Private Equity Investment in Senior Housing All About “Operator, Operator, Location”

For private equity investors interested in entering the senior housing space, it’s all about the operator, agreed a panel on tapping into private equity during NIC’s 2013 Regional Conference held March 5-7 in San Diego. 

While criteria in real estate often hinges on “location, location, location,” in senior housing, it’s more like “operator, operator, location,” said moderator Scott Stewart, managing partner at Capitol Seniors Housing, attributing the modified phrase to an industry peer.

“That’s everything—that’s where the rubber hits the road,” said Curt Schaller, principal, Focus Healthcare Partners LLC. The scariest thing in senior housing, he said, is when there’s a new, beautiful, easily accessible building that’s only 80% occupied and struggling, but the 20-year-old community with an out-of-the-way location is “kicking its butt.” 

How a community is operated can often defy traditional thinking of why one building is successful while another isn’t, Schaller said.

“It gets right down to operations: you need a strong operator with a bench that can react,” he said, highlighting the importance of a competent executive director.

“We want to peel back the onion on operations and see cabinet-level positions that have been in place for 10 years with good stability, passion, and alignment with the mission and the owner’s purpose,” said Kathryn Sweeney, principal at Great Point Investors. 

There are a couple key factors private equity sources generally consider when assessing whether a proposal for investment is worth pursuing, Sweeney said.

“If you don’t have [an existing private equity] relationship, [you have to] approach a private equity source with all of your homework done,” Sweeney said. “Typically, I’m most interested in phone calls or visits that start with [asking me], ‘What are you looking for?’ instead of just saying, ‘Here’s what I have; does it fit?'”

If the proposal is in reference to a particular project, she said, it’s a good idea to already have development and operations “if not integrated, then very well aligned” with a team track record that extends over a period of time longer than six months. 

Deciding whether or not a pitch is worth pursuing varies case-by-case, she said, but if a majority of the boxes check out, then she’ll want to receive some printed materials such as market study results, a pro forma, or the operating and developing teams’ bios.

There are two big red flags during the initial stages of this process, according to Schaller: If the person seeking private equity has made extensive plans without lining up an operator, or if operators call up looking to buy an assisted living property outside their region when their expertise is in independent living. 

“You’ve gotta stick with core competencies,” he said. 

That’s not to say operators can’t add to or improve existing operations, and this could be a “tremendous” opportunity when it comes to memory care. In a bid to “close the back door,” said Stewart, Capitol Seniors Housing is looking at its portfolio to see what buildings could accommodate memory care additions or conversions.

“A lot of the buffalo have been shot and you’ve got to get really creative out there to get opportunities,” he said. “Memory care is a fantastic opportunity… It’s low-hanging fruit, but a lot of operators don’t seem to have the construction expertise needed to execute on that. The new development part scares me, as there are low barriers to entry and smaller [stand-alone] buildings, but as an add-on, it’s a tremendous opportunity.”

Written by Alyssa Gerace