By Tim Regan
The middle market is one of the biggest opportunities in the senior housing industry, and conditions may be particularly favorable at the moment for operators and capital providers to embark on projects..
The reward for senior living companies that can carve out a working middle-market model is that there is a rapidly growing group of older adults in great need of those services at this price point. To attract them, operators must charge a low enough rate that middle-income residents can afford, but one that is high enough to carry the right margins to make it a profitable endeavor for operators and owners alike.
But there are some companies focused on senior living that are blazing new trails in the middle-market space today by tweaking how these communities are financed and built.
They include Lloyd Jones, a Miami-based real estate investment, development and management platform that is actively forging a new middle-market model under the umbrella of its Aviva brand; and Innovation Senior Living, a Winter Park, Florida-based company that pivoted to serving middle-income older adults under an owner/operator approach earlier this year.
Before the pandemic, some senior living capital providers might have looked at middle-market senior housing as an emerging or niche product type. But Covid-19 has led to a wave of disruption, and lenders such as Liberty SBF see current conditions are more favorable for middle-market senior housing than before the pandemic.
“There are better opportunities to acquire properties at a lower basis, which makes executing on those types of business plans more realistic and less risky,” Liberty SBF CEO and Co-Founder Alex Cohen said during a recent Senior Housing News webinar.
Lloyd Jones COO and EVP of Senior Living Tod Petty believes that the middle market is the industry’s “opportunity of a lifetime.” And, he thinks it’s a product type that providers have the tools to reach.
“Some say it’s a mystery, and we may never figure it out,” Petty said during the webinar. “But I think we’ve been doing it all along.”
Part of what makes the middle-market opportunity so attractive is the fact that many senior living communities are trading at a discount to replacement costs, given the level disruption that Covid-19 has brought.
Looking across the market today, Petty believes that the greatest opportunity to serve middle-income seniors is by acquiring properties at a good price and transforming them into middle-market senior housing. As many as 70% of the communities Petty sees on the market are “tired and old,” and have been starved of CapEx.. Typically, they are owned by real estate investment trusts (REITs) who “want to dispose of them at very nice prices,” he said.
“For someone that has the vision, the wherewithal, has done it before and has a creative, vertically integrated platform, then this building can be bought, repurposed and put back on the market,” Petty said. “You will fill up because you’ll capture 40% to 60% of the market that is unserved, plus you’re going to get the baby boomers that don’t want to spend their fortunes.”
Cohen agreed that there is significant opportunity to acquire older distressed assets, not only from REITs but from private equity investors or mom-and-pop owners.
“That is exactly the type of business plan that we’re looking at and financing through our bridge product,” Cohen said. “Between now and the end of the year, I would anticipate doing somewhere in the neighborhood of $102 million to $150 million in core lending.”
Lloyd Jones is looking to meet the middle market in a few ways. The company is buying distressed hotels and converting them into senior living as well as picking up distressed and even Class A senior housing assets at a good price. Lloyd Jones is also developing ground-up “independent living light” communities where residents can age in place through the use of technology and partnerships with service providers.
Petty stressed that being vertically integrated is a big advantage for serving the middle market, and that operators need to be “lean and mean” when it comes to operations. He compares a middle-market senior living community to a boutique bed-and-breakfast — not as fancy as the Ritz-Carlton, but still charming in its own way.
While some newer communities have dropped their rates closer to the middle market to compete in the Covid recovery period, Petty believes those rates will rise again as capital providers seek to meet debt service ratios. And that will leave middle-market communities at an advantage.
“This product will be in a great position to thrive, because it will be affordable,” Petty said.
Petty expects Lloyd Jones will close on four acquisitions and start work on two ground-up developments by the year’s end, with a goal of adding about 1,000 units to its portfolio each year.
Innovation Senior Living takes a similar approach as Lloyd Jones by acquiring “tired, 20- to 30-year-old properties,” CEO Pilar Carvajal said. Currently, the company owns and operates three communities, with two more communities likely to come online by the end of the year. But CEO Pilar Carvajal would like to grow the operator to about 12 to 15 communities in about five years’ time, with the middle market as a specialization.
Carvajal comes from the subsidized housing world — and she sees some overlap between housing meant for low- and middle-income seniors.
“It’s very heavy on the operations, very strict expense control,” Carvajal said during the webinar.
Indeed — echoing Petty’s point that “we’ve been doing it all along” — she emphasized that her career has been focused largely on serving the middle-market, and that foundational operational approaches and financing structures to grow this sector of the industry are already in place.
Underpinning the company’s middle-market model are universal workers who can do many tasks in a community. Carvajal added that the operator is constantly negotiating its prices with vendors for goods and services, such as payroll, food and medical supplies. Using those strategies, the company can achieve “pretty good operating margins,” although not to the level of other high-end properties. Still, that can be enough for capital providers to get on board with a project.
“You can be profitable, and you can serve a population that has been largely neglected, that needs our help and that hasn’t seen their place in our industry — ever,” Carvajal said.
What lenders want
As a non-bank lender, Cohen said Liberty is more open now to “business-plan focused financing opportunities,” such as middle-market conversions or ground-up construction projects, with one opportunity being its small business administration loan product. The firm is also again underwriting conventional loans and bridge transactions outside of SBA.
When looking at operators to partner with, Liberty’s preference lies in those who come to the table with a few projects under their belt.
“We’re going to want to make sure that there’s operating experience in executing specific type of business plans that the borrower is currently seeking,” he explained. “As well as the … net worth and liquidity that are going to support that type of project.”
When underwriting new financing, Cohen said Liberty examines how a property or operator performed before the pandemic, and whether they can see a clear trajectory to return to those conditions in the months ahead.
“It really comes down to, what did the census look like before Covid and what is the trajectory in the last six to nine months?” Cohen added. “Savvy operators are figuring out ways to mitigate downside risk as waves continue to hit … and we’re excited to partner with folks who have been able to do that.”
Liberty is currently lending up to 85% of cost for SBA loans, including on ground-up construction deals. On the conventional side, the company is a little more cautious, with loans at about 65% to 70% loan-to-value, depending on the operator and product type.
Most of the deals that Liberty is looking at today are opportunistic acquisitions of distressed senior housing assets, as well as refinancings. And looking ahead, Cohen believes the market will continue to stay choppy and therefore that banks will continue to be cautious in looking for new projects to partner on.
In the meantime, he sees a lot of capital sitting on the sidelines, and lenders and equity investors are looking to deploy it where they can.
“We didn’t see the same types of underwriting miscalculations that occurred during the last recession, and we don’t see the same kind of oversupply of inventory,” Cohen said. “We think now is a good time to be investing in the sector.”
‘Opportunity of a Lifetime’: Conditions Favorable for Penciling Out Middle-Market Senior Living