Gone are the old adages in senior care investment: Real estate ownership isn’t a must and shiny new facilities don’t necessarily wow would-be partners.
Instead, both long-time investors and those entering the market as demographics spike demand want proof that the operations will deliver quality care — and quality returns.
“Twenty-five years ago, you could call yourself an operator and throw a pro forma in front of a [real estate investment trust] and they’d lend you the money because they were looking at it as a real estate investment,” said Steve LaForte, principal and CFO for Cascadia Healthcare. “REITs, institutional capital across the board, they look at operators now, and it’s operator-driven, it’s performance-driven, it’s quality-driven.”
That evolution underpins a hot time for the skilled nursing and senior living markets, with occupancy and bed counts growing — even as construction remains below expectations. Today, senior living providers are adding beds in senior living where existing licenses allow and looking at semi-private units at the same time that skilled nursing continues its drift toward room privatization.
But given the demand and investor interest, industry insiders said on a recent webinar sponsored by Ikaria Capital Group, there’s less need to compete for market share and more need to focus on service across the continuum.
Senior care and housing is second only to industrial real estate in investment value over the last 20 years, noted Jason Dopoulos, Ikaria’s founder and managing principal. Now that occupancy and — for many — labor have returned to post-COVID norms, expected demand and a shortage in supply are drawing even more interest.
Last year, he said private equity funds raised about $27.5 billion for senior housing and care investments, making it a top three alternative asset class alongside medical offices and student housing.
That’s enabling many operators “to grow and refurbish their assets and meet the demand that’s out there,” Dopoulos added.
“We’ve got wind behind our backs here as a sector to grow, and that’s why we’ve been talking to a lot of new investors,” he said. “It’s no longer as sleepy as it once was because the demographics are at a point where it’s getting noticed by all investors.”
Risk and reward
With the number of 85-year-olds set to more than double, from 6.4 million to 13.7 million, by 2030, various providers along the aging services continuum are “not competing against each other anymore,” LaForte said.
“There’s room for AL, and there’s room for striations of AL, from AL-light to AL with higher acuity, and then skilled, and at the other end, home health. There is a lot of opportunity,” he said. “And at a general level, how we look at the care model and expectations and performance are evolving. I think it’s a confluence between acuity across that continuum and then reimbursement, and reimbursement most specifically on the skilled side, is managed care and Medicare advantage.”
Looking to embrace change, Cascadia launched an Institutional-Special Needs Plan in Idaho, where about half its facilities are, three years ago. It’s also looking to partner in accountable care organizations and pursue new reimbursement opportunities — initiatives today’s well-informed investors want to know about when they evaluate potential partnerships. LaForte expects taking on more risk and earning pay for performance will become another key driver for nursing home stability in the next three to five years.
For some, higher occupancy, shifting payment models and higher margins means fewer partners are needed. But that’s not a blanket condition for operators, said Kent Eikanas, president of Stacked Stone Ventures.
“One of the interesting things about the growth of the demand curve is that it’s intersecting with the fact that — really across the skilled spectrum and going into the middle market on AL — the middle middle market and lower market were underbedded,” said Eikanas, whose company specialized in skilled deals after its launch but has recently closed more senior living deals.
Now, when those providers are producing high-quality results and inching ever closer to complete occupancy, they can make a better case for underwriters by demonstrating care quality and other operating metrics. The model may be more valuable than money in the bank.
“A lot of other [real estate] investments look at the credit of the tenant or whatever,” Eikanas said. “Some of these operators are amazing operators, but they don’t have a huge balance sheet, which is why they need an investor to grow.”
Chandeliers vs. duct tape
LaForte says Cascadia’s occupancy averaging above 80% and moving in only one direction: up.
“The high census that we’re realizing now, and the ability to maintain and sustain that census, is giving operators who want to grow, it’s giving us a different level of freedom to grow,” he said. “Our current operations are very stable, they’re very sustainable, and the demand curve is only going one way. So we’re not worried about occupancy at 68%, 72%, and sort of, you know, dancing on the head of that pin anymore. … We’re able to acquire and invest in a different way than I think we were 10, 15 years ago.”
The company is considering stretching beyond its footprint in the Northwest, with LaForte noting that the organization has trained more leaders than it has buildings to run.
Likewise, Chris Metternich, co-founder of Viva Senior Living, said he uses zero agency in nearly 50 communities across 12 states. His focus as a growing operator partnering with investment firms is to focus on staffing and clinical models to ensure consistency and quality.
“You can no longer purchase a property by a spreadsheet. It does not work. A market analysis has to be done, not by a third party, by your management company. You have to go into the buildings. You have to kick the tires. You need to be able to see the property for yourself. You need to be able to explore the local market yourself,” Metternich said.
“The problem we had probably five years ago, six years ago, was we thought that the value was in the property. It’s not. It’s all the ops,” he added. “What are we valuing at the end? It’s the results of what the property produces. So whether it has chandeliers or duct tape, what it does as an operation is what’s the most important conversation here and what you bring to their property.”
Across the board and across settings today, Eikanas agreed, the operator can very much dictate how deals turn out.
“Instead of the ‘where,’ it’s more about the ‘who,’” he said. “And that is the operator, and that is going to be the biggest driver of what you’re going to see before, during your investment and the success of it.
Listen to this article:
Source link