WASHINGTON, D.C. — Jon Fletcher of Senior Housing Partners, the development arm of Roseville, Minnesota-based Presbyterian Homes & Services, offers this advice to developers undertaking a middle-market project: set aside your ego, focus on what the residents need, and avoid the temptation to provide a variety of “fringe luxury amenities.”
Not every community needs two to four restaurants, for example. “The reality is that it’s just not going to work in a middle-market space. Residents obviously still need to be treated with respect and have an amazing life enrichment experience, but the residents themselves are the community. The building isn’t the community,” emphasized Fletcher, who is the senior vice president with Senior Housing Partners. The focus should be on providing residents with the services they need to live life to the fullest, he added.
The insights from Fletcher came during a panel session aptly titled “Unlocking Middle- Market Housing Opportunity” on the second day of the 2024 NIC Fall Conference at the Marriott Marquis Washington, D.C. The three-day conference has drawn over 2,800 real estate professionals from a broad swath of the seniors housing industry.
Joining Fletcher on the main stage were Ben Firestone, CEO of Blueprint, a healthcare real estate advisory firm; Chris King, CEO of Elevation Financial Group, a private equity real estate investment company; Joe Pohlen, CEO of Cardinal Senior Management, a smaller operator based in Michigan; and panel moderator Susan DiMickele, president and CEO of National Church Residences, the nation’s largest nonprofit provider of affordable seniors housing with more than 350 communities across the country.
Presbyterian Homes is a faith-based, nonprofit organization that owns 63 communities located primarily in the Upper Midwest. About 50 of those properties were ground-up developments undertaken by the nonprofit, and the remainder were added to the portfolio through acquisitions over the past three years.
“In most cases, what we’re developing would look, smell and feel very similar to a market rate, or even in some cases, a luxury seniors housing community,” said Fletcher.
Approximately two-thirds of the portfolio is independent living, and the remainder is comprised of assisted living, memory care and skilled nursing facilities. The organization also provides a host of in-home, community-based services such as Meals on Wheels- type programs, therapy, pharmacy, primary care physician networks. All told, Presbyterian Homes serves more than 27,000 residents and has nearly 8,000 employees.
About 60 percent of the portfolio is dedicated to the middle market, which it defines as household income between 60 and 120 percent of area median income (AMI) depending on the market, says Fletcher. Presbyterian Homes tries to avoid any reliance on tax credits to help fund projects. The majority of revenues stem from private sources, including the residents.
As a nonprofit, Presbyterian Homes makes a conscious effort to pass along only modest rent increases to tenants, said Fletcher. “What we find in almost every market is that housing cost inflation is far outpacing the Consumer Price Index. What we try to do in each market is if our operating costs are going up 3 to 4 percent for that year, we try to match our rent increases to that 4 percent. Even if our competitors might be increasing their rents by 5 or 6 percent, what we try to do is arbitrage that over time,” explained Fletcher.
If Presbyterian Homes can stick to that 1 to 2 percent spread in rent on an annual basis, over a 10-year period it can achieve a 10 to 20 percent discount versus the market, said Fletcher. “Obviously, that gives us a very big competitive advantage. Basically, what we’re trying to do is grow into the middle market over time.”
Small Operator Strategy
Cardinal Senior Management owns and operates assisted living and memory communities in Michigan and Pennsylvania. The Grand Rapids, Michigan-based company seeks to acquire communities built in the 2000s that were Class A at one point in time, but which can no longer fetch top rents. Cardinal purchases those buildings significantly below replacement cost, repositions the assets and then utilizes the availability of HUD financing to secure long-term, fixed-rate loans on the properties. The HUD Section 232 program allows for long-term, fixed-rate financing up to 40 years for new and rehabilitated properties and up to 35 years for existing properties without rehabilitation.
The all-in, entry-level cost for an assisted living resident at Cardinal communities is roughly $3,700 per month and in the low $4,000s for memory care, and those figures include food and all transportation. In instances where a resident moves in and eventually exhausts all his or her personal funds, he or she will be assigned a roommate and be able to utilize the Medicaid waiver program to remain in place and receive care.
To acquire seniors housing properties, Cardinal raises capital through a family office. It uses that money to pay all cash for properties and then refinances those real estate assets through HUD to recycle that equity. The strategy is to hold the acquired assets for the long term.
The panel moderator asked Pohlen if he believes that family offices will be a viable source of capital for the long term. “Yes,” he said. “I think you are going to see more and more international capital coming into our space because [the investors] see the opportunity, they see the demographics, and they’re looking for places to place capital long term.” Cardinal, for example, has attracted Latin American capital, said Pohlen.
Fixing Broken Properties
King of the Elevation Financial Group, headquartered in Winter Park, Florida, acknowledged that the middle market is a tough nut to crack in the seniors housing industry. “There’s the highly affluent, very small sector of the space, and a lot of people are competing for that. There’s also a very well-defined, very government-involved, low-income housing sector. Then there’s this giant middle where most Americans live. What we have seen is very few private solutions to what is really a public policy problem,” he explained.
Elevation’s mission is to acquire, revitalize and operate affordable apartment communities for independent seniors and families. The company tries to “reimagine” or ”reinvent” failed assisted living, memory care and skilled nursing communities across the country, said King.
Many factors may have led to these financially troubled properties that Elevation is targeting. The COVID-19 pandemic was the accelerator of many problems starting in March 2020. But even before that there were labor shortages in senior living and issues surrounding Medicaid and Medicare reimbursement rates. In some cases, a new property that was built near an existing property could mean that the existing asset can no longer generate $4,000 or $5,000 rents.
Elevation buys those troubled properties with the aim of making them more attractive and affordable to a slightly lower-income customer. The monthly rents for this middle-income product generally range from $1,000 to $1,400, but rents can vary by market, said King.
The company is currently active in about 10 states, stretching from Massachusetts to Florida to Texas and the Midwest. Elevation’s website shows 15 properties in its portfolio.
“What we’re offering is safe, clean, elegant and affordable. What we find is there is a huge demand and a very limited supply.”
— Matt Valley