Brokerage firm finds its niche in specialized knowledge of seniors housing.
By Jeff Shaw
Cindy and Jim Hazzard would like you to know that bigger does not necessarily mean better.
That was one of their principles when the husband-and-wife team founded JCH Consulting Group in 1998, as it still is today. The brokerage firm, based in the Los Angeles suburb of Anaheim Hills, emphasizes its extreme specialization rather than focus on deal volume or size.
JCH works exclusively in the seniors housing space. Every broker in the company must receive an Assisted Living Administrator Certificate, and most came to JCH from a prior career with owners and operators. Jim, for example, worked for the predecessor company to one-time skilled nursing giant Kindred Healthcare.
“Anyone that’s asked to work with me, the very first thing I have them do is get their Administration Certificate so they understand the ins and outs of operating a facility,” says Shep Roylance, a senior vice president with the company. “That’s key to understanding our clients and aligning ourselves with our clients’ interests.”
Compared with commercial real estate giants, JCH is a small brokerage firm, but it wears the term “boutique” as a badge of honor. The company’s average transaction is $10 million to $15 million for a single property, and in excess of $100 million for a portfolio.
Although Jim admits he’s tempted by the idea of making the company larger — more brokers, bigger deals — he always comes back to wanting the personal involvement and quality control that a smaller company allows.
“As a boutique team, we have more flexibility than the larger shops,” says Roylance. “It makes us more nimble and aligns our commitment to the industry with our clients.”
Single-asset deals make up the “bread and butter” of JCH’s transactions. The bulk of the company’s work comes via referrals from existing clients. One of the firm’s specialties is helping small, mom-and-pop owners complete a transaction at a fair price, rather than having buyers and sellers take advantage of their small size and naiveté.
“The mom-and-pops will often try to buy or sell an asset themselves the first time and get bloodied up in the market,” says Nick Stahler, a senior vice president with the company. “We allow them to either grow their portfolio or exit the industry and make sure they get a market-rate deal. We’re able to keep their retirement plan in place. We’re really proud that we can help out these smaller operators.”
Clients also don’t get just get the services of a broker or two when they hire JCH — they get the whole company. “When you hire us, you hire the entire team,” notes Stahler.
“Our philosophy is that of a team, and we work together as a team,” adds Cindy. “By doing that it allows us to keep control of situations and for the deal process to be very intimate.”
This team mentality and intimacy helps in another way. Clients in sensitive situations can expect a level of confidentiality that can’t be matched on bigger deals with bigger companies, claims the company.
Crisis SWAT team mobilizes
It’s a fact of doing business that some companies are going to fail. But in seniors housing, it’s difficult for an owner or operator to cut and run because elderly residents could be affected.
The JCH management team considers itself an expert on handling crisis situations for clients. The brokerage firm handles two to three bankruptcies every year. Most recently, the company was able to prevent a 95-unit assisted living community in Las Vegas from closing.
The owner, a private equity firm, hadn’t received rent in over a year and was in the process of evicting the operator. The property “was on the fast track to shutting down,” says Stahler.
Within 30 days, JCH found a new operator and helped obtain an emergency license so the new operator could take over management immediately. The new 25-year lease includes incentives that JCH expects will result in the community’s rents returning to market rate within three years.
“We worked under the radar and were able to salvage an asset,” says Stahler.
“There are no easy deals in this industry. Every deal is hairy,” adds Roylance. “We all thrive and work well under pressure, while problem-solving and troubleshooting issues to help bring single assets or portfolios to the market.”
As a result of its business style, the slowdown in mergers and acquisitions in 2016 did not hit JCH. Although total seniors housing transactions dropped 35 percent from 2015 to 2016 at the firm, the bulk of that drop was in large portfolio sales. The big REITs were the main source of the slowdown, while smaller buyers actually increased their spending.
“Our business didn’t struggle in 2016,” says Stahler. “It was our existing reputation that kept us going and kept the pipeline full. We can push through a slowdown and keep our numbers.”
Specialists in off-market deals
There’s a hidden advantage to being a boutique firm: the ability to work quietly and behind the scenes.
JCH rarely puts out a property for bids in the traditional way, except in cases such as bankruptcy where it’s mandated to do so by a court. Instead, the brokers only market the asset to a select group of potential buyers. That group is specifically chosen based on its ability to buy and own/operate the community effectively.
“We can identify the correct buyer. We don’t have to show it to 5,000 people,” says Jim. “We’ll know four or five buyers for whom it’s a match.”
“For example, if a facility is having a census issue but not a lot of complaints, you’ll bring in a buyer whose strength is marketing and filling buildings,” adds Stahler. “There might be another property that’s good at maintaining the status quo, so we’ll give them a building already doing well. If there’s licensing and compliance issues, we’ll find a buyer that’s great at licensing in that state and can salvage the asset.”
With a smaller pool of buyers, JCH can also control how many prospective buyers are aware the property is even for sale. Confidentiality is key to keeping a transaction flowing smoothly, according to the JCH brokers.
If employees and residents know that a community is up for sale, they’ll become unsure of their future. When that happens, performance on nearly every metric can begin to slip.
“It starts to affect the leadership all the way down to the care providers and the maintenance people,” says Roylance. “Quality of care can drop off, census will slow down. It has a ripple effect on the families and the communities. You really need to be careful.”
If performance starts to slip, it could damage or even torpedo the sale itself, adds Stahler.
“If census dips during escrow, the buyer is going to attempt to renegotiate,” says Stahler. “It may even create issues for a lender. No lender in the industry wants to see a downward trend.”
“We know we’ve done our job when the frontline staff only knows about a sale when we’re introducing the buyers,” adds Jim.
By marketing the asset to a select group of buyers, JCH also believes that process will lead to realistic, actionable bids. Although it’s unlikely to create a bidding war, limiting the buyer pool ensures that all the offers received are genuine and in good faith.
“We learned over the years of experience we have that it doesn’t pay to have maximum exposure of the property,” says Stahler. “When buyers know a property is being marketed to a large group, two things happen: they’ll step away and stay out of the mix, or they’ll send out offers that are meaningless that just hang up the process. When a buyer puts forth an offer, we want it to be an offer they can stand behind. We want them to close on that offered price.”
The smaller number of bids also enables all parties to take their time to complete the necessary underwriting, property tours and due diligence rather than spend that time negotiating terms, adds Roylance.
‘One-stop transaction shop’
Because of the team’s deep background in seniors housing, JCH is able to tout itself as a start-to-finish solution for buyers and sellers. The company can assist with everything from financing to legal support.
“Many times we’ve been hired because of our network,” says Stahler. “We can become the one-stop transaction shop. We can help place the debt, equity, legal counsel, insurance providers — you name it. And our platform is nationwide.”
The JCH team emphasizes the need for having seniors housing specialists involved in every part of a sale. Although seniors housing is a segment of the commercial real estate industry, the intricacies of the niche are often lost on those who work in other sectors. The hiring specialists make sure everyone’s on the same page. As Jim puts it, “the best way to solve a problem is to avoid it in the first place.”
“A loan in seniors housing is not one that’s typical of multifamily financing,” adds Stahler. “There are much different performance covenants. It’s a completely different world versus other types of real estate.”
Welcoming new faces
Despite its emphasis on industry experts, the JCH team welcomes newcomers to the sector and is optimistic that their impact will be largely positive.
Although many companies might wash out, fresh blood is vital to sustaining the seniors housing industry, the team argues.
“It’s fun to work with the upstart guys that have a similar vision for our industry, and see those guys learn to do it right,” says Roylance. “On the other hand, there are guys out there without the right infrastructure and it’s just a matter of time before they go into bankruptcy.”
Newcomers have to ante up to enter the industry, though. Stahler cites a recent sale where disciplined veterans were outbid by newcomers to the industry.
The newcomers were willing to pay 40 percent more than the veterans who “all offered within $500,000 of each other.” Although this might sound like hubris, Stahler sees it as a necessary step to entering a new sector.
“Typically, if a company is going to do it right, it has to pay a little more to get to the asset count and size that the lenders are looking for,” says Stahler. “The company can do that at the beginning, but at some point it has to become disciplined.”
“During that initial growth period, you handle it through acquisitions,” adds Roylance. “Once you hit a certain size, it’s time to draw things back and focus on the organic growth. After a few years of that, you really start to attract the better lenders and underwriting, and then you can grow through acquisitions again.”
The most successful owners and operators tend to be the mid-size, regional companies, rather than industry giants or mom-and-pops, notes Stahler.
“The operators I’ve seen do extremely well are usually around 50 to 70 facilities, and are regional,” he says. “Once you get over 100 facilities, companies seem to struggle. It’s not that it can’t be done, but we’ve really seen companies perform well at that regional level.”
A portfolio size of 50 to 70 facilities is the sweet spot for maximizing knowledge and scalability, while still allowing the focus to be on delivering quality care more than returns for investors, adds Roylance.
“At the end of the day, it’s all about the operator and the care you provide. In managing the financials, the focus can shift from providing care to being beholden to the shareholders.”