Developer finds that its slow, methodical approach to the assisted living sector makes for sound investments
By Jeff Shaw
Managing Editor
The seniors housing industry is coming off a fast and furious 2014 and 2015 that saw record acquisition prices and volume, not to mention an acceleration of development activity. Well, if the industry as a whole is the hare, then developer Prevarian is happy to be the tortoise.
The Dallas-based company currently owns a seniors housing portfolio of seven high-end communities totaling approximately 650 assisted living and memory care beds in Texas, Oklahoma, Arizona and Florida, and is constantly on the lookout for quality buildings to acquire or markets in which to develop. But rather than buy or build on a whim, Prevarian takes a slow, methodical approach to each market and building it considers.
“We spend a lot of time before we take the plunge,” says Allan Brown, Prevarian’s co-founder and partner. “Our selection of a location is only after a lot of due diligence. Sometimes we lose an opportunity because someone else is willing to be quicker.”
This is how Prevarian succeeds in a hyper-competitive climate: patience, research and careful selection of markets. The company has even canceled planned projects upon the announcement of a new competing community that would overcrowd the market.
“We don’t believe there’s capacity for all of us, so we’d rather not duke it out unless we have a particular advantage,” says Brown.
The strategy stems from a background in both the design and development sides of seniors housing.
A history in healthcare
Brown started his career as an architect at a healthcare-focused firm, which was later acquired by Perkins+Will. After designing healthcare properties for many years, he decided to leverage that knowledge and start his own real estate development firm. That company was launched in 2004, and quickly built up a portfolio of hospitals, medical office buildings and skilled nursing facilities.
In 2009, Brown decided to shift the company’s focus to concentrate more on seniors housing development, spanning the full continuum of care. He changed the company name to Prevarian — a name that he freely admits holds no special significance.
“People have asked what Prevarian means. We didn’t really have a good answer, so we’d make things up that sounded thoughtful and sophisticated,” says Brown. “The truth is it was thought up after a few margaritas. It sounded good and wasn’t taken. It sounded like something in healthcare.”
Dodd Crutcher joined as a partner to lead the seniors housing division, and by 2012 the company completed its first building: Wyoming Springs Assisted Living and Memory Care in Round Rock, Texas.
“It filled up very quickly,” recalls Brown. “It was the first hospitality model in the area and was very well received.”
In 2014, the “slow and steady” approach to development became the company’s mantra. Prevarian began digging deep into various markets and looking for development and acquisition opportunities as well as strong operational partners in those areas.
“What we do is good old-fashioned, shoe-leather due diligence,” says Brown.
Prevarian takes two very different approaches for skilled nursing versus assisted living and memory care.
For its standard seniors housing, the company doesn’t lease the properties, but hires operators as “fee-for-service managers,” according to Brown. The company’s current partners are Civitas for its Texas communities and Life Care Services for all others.
The structure allows Prevarian to keep stronger control over its properties without being locked into a long-term lease with a single company. Prevarian takes in the rental income, then pays an operator for services at the community.
“With our equity partners, we develop and own all the seniors housing properties — the entire enterprise including both operations and real estate,” says Brown.
Currently, the seniors housing properties only include assisted living and memory care, but the company is in the design phase of a 250-bed community in St. Petersburg, Fla., that will include independent living.
The skilled nursing challenge
When it comes to skilled nursing, Prevarian has a completely different plan.
Prevarian is not interested in owning the operations of skilled nursing facilities. It is, however, quite adept at building the facilities, given the company’s roots in hospitals and post-acute care.
The company develops build-to-suit skilled nursing facilities, for which it finds a quality operator that it can lease the property to on a triple-net lease basis. Once an operator is found, Prevarian generally sells off the real estate.
“We are not at this time interested in owning a skilled nursing facility,” says Brown. “We know that industry well, and we know the facilities and how that business is run, but it’s a very different business from a private-pay model. We’re reluctant to get into the government reimbursement system with Medicaid and Medicare.”
Prevarian’s capital partners, lenders and investors — largely made up of family offices and individuals — are also more knowledgeable about assisted living and memory care, and are interested in skilled nursing only when a creditworthy tenant is already lined up.
“We’re leaving skilled nursing, so to speak, to the experts,” says Brown. “Let the operators operate. We’ll provide the real estate we know very well, and create a deal that allows them to be successful.”
Although the company steers clear of skilled nursing operations, Brown sees it as complementary to Prevarian’s private-pay communities. One of the company’s first criteria for developing or buying in a market is the presence of an acute-care partner.
“That’s often one of our first meetings when doing due diligence,” says Brown. “[Hospital operators] have a great idea of a market’s viability.”
Formal alliances with acute-care providers, hospitals and health systems are one way Prevarian differentiates its properties from other seniors housing communities.
Thanks to the company’s background in hospitals, Brown and his team are able to explain the benefits of a partnership in language that the health system executives will understand.
“When we talk to them about how an assisted living and memory care community could have a beneficial alliance, it tends to make sense to them,” says Brown. “It’s afforded us relationships that open doors.”
A new community Prevarian is developing in Broken Arrow, Okla., is even located on a hospital’s campus, and the hospital is a financial partner in the project. Brown credits the partnership with improving resident care at the communities.
Increasing acquisitions pace
Although the vast majority of Prevarian’s portfolio is made up of properties the company developed, Brown says he is actively looking to increase the portfolio via acquisitions. The company is too small to engage in bidding wars, meaning it must look for hidden value that large, well-capitalized buyers might miss.
“We can’t pay retail [prices] like the big buyers out there, and we haven’t found a lot of brokered deals that make a lot of sense,” says Brown. “We’re looking for opportunities that require some creativity, an opportunity for redevelopment where we can find some value with capital and ingenuity.”
The company will even approach competitors in a market where Prevarian is developing. If the services are diverse enough between the competitor and Prevarian’s development, the companies may explore partnerships or acquisition opportunities.
“We’ll knock on a door and ask if they want to sell to us,” says Brown.
Although Brown shares the general concerns being voiced in the industry today about overbuilding in some markets, he emphasizes that the company’s methodical approach to market research can often find pockets where a new community would fit right in.
Prevarian just built a new community in Naples, Fla., where “there is a lot of competition.” But between high barriers to entry, the alignment with a health system and the age of the competing communities, the company decided there was room for a new building.
“Our market analysis focuses on what’s going on around our prospective site, not 20 miles from our site. We want to know what’s going on in our immediate market area,” says Brown. “We look for an advantage, or a barrier to entry like entitlements or geography. If we look at our competition and it’s old or full — and market rates support a new community — we’re going to take a hard look.”
Brown adds that while aging product is an ongoing issue for the seniors housing industry, it also presents opportunities for developers like Prevarian to enter a market that may initially appear to be overcrowded.
“Nationally, about 85 percent of existing product is 10 years or older. We compete really well with older properties.”
At the end of the day, Brown believes the stronger the industry is as a whole, the better it will be for all players involved. Good partnerships make for healthier residents. Healthier residents lead to a healthier seniors housing industry.
“We’re really proud to be part of an industry with so many amazing people in it,” says Brown. “We’re going to see our residents evolve and our caregivers evolve. It’s an exciting time to be in assisted living.”