Private equity fund manager amasses $1.2 billion seniors housing portfolio in just two years
By Jeff Shaw
When Bridge Investment Group Partners became aware of the healthy return-on-investment numbers generated by the seniors housing industry, the company wanted in on the action. In response, Bridge joined forces with experienced seniors housing executives to form ROC Seniors Housing Fund Manager in 2013.
The original goal of the Salt Lake City-based investor was lofty: create a company to specifically manage private equity seniors housing funds, targeting an initial capital raise of $400 million.
The first ROC Seniors-managed fund launched in 2014. By the time it closed in June 2015, the fund had raised a total of $740 million after it became clear that there were far more opportunities for ROC Seniors’ value-add strategy than previously known.
In less than a year’s time, the $740 million raised has made ROC Seniors the largest seniors housing-exclusive private equity investor in the country, according to the company.
The capital is currently invested in 42 properties across 19 states totaling over 5,200 units. The portfolio is valued at approximately $1.2 billion. ROC Seniors executives hope to grow the portfolio to 60 or more properties with a total value of $2 billion by the end of this year.
The senior living communities range in size from 60 to 450 units and include independent living, assisted living and memory care. The company invests in some continuing care retirement communities as well, but not standalone skilled nursing facilities. That’s because ROC specializes in private pay seniors housing rather than properties dependent on government reimbursement.
High-net-worth individuals, pension funds and endowments are among the investors in ROC Seniors’ fund. International investors, some from as far away as Taiwan and Australia, account for 15 percent of the equity raised. ROC Seniors also has skin in the game by co-investing alongside its partners.
The closed-end funds have a 10-year life.
Building the team
Founded in 2009, Bridge had already managed several successful funds by the time it decided to launch a healthcare real estate platform.
Bridge needed an expert in seniors housing to successfully deploy those funds, which is
why it called on veteran investor Robb Chapin to help build ROC Seniors and become CEO.
“Bridge had all the infrastructure on the capital markets side and a great track record of raising institutional private equity for their other funds,” says Chapin. “Bridge determined that seniors housing had a lot of legs. That’s a sector that it wanted to focus on and commit to.”
To help fill out the C-suite, Chapin called on an old friend to become chief investment officer — Phil Anderson, who Chapin had recruited when CNL Retirement Properties, another seniors housing investment company, was created.
Upon CNL Retirement Properties’ acquisition by HCP in 2006, the two went in different directions professionally, but stayed close personally. The friendship is so old that Anderson’s now-wife once asked Chapin’s opinion before their first date. “It was an easy endorsement,” jokes Chapin.
Chapin and Rick Steinberger, a long-time business partner and ROC Seniors’ chief operating officer, met with Anderson to discuss the formation of ROC Seniors and decided a second professional partnership was in order.
“We had coffee and said, ‘It worked out pretty well the first time at CNL. We have enough gas in the tank to give it another good run. We’ll try it again,’” says Anderson.
The company established its headquarters in Orlando, Fla. — overlooking two lakes full of skiers and wakeboarders — where its 26 employees are now based.
A buy-and-improve approach
Although the company does invest in some new construction, more than 80 percent of its investments go toward acquisitions. The company actively seeks out value-add opportunities.
“Our strategy centers around acquisitions where we see upside that others don’t see,” says Anderson. “There needs to be an opportunity to move the NOI (net operating income) from wherever it is today, increasing it anywhere from 10 to 80 percent.”
ROC Seniors improves NOI in a variety of ways: renovating the property, “right-sizing” rents, changing marketing strategies, reducing expenses, generally improving operations, or even changing use (such as adding memory care units).
There is no shortage of opportunities for the buy-and-improve strategy.
“If you look across the inventory of seniors housing today in the U.S., much of it is well over 20 years old,” says Chapin. “This presents a lot of obsolescence, both operationally and functionally, despite a lot of great real estate in great locations.”
There are many communities looking for a value-add owner, says Chapin. This is why the company decided — and was able — to nearly double its initial planned capital raise.
To date, ROC Seniors principals have invested in seniors housing properties across 38 states. Before making an acquisition, the team dives deeply into the regional market data and the “micromarket” in which the property operates.
When determining whether a micromarket is worth entering, ROC Seniors considers market rates, current inventory and qualified demand, as well as the specific developer and operator of the property.
“We go into every market with our eyes wide open,” says Anderson. “We’re pretty picky about understanding the micromarkets and what we’re buying. We want to make sure we’re entering a market we believe will fill.”
Being a good partner
Since ROC Seniors acquires but doesn’t operate its communities, working with quality operators is crucial to its success.
The company works with 10 to 15 different operators, preferring to do repeat business with an existing partner. ROC Seniors’ typical investment structures are similar to a RIDEA (REIT Investment Diversification and Empowerment Act) structure.
“Our asset management people come to understand how a particular manager likes to run a property — how they hire people, how they motivate them, how they train them,” says Anderson. “If we do a transaction with a manager, chances are we’re going to do many more with that same manager. You end up really getting to know each other.”
The partnerships bring economies of scale to each transaction, reducing negotiation times as the companies already know each other well and understand each other. In some cases, ROC Seniors even reuses paperwork from previous transactions with an operator to help simplify or expedite matters.
Knowing its partners so well also enables ROC Seniors to determine the operator most likely to achieve success at a particular property.
“An operator that’s really good on a 280-unit community might not be as good on a 60-unit community,” says Chapin. “Every operator has its own secret sauce.”
The strong partnerships have paid off in another way, too. More than half of ROC Seniors’ acquisition opportunities come through direct referrals due to existing operator relationships.
An operator that either owns or operates a property knows that ROC Seniors is strategically aligned. When it comes time to find a new investor or sell the property, the first call is obvious.
“We’ve never subjected ourselves to the general cattle calls, where a brokerage goes out to the masses and the property goes to the highest bidder,” says Chapin. “The success of what we’ve done is in building our investments through long-term relationships.”
ROC Seniors’ biggest acquisition of the year was achieved through this type of partnership.
Meridian Senior Living, which partnered with ROC Seniors on previous deals, was brought on as the operator of a six-property, 596-unit portfolio in California, Michigan, Pennsylvania and Washington, D.C. Meridian was contracted to buy the portfolio and was looking for a buyer or capital partner. Because of prior deals, it was easy for Meridian to bring ROC Seniors to the table.
ROC Seniors ended up purchasing the portfolio in December with Meridian as manager. ROC Seniors wouldn’t disclose the purchase price, but confirmed that the transaction was its largest capital deployment of the year.
“That’s the classic example of an off-market deal for us,” says Anderson. “It sounds so simple, but you really have to like the people you work with. It makes things a lot easier. Particularly when things don’t go quite the way you expect, you’d better like the guy on the other side of the table.”
New investors bring good and bad
Although ROC Seniors has managed to find plenty of attractive opportunities to deploy its capital, Anderson and Chapin both see signs of many inexperienced investors flooding the seniors housing sector.
Seniors housing’s strong performance during the Great Recession was a blessing and a curse. The industry’s resilience was good for existing players in the industry, but it also gained
the attention of many who don’t have the knowledge to succeed in the sector.
“What’s frustrating from our perspective is that we see a lot of inexperienced capital coming into the market,” says Chapin, referring to aggressively underwritten acquisitions and developments.
Seniors housing is within a decade of being considered a core asset class in commercial real estate rather than simply a niche sector, adds Chapin.
The only reason it isn’t core class already is size, says Anderson. That will change naturally as the demand for seniors housing grows. It will never be as large as multifamily, but will get closer over time.
“Within 15 years, this industry is going to double, maybe triple, in size. The demographics alone will make it double,” says Anderson. “Demographics aren’t going to make multifamily double. The gap between the size of those two industries is going to narrow.”
The silver lining is that experts from all corners of the sector will be in greater demand as new investors enter seniors housing, notes Anderson.
“The good news for the industry is that there’s so much operational specialization, investors are going to need people that have that specialized knowledge.”