By investing in both seniors housing and related healthcare services, the private equity firm is making its mark.
By Matt Valley
Brian Beckwith was built for his role as CEO of Formation Capital LLC, a post-acute healthcare private equity and investment firm based in Alpharetta, Ga. In short, he hates to lose out on deals. “That’s a common trait here,” he says of the firm launched by Chairman Arnold Whitman and President and Co-Chairman Steve Fishman in 1999. “We’re not good losers.”
The company has a track record of strong performance and a reputation for execution in the market, emphasizes Beckwith, who has served as the firm’s CEO for the past four years. “We have a loyal investor base and we are attracting significant capital to invest alongside Formation.”
By being nimble and opportunistic, Formation Capital has maintained a national investment presence with nearly $5 billion of managed investments in post-acute healthcare, including real estate comprising over 60,000 beds in 35 states. The private equity firm’s acquisition pace has increased and its portfolio has become more diversified over the past four years. About 15 percent of Formation Capital’s real estate portfolio is private pay, a figure that it seeks
The firm’s already large footprint has grown to include a major investment in seniors housing across the pond. After losing out to Terra Firma more than two years ago in its quest to acquire Four Seasons Health Care, a care-home operator in the United Kingdom, the company scored a victory last fall.
In November, Formation Capital and its acquisition partner, Safanad Ltd., entered into an agreement to purchase 261 nursing and residential care facilities in England and Scotland from NHP for approximately $761 million. The portfolio includes 12,500 beds and has an overall occupancy of approximately 88 percent. HC-One, a wholly owned subsidiary, manages a majority of the properties.
“They are senior care homes. In this case, they are mostly government-funded homes through the local authorities in
the U.K.,” says Beckwith. “It’s something that we expect will be a growth area for us.”
On this side of the Atlantic Ocean, Formation Capital and its investors acquired 14 skilled nursing facilities in the mid-Atlantic region for approximately $150 million last June. The portfolio was comprised of 1,658 beds operated by Consulate Health Care, another Formation investment and the sixth largest provider of skilled nursing care at the time.
Prior to joining Formation Capital, Beckwith led the lending and investing efforts for healthcare real estate and senior housing for GE Capital, where he also oversaw $7 billion in loans and investments. Seniors Housing Business recently sat down with Beckwith to gain a better understanding of Formation Capital’s overall investment strategy and discuss some of the trend lines in the industry in America and the U.K.
Seniors Housing Business: Formation Capital is a dynamic firm with several moving parts. How do you describe yourself to the outside world?
Brian Beckwith: We’re a private equity firm focused on post-acute investments. Our investment strategy most recently has been comprised of 50 percent services and 50 percent real estate. That includes our traditional real estate investments, where we are buying healthcare real estate and leasing it to a third-party operator. That’s our history. We really look like a REIT in that world. The other part of what we do is invest in services in the post-acute space. That includes leading care providers such as Consulate Health Care, Trident USA Health Services and Hospice Compassus Inc.
SHB: What is Formation Capital’s definition of “post-acute” investing as it relates to seniors housing?
Beckwith: It is a very simple definition: anything that happens after the hospital stay. We are trying to make investments across the sector — whether it’s a synthetic post-acute network that we create through different types of investments, or whether we are opportunistic in a specific real estate deal. That includes everything from independent living to hospice.
Some of the services that are provided to a post-acute patient are provided in a real estate-based setting: independent living, assisted living, Alzheimer’s and skilled nursing. Some are more service-based: home health, hospice and rehab services. We are becoming more involved in every one of those areas to take advantage of the expertise and relationships we have developed over the years.
When we talk about post-acute investing, our history had been real estate, which is where our skills developed and that was our true core competency We’ve broadened that scope more recently, and we expect to continue to invest in the real estate sector as well as select service sectors.
SHB: Is there a sweet spot for Formation Capital when it comes to making an investment in a post-acute facility (either by dollar amount or type of transaction)?
Beckwith: Our sweet spot is opportunistic-style investments — finding areas where we can add value and add that value quickly. We look for transactions where we think we can provide an advantage and align ourselves with strong management teams and operators.
A few examples of our value-add approach include investing capital to expand or update the physical plant of our facilities, or buying from one owner/operator and transitioning to a new operator to manage the facilities, even though that is never an easy task. We try to place ourselves in a position where with a little more of the nitty-gritty work — and without the pressure of being a publicly traded company — we’re able to transition a portfolio to be a stable cash flow stream, while benefiting the resident.
SHB: Can you provide an example where Formation Capital made a difference?
Beckwith: In December 2011, we bought a skilled nursing portfolio of 11 assets in Illinois. We switched operators on day one and it was exactly the kind of situation we like. The portfolio needed significant capex (capital expenditures), and it needed a new operator because the existing operator was going to move on and retire. There wasn’t a family opportunity to transition the business. We were able to really shift the mix a bit to make it more of a short-stay, rehab-focused portfolio versus the longer-term, Medicaid-style facilities. It has been a beneficial transaction for all.
SHB: Does Formation Capital prefer complicated deals?
Beckwith: I think it fits our skill set a bit more. Complicated transactions are where we have a competitive edge over some of our competitors. A transaction that has a lot of complexity to it doesn’t fit as well with a publicly traded discussion. When you go out and talk about complexity, that doesn’t translate to stability of cash flow initially. It may still be the same stable cash flow, but it’s harder to explain and that becomes more difficult.
So, complexity is something that we don’t shy away from. It does make things harder and stressful, but it’s something that we embrace because it’s where we can be very competitive.
SHB: Formation Capital invests its own capital and the capital of others. Can you give us some more insight on who the “others” are exactly and how you work with them?
Beckwith: We operate more like a pledge fund in that we have specific partners that have worked with us on transactions over our history. We access different pools of capital for different transactions.
The most active pools of capital include the principals and employees of Formation Capital. Second, we work closely with a group of friends and family made up of high-net-worth accredited investors, a group we partner with in almost every transaction, and in some cases exclusively. Then we have institutional partners, the best examples of which include Northstar Realty Finance Corp. and Safanad, in addition to some of the public REITs in our most recent U.K. transaction.
We access these different pools of capital depending on the types of transactions. Some investors are more interested in a private pay, lower return type of transaction, while others are interested in more of a higher risk, higher return type transaction. We try to match the capital to the opportunity. We have some very good partnerships and relationships that have developed over the years that enable us to do that with some confidence.
SHB: How many people does Formation Capital employ?
Beckwith: We have 36 employees today. That excludes our development team, which is another five. So, 41 total employees. That figure has grown over time. It’s 25 percent higher than it was four years ago. Our expectation is that we will continue to grow in the short term.
SHB: Do your employees come from a variety of disciplines? What kind of skill sets are you looking for as an employer?
Beckwith: A lot of the folks that are with us today have significant post-acute backgrounds in real estate or services. I was at GE in healthcare lending and investing for 14 years. We’ve got a couple of other GE folks who have since joined us and who have similar backgrounds. We hired three people from one of our former investors, JER Partners.
When it comes to acquisitions and asset management, we’re targeting employees who either have a real estate background or a healthcare background. We try to find skill sets in one of the two disciplines. Ultimately, the most important is their ability to fit our culture. We focus on making sure we bring people to the team who are smart, work hard, and can help us reach the goal of making returns for our investors while being good partners with our operators and positively impacting residents and patients.
SHB: How many transactions are you working on in a given year?
Beckwith: It varies year by year. Our activity over the past four years has been over $1.2 billion in transaction volume per year from an acquisitions standpoint. In terms of the number of transactions, we tend to look at larger transactions. We will acquire the four- and five-asset portfolios, but the 10s and above is where we spend more of our time. On the services side of the business, a couple of the acquisitions that we’ve made recently are $300 million or more.
SHB: Over the past few years, has Formation Capital been more of a net buyer or seller?
Beckwith: We’ve definitely been more of a net buyer over the past few years. The vast majority of the $5 billion in assets in our portfolio have been acquired over the past four years. We did have one major sale last year. We sold a $1.05 billion healthcare real estate portfolio to Northstar. (The portfolio included 43 primarily private pay seniors housing facilities and 37 skilled nursing facilities.) We continue to manage that portfolio with Northstar as our partner.
In addition to the significant acquisition we made in the U.K., last June we acquired a 14-asset portfolio in the Mid-Atlantic region (highlighted in the introduction). In December, as a continuation of our post-acute private equity strategy, we acquired Hospice Compassus, a nationwide network of community-based hospice programs based in Brentwood, Tenn., with an average daily census of over 3,500.
SHB: From 2005 through 2008, you led the entire healthcare lending and investing operations for GE Capital in Europe. What did you take away from that experience?
Beckwith: I was based in London and it was a very interesting and exciting time right before the market changed. When you think about how aggressive the U.S. market got, I think the European market was even more aggressive. Transaction volume was going gangbusters, but I learned a lot when I was there and developed a lot of good contacts.
There’s been a little bit of a history with private equity investors in senior care in the U.K. During the time I was there, some of the large private equity investors were very involved and made a ton of money, but left a couple of skid marks with respect to how much leverage they used — which was 80 to 90 percent. They were big numbers, and it didn’t work out well for some of the lenders.
SHB: Can you compare and contrast the seniors housing market in the U.K. with the U.S. seniors housing market?
Beckwith: It’s hard to compare because of the National Health Service (NHS) in the U.K. At one point it was the third largest employer in the world, and it has a very big influence on all of the healthcare delivery in the U.K. However, I would say that in the post-acute senior care market, the U.K. is a little behind where we are today and even where we were 10 years ago.
Part of the challenge that we have, and part of the strategy, is to help facilitate the transition of patients from NHS hospitals to care homes in a lower-cost setting to allow for an overall reduction in spending for a particular patient. It’s going to be hard to accomplish for lots of reasons, but we can see signs of that happening down
SHB: How does the existence of the NHS make healthcare more challenging in the U.K. than here in the U.S.?
Beckwith: The average length of stay in a hospital in the U.K. is significantly higher than in the U.S., and there is more pressure in the U.S. to get people out of hospitals quickly. In the U.K., there’s not as much pressure to push people out of hospitals. That will likely change over time, but there’s some resistance to quicker discharges because the hospitals are such a big employer. Closing hospitals is a hard thing to do. Sometimes they’re oversupplied in certain markets.
SHB: How much debt does Formation Capital typically put on the properties it acquires?
Beckwith: That’s part of the benefit of being private, and that’s part of the way that we compete with some of the big guys. We’re able to use a decent amount of leverage and our relationships with lenders have been helpful. They’ve been supportive. We’re using 70 to 75 percent loan-to-value on our real estate transactions.
SHB: And you’re comfortable with that LTV?
Beckwith: I’m probably more comfortable with it than the lenders are, but yes. Historically that number had been 85 percent. Prior to 2007 and especially when I was at GE, 85 percent was pretty standard.
SHB: Formation Capital is opportunistic and nimble. Where do you see the company in two to three years?
Beckwith: In two to three years it’s inevitable that we will become a little bit more institutional. We’re attracting more institutional capital, often with SEC reporting requirements, and we have the infrastructure to transition the firm to become a little bit more institutional. The goal is to maintain that opportunistic, creative, kind of aggressive entrepreneurial spirit that has made Formation successful, while attracting the capital and providing the right level of information for an institutional investor. I’m hopeful that we can manage that balance well.
SHB: What level of return can investors who invest their money alongside Formation Capital expect to receive today?
Beckwith: I can tell you that returns have compressed as prices have started to become aggressive. I’m hesitant to throw out specific numbers because it provides our competitors with a little insight into how we do this. However, I will say that historically we were looking at cap rates for skilled nursing of 12 to 12.5 percent. Today, they are definitely lower by at least 100 basis points. Assisted living has dropped and could be in the 6s, sometimes even lower.
SHB: What’s the relationship between Formation Capital and Formation Development Group (FDG)?
Beckwith: It is a sister company. I interact with the team daily, and the development company can give us very good feedback on specific markets. When we are evaluating possible assisted living investments, FDG has proven very helpful. If we have a concern about an operator or market, the first thing I do is talk to Mark Spiegel (president of FDG). In turn, when we see opportunities that may make sense for FDG, we point them out and get the team involved. It’s part of our strategy — creating pockets of expertise that allow us to make better decisions. So, it’s a very complementary, close relationship.
SHB: What do you like most about your job?
Beckwith: I enjoy this role mostly because it enables me to apply my financial skill set to an industry that at the end of the day can help communities, residents and patients. I’m here to deliver returns for investors. But the ancillary benefit is that if we do our job well, we’re enhancing the delivery of healthcare to a population that needs it.