ATLANTA — The seniors housing sector stands at a “curious” crossroads in terms of the current real estate cycle, according to Chris Guay, CEO of Vitality Living. The Brentwood, Tenn.-based company is a seniors housing owner-operator with communities located across the Southeast and Texas.
Guay asserts that on one hand, seniors housing owners and operators are still healing from the supply-and-demand shocks stemming from the COVID-19 pandemic. On the other, the sector is standing on the precipice of the prophesied “silver tsunami,” a phenomenon wherein the baby boomer generation is aging into needing senior living care.
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The oldest baby boomers are now turning 80, and Guay says that even if developers met the output of the highest point of the previous cycle annually, it still wouldn’t be enough to satisfy the wave of demand coming.
“The silver tsunami is actually here,” says Guay. “Right now is probably the most interesting time in the industry that I can remember.”
Guay’s comments came during the “power panel” at InterFace Seniors Housing Southeast, a two-day conference that was held Aug. 26-27 at the InterContinental Buckhead hotel in Atlanta. The event welcomed approximately 300 attendees across the spectrum of the senior living industry. John Lariccia, CEO of WelcomeHome Software, moderated the power panel.
Doug Schiffer, president and CEO of Allegro Living, said that the industry is now “in a much better place” than it was a year ago but that there are a couple sticky wickets that need to be addressed, most notably on the staffing front.
“There are many partners that have struggled throughout the past few years, including our operating partners and our capital partners,” said Schiffer. “The industry is on an upstream, so I would say that I’m cautiously optimistic.”
On the move
The panelists agreed that the tide is shifting for the seniors housing industry — and in more ways than one. Lariccia asked how each panelist is faring in terms of forming new relationships with capital partners. Jesse Marinko, CEO and founder of Phoenix Senior Living, said it’s been encouraging to see more companies get off the sidelines in recent months.
“It’s been encouraging to see the REITs back,” said Marinko. “We’ve all seen new capital enter the space or get more involved, so there’s optimism on the sustainability of our space. But as operators we’re all thinking the same thing: We’re walking into those new relationships. No one is sprinting to them.”
Panelists spoke about vetting their partnerships more diligently than ever due to the executive-level personnel changes among several stakeholders, whether in the form of new faces that have risen through the ranks at their respective companies or those who have branched off and formed their own companies.
Schiffer said that Allegro Living is seeing a full gamut of prospective buyers when marketing properties for sale.
“I have two [properties] that are in the market right now, and there are three bidders left,” said Schiffer. “One [bidder] is brand new, one is a company with people who used to be at a different organization and the third is somebody we’ve worked with a lot in the past. While capital now seems to be all over the place, we’re starting to get the choice, and that’s a place that, as an operator, we’ve never been before.”
The panel spoke at length about the importance of understanding the expectations of their capital partners and how they view opportunities as they become available. Judd Harper, president of The Arbor Co., a third-party seniors housing management firm based in Atlanta, noted that Arbor’s ownership clients are itching to sell more than he’s ever seen.
“We have a lot of communities either in play or that will be in play to be sold in the next 12 to 18 months, many of which were purchased pre-COVID,” said Harper. “We are trying to make sure those communities are positioned to be as successful as they can possibly be so that we can work with the new ownership groups [post-acquisition].”
Marinko said that the investment committees for many of the owners are looking at shorter-term horizons, which he said doesn’t always align with the ebbs and flows of the seniors housing sector.
“The thesis is understanding the capital partner’s goal; is it to take the fund, close it and be out of the industry in two to three years?” said Marinko. “They are looking at returns in 24 to 36 months, and the problem is they need to be really looking at the industry’s profile in 2031 and 2032.”
Schiffer concurred that investors need to be looking at longer investment horizons.
“Our equity partners have committees they normally run their investments through,” said Schiffer. “If we say that the return will be in five years, half of the people on the committee won’t be there.”
The panelists discussed how now would be a smart time to build, ahead of when the demand will inevitably come in earnest. They noted that the issue with developing today is the elevated cost of virtually every aspect of the enterprise — including land, labor, construction materials, debt and insurance. Marinko said developing seniors housing today is not for the impatient.
“Development is a ‘get rich slow’ business, if you get rich at all,” he said.
Sweet spot
Panelists spoke at length about the “sweet spot” for their respective companies, and the number 50 was a reoccurring figure. Harper said that Arbor has been working for 15 years to get to the 50 figure for its management portfolio.
“We’ve had a lot of investors, mainly equity groups, say that in their experience the best operators are those that have 50 or fewer properties they manage,” said Harper. “We’re back to 49, so we will stick to that commitment. That number has anchored our whole team and ecosystem. Fifty gives us the ability to scale the right staff at the department level and at the management level, and we feel like we can give incredible attention to those communities.”
Schiffer’s company, Allegro Living, is the result of a merger earlier this year between Spring Arbor Senior Living and Allegro Management. He said that the merger brought the firm’s total assets to 53.
“I’m less concerned with getting under the 50 number and more concerned about keeping our corporate culture but not overtaxing our people,” said Schiffer.
“Sixty is a great number,” added Guay about Vitality’s current portfolio. “When I was at Brookdale there were more than 300 properties to manage, and you can’t keep your pulse on all of it.”
The panelists concluded the discussion talking about how the seniors housing industry as an institutionalized real estate class is currently in its adolescence. A number of seniors housing companies formed in the late 1990s and early 2000s and are now dealing with succession issues.
“A lot of companies had the entrepreneur who started the company and are now at a point where they’re in the retirement phase or not as focused,” said Schiffer. “We’re in a weird point with a lot of little junction spots happening right now in our industry as we’re growing up.”
— John Nelson