InterFace Panel: Developers Must Get Creative in Sourcing Financing, Changing Up Product Mix

by Jeff Shaw

ATLANTA — Charlie Jennings, chief development officer with Vero Beach, Fla.-based Harbor Retirement Associates, said he would challenge the “Stay alive until ‘25” mantra that some real estate professionals are touting amid today’s economic uncertainty. The phrase is a play on the late billionaire investor Sam Zell’s remarks amid the downturn in 1991 when he coined the mantra “Stay alive until ’95.”

“I do not agree with that at all; that insinuates that we’re just going to sit on our hands as an industry and wait for somebody else to turn the lights back on,” said Jennings. “Our industry will continue to grow, push forward and be innovative, and build relationships outside the normal REIT and private equity model that we’ve all grown accustomed to.”

Jennings’ remarks came during the development outlook panel at the 10th annual InterFace Seniors Housing Southeast, a conference hosted by France Media’s InterFace Conference Group and Seniors Housing Business on Wednesday, Aug. 16 at the Westin Buckhead in Atlanta. Todd Hudgins, senior vice president of senior living for Madison, Wisconsin-based ERDMAN, moderated the panel.

Jennings went on to say that while it is tough to get a deal done right now, eventually it will get easier.

“I can remember sitting here in 2008 wondering if we would ever get a new development deal done again. Next thing you know, the stars aligned and we had a really good 10-year run,” he said. “We’ve got another run coming. It’s going to be even better than the last, so hang in there.”

Also on the panel was Jesse Marinko, CEO and founder of Roswell, Ga.-based Phoenix Senior Living. Marinko stressed the importance of staying nimble and finding different ways to get deals done today. Examples include different infusions of capital or exploring new structures like bond deals. While properties still need to be built, maybe now is the time to pursue a renovation instead of a ground-up development, he suggested.

“Asking for a little check right now is easier than asking for a big check,” said Marinko.

David Mills, president and COO of North Palm Beach, Fla.-based AgeWell Solvere Living, concurred that putting money into older product is a good move for the next six months. His firm has three renovation projects underway to refresh memory care communities.

Loans require inventiveness

Panelists weighed in on the challenges the industry currently faces, most notably the cost of capital.

Richard Ackerman, managing partner with Beverly Hills, Calif.-based Big Rock Partners, said the bank market will be shut down for a long time. But Marinko noted that local, small banks are an area of opportunity, as are alternative use options like debt funds.

The bottom line is that developing in today’s market is tough, and to do so developers will have to look in more unique places for financing than they have historically considered.

Another issue for seniors housing developers is high project costs. Building a continuing care retirement community with an entrance fee or rental model often costs upwards of $100 million, according to Ackerman.

“That market was tough pre-financial crisis. There have to be alternative sources of financing for these projects, whether it’s debt funds or private equity,” he said.

Amid these challenges, relationships are huge, said Jennings. He stressed the importance of in-person visits and demonstrating the operational side of seniors housing to prospective capital sources.

Blanding Beatty, chief investment officer of Brentwood, Tenn.-based Vitality Living, said now is a time to temper expectations from a proceeds perspective.

“Lower your loan-to-cost ratio expectations; they are probably going to be more like 50 percent or 55 percent at best,” he said.

As long as interest rates stay elevated, Ackerman does not foresee equity being attracted to development. The only new development he expects to see in the near future is for unique pieces of real estate in urban areas that can command high rents.

Expense control is key

Hudgins also asked panelists to assess the labor market and its impact on development. Marinko said labor has without a doubt impacted the product mix.

Historically, the bread-and-butter product type was a 100-unit assisted living and memory care community, according to Marinko. But now developers are looking at how to build 80-unit independent living properties or smaller 48-unit assisted living and 24-unit memory care projects.

“You have to remove the uncontrollable variable, which is labor. It has changed development dramatically,” said Marinko. “You have to look at the long-term survivability and sustainability of your business.”

One suggestion is to re-evaluate a community’s purchasing model, perhaps removing the inclusion of food and making it a fee-for-service model. This way, residents can purchase services a la carte.

“The operating margin compression has really forced the hand of developers to either find a location that is so irreplaceable that it can command an above-market rent relative to anything else we’ve seen, or adjust the care mix so as to minimize the impact of labor,” said Beatty. Lately, his firm has been targeting more active adult and independent living communities and even outsourced care.

Ackerman emphasized that labor isn’t the only concern from a cost standpoint. Operating costs are simply up across the board.

“Our margins have collapsed from the average that used to be 30 to 33 precent. Now the average REIT is in the 20s.”

Until that profit margin turns around, the industry will focus on attaining the highest possible rents. But concerns are quickly multiplying as to the number of seniors that can afford high rents.

“We know people can’t afford $7,000 rents,” said Ackerman. “So, we have a real conundrum in the industry of how to provide seniors housing in the middle-class model.”

Jennings agreed that high costs are causing developers and owners to reassess their property models, saying that buildings will probably have to be smaller and more efficiently built in order to reduce the overall cost of construction.

“When you have a site you really like, it’s easy to get convinced you should go larger to make the numbers work,” said Jennings. “But if I look at everything I’ve developed in the past 10 years, I can’t think of one building that I wish was bigger. I can think of 10 that I wish were smaller.”

— Kristin Harlow

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