan, particularly the Florida Gators.

www.healthtrust.com