SAN DIEGO — Seniors housing defies the old axiom that real estate is all about location, location, location. Just ask Curt Schaller, co-founder and principal of Chicago-based Focus Healthcare Partners LLC, a private investment and asset management firm. To achieve a healthy return for its investors, Focus Healthcare must partner with the right operator or suffer the consequences.
“The scariest thing about seniors housing, for me, is when you go into a market and see the beautiful building on Main and Main that is four years old, 80 percent occupied and struggling. And then behind a shopping center is a 20-year-old building that you have to use a one-lane street to get to, and it’s kicking the newer building’s butt [in terms of performance],” said Schaller. “It gets right down to operations, and very often it gets right down to the executive director in that building.”
Schaller’s comments came Wednesday during a panel discussion titled “Tapping Into Private Equity” as part of the 2013 NIC Regional Conference at the Hilton San Diego Bayfront hotel. Approximately1,150 industry professionals have registered for the two-day conference, which has attracted owners, operators, debt and equity providers and intermediaries, appraisers, legal experts and others with ties to seniors housing or healthcare.
Learn to adapt
Smaller operators who in the past may have relied on capital from “friends and family” — and who are now trying to tap private equity — must adjust to the reality that they are relinquishing control, Schaller emphasized.
“If you bring in a private equity partner, it will take a majority interest in the asset, so you are going to lose control. That is going to open a whole can of worms, something that you are going to flush out in your joint venture agreement if you have an ownership interest,” he said.
Kathryn Sweeney, principal with Boston-based Great Point Investors, said it is imperative that the interests of the operator and the private equity source be aligned before entering into a partnership. She is particularly interested in operators who demonstrate a “passion” with regard to their mission.
Sweeney developed Great Point’s seniors housing investment strategy. She has been an active seniors housing equity investor since 1997, during which time she has been involved in the development, repositioning and stabilization of acquisitions on behalf of large institutional investors.
Another consideration of operators when pursuing private equity has to be the “churn” factor. The hold periods for private equity investors typically range from three to 10 years, explained Schaller. That’s a stark contrast from friends-and-family capital, which is willing to hold assets for up to 30 years or longer. “Private equity needs to return most profits to their institutional partners,” said Schaller.
Game changer
The REIT Investment Diversification and Empowerment Act of 2007 RIDEA was a significant piece of legislation. Up until that time, REITs were not allowed to enter into joint ventures with operators. That was the role private equity played. But when RIDEA was enacted, the private equity market had to adjust. Now private equity is increasingly willing to focus on small and medium-sized operators.
Today, an operator would most likely seek out a private equity source because a particular transaction doesn’t fit the sweet spot of a REIT, said Sweeney. It would also be because there are relationships that operators and developers have with private equity sources that have served them well in the past.
Sweeney advised operators who are trying to establish a relationship with a private equity source to properly lay the groundwork. “Typically I am most interested in a phone call or a visit that starts with what I am looking for, as opposed to a phone call that starts with the seniors housing operator saying, ‘Here’s what I have. Is there a fit?’ Learn from me because if you start a conversation on that level I’m going to tell you what markets I’m interested in, what product type I’m interested in, what my criteria is.”
Panel moderator Scott Stewart, managing partner of Washington, D.C.-based Capitol Seniors Housing, said its business strategy is to invest in three types of seniors housing: stabilized assets with a 16 percent levered return; opportunistic assets with a levered return between 19 and 21 percent; and development with an internal rate of return between 20 and 25 percent.
The conference continues today with Gary Zimmerman, senior economist with the Federal Reserve Bank of San Francisco, assessing the health of the national and regional economy with a particular focus on job growth and the housing market.
— Matt Valley