Seniors Housing Business is the magazine that helps you navigate the evolution of the seniors housing industry.
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www.seniorshousingbusiness.com 63 February-March 2015 n Seniors Housing Business cash fow stream, while benefting the resident. SHB: Can you provide an exam- ple where Formation Capital made a difference? Beckwith: In December 2011, we bought a skilled nursing port- folio of 11 assets in Illinois. We switched operators on day one and it was exactly the kind of situ- ation we like. The portfolio needed signifcant capex (capital expendi- tures), and it needed a new opera- tor because the existing operator was going to move on and retire. There wasn't a family opportu- nity to transition the business. We were able to really shift the mix a bit to make it more of a short-stay, rehab-focused portfolio versus the longer-term, Medicaid-style facilities. It has been a benefcial transaction for all. SHB: Does Formation Capital prefer complicated deals? Beckwith: I think it fts our skill set a bit more. Complicated transactions are where we have a competitive edge over some of our competitors. A transaction that has a lot of complexity to it doesn't ft as well with a publicly traded discussion. When you go out and talk about complexity, that doesn't translate to stability of cash fow initially. It may still be the same stable cash fow, but it's harder to explain and that becomes more diffcult. So, complexity is something that we don't shy away from. It does make things harder and stressful, but it's something that we embrace because it's where we can be very competitive. SHB: Formation Capital invests its own capital and the capital of others. Can you give us some more insight on who the "others" are exactly and how you work with them? Beckwith: We operate more like a pledge fund in that we have specifc partners that have worked with us on transactions over our history. We access different pools of capital for different transactions. The most active pools of capital include the principals and employ- ees of Formation Capital. Second, we work closely with a group of friends and family made up of high-net-worth accredited inves- tors, a group we partner with in almost every transaction, and in some cases exclusively. Then we have institutional partners, the best examples of which include Northstar Realty Finance Corp. and Safanad, in addition to some of the public REITs in our most recent U.K. transaction. We access these different pools of capital depending on the types of transactions. Some investors are more interested in a private pay, lower return type of transaction, while others are interested in more of a higher risk, higher return type transaction. We try to match the capital to the opportunity. We have some very good partnerships and relationships that have devel- oped over the years that enable us to do that with some confdence. SHB: How many people does Formation Capital employ? Beckwith: We have 36 employ- ees today. That excludes our devel- opment team, which is another fve. So, 41 total employees. That fgure has grown over time. It's 25 percent higher than it was four years ago. Our expectation is that we will continue to grow in the short term. SHB: Do your employees come from a variety of disciplines? What kind of skill sets are you looking for as an employer? Beckwith: A lot of the folks that are with us today have signifcant post-acute backgrounds in real estate or services. I was at GE in healthcare lending and investing for 14 years. We've got a couple of other GE folks who have since joined us and who have similar backgrounds. We hired three people from one of our former investors, JER Partners. When it comes to acquisitions and asset management, we're targeting employees who either have a real estate background or a healthcare background. We try to fnd skill sets in one of the two disciplines. Ultimately, the most important is their ability to ft our culture. We focus on making sure we bring people to the team who are smart, work hard, and can help us reach the goal of making returns for our investors while being good partners with our operators and positively impacting residents and patients. SHB: How many transactions are you working on in a given year? Beckwith: It varies year by year. Our activity over the past four years has been over $1.2 billion in transaction volume per year from an acquisitions standpoint. In terms of the number of transac- tions, we tend to look at larger transactions. We will acquire the four- and fve-asset portfolios, but the 10s and above is where we spend more of our time. On the services side of the business, a couple of the acquisitions that we've made recently are $300 mil- lion or more. SHB: Over the past few years, has Formation Capital been more of a net buyer or seller? Beckwith: We've defnitely been more of a net buyer over the past few years. The vast majority of the $5 billion in assets in our portfolio have been acquired over the past four years. We did have one major sale last year. We sold a $1.05 billion healthcare real estate portfolio to Northstar. (The port- folio included 43 primarily private pay seniors housing facilities and 37 skilled nursing facilities.) We continue to manage that portfolio with Northstar as our partner. In addition to the signifcant acquisition we made in the U.K., last June we acquired a 14-asset portfolio in the Mid-Atlantic region (highlighted in the introduction). In December, as a continuation of our post-acute private equity strategy, we acquired Hospice Compassus, a nationwide network of community-based hospice pro- grams based in Brentwood, Tenn., with an average daily census of over 3,500. SHB: From 2005 through 2008, you led the entire healthcare lending and investing operations for GE Capital in Europe. What did you take away from that experience? Beckwith: I was based in Lon- don and it was a very interesting and exciting time right before the market changed. When you think about how aggressive the U.S. market got, I think the European market was even more aggressive. Transaction volume was going gangbusters, but I learned a lot when I was there and developed a lot of good contacts. There's been a little bit of a his- tory with private equity investors in senior care in the U.K. During the time I was there, some of the large private equity investors were very involved and made a ton of money, but left a couple of skid marks with respect to how much leverage they used — which was 80 to 90 percent. They were big numbers, and it didn't work out well for some of the lenders. SHB: Can you compare and con- trast the seniors housing market in the U.K. with the U.S. seniors housing market? Beckwith: It's hard to compare because of the National Health Service (NHS) in the U.K. At one point it was the third largest employer in the world, and it has a very big infuence on all of the healthcare delivery in the U.K. However, I would say that in the post-acute senior care market, the U.K. is a little behind where we are today and even where we were 10 years ago. Part of the challenge that we have, and part of the strategy, is to help facilitate the transition of patients from NHS hospitals to care homes in a lower-cost setting to allow for an overall reduction in spending for a particular patient. It's going to be hard to accomplish for lots of reasons, but we can see signs of that happening down the road. SHB: How does the existence of the NHS make healthcare more challenging in the U.K. than here in the U.S.? Beckwith: The average length of stay in a hospital in the U.K. is signifcantly higher than in the U.S., and there is more pressure in the U.S. to get people out of hospitals quickly. In the U.K., there's not as much pressure to push people out of hospitals. That will likely change over time, but there's some resistance to quicker discharges because the hospitals are such a The Solana Doylestown, located in Doylestown, Pa., about 30 miles north of Philadelphia, is a 98-unit assisted living and memory care facility developed by Formation Development Group (FDG). The community opened in November 2014. FDG is a sister company of Alpharetta, Ga.-based Formation Capital LLC.