Seniors Housing Business

AUG-SEP 2018

Seniors Housing Business is the magazine that helps you navigate the evolution of the seniors housing industry.

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48 www.seniorshousingbusiness.com Seniors Housing Business n August-September 2018 ers experimented with renovating properties that were not originally built as seniors housing. They now understand how much it really costs to physically convert these properties and add services. Many also experimented with seniors housing apartments that were too large or small to be competitive in their market, and were punished by renters. Funds have also learned that properties are more efficient to manage if they have a cer- tain number of units. At least 80 or 90 units is the minimum size to achieve optimal operations, according to Chapin. However, even with higher standards, private equity funds still need to invest. Fund manag- ers sometimes have to put their money into a less-than-perfect property rather than wait for an ideal opportunity to come along. The need for strong operators For private equity funds to suc- ceed with the properties that they acquire or build, they will need to partner with strong operators. That's especially true for funds that attempt value-added renova- tions of properties. As a result, the relatively few private equity funds that buy and renovate older properties tend to have strong property management teams either on staff or as equity partners. For example, Palatine Capi- tal Partners, a real estate invest- ment firm based in New York and Miami, created its own seniors housing management platform in order to provide better operational oversight. "It requires significant opera- tional expertise to underwrite and implement a turnaround strategy," says Brian Benson, a real estate investment professional with Palatine. Bridge Investment Group also assembled an asset management team to support the operation of its seniors housing properties and communicate with its operators. "We have a fully built-out team of 40 professionals that speaks the operator's language," says Chapin. Bridge plans to use the $1 bil- lion size of its new Seniors Hous- ing Fund II to recapitalize large and medium-sized portfolios. The new fund is nearly one-third larger than Bridge's first fund. Many private equity funds have also learned not to bother with third-party operators that do not have an ownership stake in the properties that they operate. For example, Harrison Street Real Estate Capital, a private equity fund manager based in Chi- cago, now makes sure that every property acquired by its funds comes with an operator that has an equity stake in the asset. The fund manager has longstanding relationships with operators in various regions, such as The Engel Burman Group in Long Island, N.Y., and The Shelter Group in the Mid-Atlantic. The skepticism between private equity funds and third-party man- agers can sometimes be mutual. Third-party managers may look at a private equity fund as an entity that is likely to sell the property in a few years and allow the operator to be replaced. Many private equity funds are also having an increasingly dif- ficult time finding properties that are suitable candidates for value- added redevelopment. Property prices for these deals have become inflated and often already include some of the poten- tial upside of renovation, says Mendes. Owners also point out that it's increasingly challenging to raise rents at a renovated seniors hous- ing property due to the new sup- ply hitting the market, according to Swartz. "You can't always count on the same rent bump that you would see five years ago." n Private equity leads development charge In addition to being active buyers, private equity funds have also become leading development part- ners within the seniors housing industry. Private equity has taken over this leading devel- opment role from real estate investment trusts (REITs), which have had to cut back on development due to their higher cost of capital stemming from depressed stock prices. Private equity has filled the gap. "Most private equity funds in seniors housing have done some development," says Richard Swartz, a vice chairman with Cushman & Wakefield. Private equity funds traditionally hold their prop- erties for a relatively short time — five years is typi- cal. That matches up well with the time needed to build and stabilize a new property. "These investment vehicles are especially well suited to capitalize the development of new units that will be needed over the next decade," says Susan Barlow, co-founder and managing partner for Blue Moon Capital Partners, a private equity fund manager based in Boston. Blue Moon's $175 million first fund, Blue Moon Seniors Housing I, invested in 12 senior housing communities, including eight development projects and four acquisitions. Blue Moon's second fund has not yet finished its fundraising, but is likely to have a similar mix of new development and acquisitions. Blue Moon has started construction of Belmont Village Aliso Viejo, a 156-unit infill community in Aliso Viejo, California, with its operator and devel- opment partner Belmont Village. Blue Moon expects a return on investment of more than 9 percent. "We typically seek spreads of at least 300 basis point rela- tive to current cap rates," says Barlow. Because private equity funds focus on total returns (including sales price), they are less depen- dent on operational cash flow than other seniors housing players such as REITs. "This has fueled the recent unprecedented new seniors housing supply in the market," says Robb Chapin, CEO of Florida- based Bridge Investment Group. That relative patience of private equity makes it well positioned to play a big part in the critical development of seniors housing in the near future, even as some markets have become overbuilt. Developers are able to find opportunities to build in submarkets that still need seniors housing. New development continues to provide solid yields for fund managers like PGIM Real Estate, a private equity fund manager based in New Jersey. "These assets continue to lead the portfolio in terms of performance," says Steve Blazejewski, senior portfolio manager at PGIM. — Bendix Anderson

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