In 2009, Alpharetta, Ga.-based Formation Development Group and Radnor, Pa.-based Shelbourne Healthcare Development Group and their respective capital arms formed a joint venture, called Formation-Shelbourne Senior Living Services.
The partnership brought together a team of members with extensive background in the senior living industry, allowing former Sunrise Senior Living principals and EdenCare Senior Living executives to combine their experience and go where few others have ventured in recent years: senior housing development.
Senior Housing News recently spoke with Mark Spiegel, the co-founder and president of Formation Development Group, to find out more about the partnership and how the Formation-Shelbourne partnership has managed to find financing for the multiple projects it’s currently working on. (A Philadelphia Inquirer article puts the total value of the six joint venture projects currently under construction at $150 million, and named Aureus Group LLC, out of Dallas, Tex., as the main investor.)
Senior Housing News: Unlike almost every other development company in the senior housing industry, you’re currently very active. How are you doing it?
Mark Spiegel: The year 2009 [when the partnership was formed] was the heart of the financial crisis and contained some of the deepest points in the recession. It was a very risky time to be talking about new development. But within a 12-month period, we have commenced seven projects.
I’m not aware of anyone else that has more than just one or two projects underway. To the outside world, it looks like we came in with a huge splash and just started a bunch of projects, but these are things that our respective teams have been working on for years.
For example, the Germantown, Tennessee project, an independent living, assisted living, and memory care community, we originally put under contract in 2007—and went through a very long zoning battle and entitlement process to do that. ( Ed. note: Two other projects are located in Willistown Township and Doylestown, Pa., near Philadelphia, with others in Olney, Md., Houston, Tex., and Roseland, N.J.)
These projects have been around in our pipeline for a while. We took the risk to keep them alive and advancing toward permitting stage, with the confidence we’d be able to attract capital.
When that came together in late 2010, we were able to accelerate the process on all the sites and the various projects. It was basically a 2-year pipeline when the financing came together.
SHN: What can you tell me about who’s financing your projects?
MS: On the equity side, Formation-Shelbourne created a couple different strategic relationships with two different private equity investment groups who are both very industry savvy, committed, and experienced.
We created two investment funds with those groups for development. They’ve been the co-investment partners with us on all seven of these projects going forward. We created that so we could have a programmatic approach to do multiple deals. These investors didn’t just want to do a one-off project; they wanted an ongoing relationship with someone with a track record and a great deal of experience. Those conversations and relationships are ones that have been around for 10 years.
They saw a void in the marketplace where there wasn’t a lot of activity, partially due to recession, and partially to lack of financing, and they were attracted to that.
On the debt side, there are some limitations. There’s institutional capital; it involves a couple different REITs. The REIT structures themselves are fairly proprietary; they’re not trying to dive into construction financing in a big way. It’s more relationship-oriented, which is where I think construction financing is going to come from in the next couple years.
SHN: Builders are saying they want to build but they can’t, because there isn’t available financing despite favorable supply/demand metrics. How would you respond to that?
MS: There is no one I’m aware of who’s trying to “put out” development financing. But, they’re willing to take a selective allocation of what they have available, and team up with relationships and work with people they’re already doing business with.
There’s activity—but the activity I tend to see is what I’ll call more one-off than programmatic. Companies or developers that have a program that’s been around for a while, are able to move forward with it. Some smaller developers are doing memory care, [and they’re] going to regional community banks and putting up a balance sheet to get that financing.
I’m not really aware of anyone gearing up to do a major program on the development side. Even us, we’re not trying to “roll out” a bunch of development, because it’s a very risky venture, and needs to be very selective.
SHN: Why has it been different for your projects?
MS: We’ve been working with all our projects for about two years. A lot of it is customized to the market, location, competition we’re facing. We’re not rolling out a prototype and trying to do as many as we can; we want to be laser-focused.
We were able to get so many going at once because what a lot of these projects—at least five—have in common is another developer that had been advancing the development process, getting everything zoned, permitted, etc., and for various reasons weren’t able to go forward because they couldn’t attract equity or debt.
We stepped into the situation where we were able to design our own product, but step into shoes of another developer and move in with our own product. We have a way to get our projects capital, and we’ve been able to find sites that were relatively tee’d up.
SHN: Who will be managing the communities once they’re completed?
MS: We’re aligning with third-party operators. The first six of the seven projects are going to be managed by Brookdale, although it’s not based on major exclusive relationship, although we do have strategic relationship with them.
We have a good relationship with Brookdale, and when they understood we were coming forward with a pipeline of high-quality product in number of markets, they realized [our projects were in] either in already-dominant markets [for Brookdale], or those identified [where they wanted] to grow regional presence. Brookdale saw it as way to grow in strategic regions.
We’re working with other operating companies as well, and some of the structures may eventually turn into joint ventures.
SHN: What types of communities are you favorable toward?
MS: We love the independent living/assisted living/memory care rental community concept. That’s one of my favorite products.
We’re very selective; a lot of dynamics have to come together to find those markets. You have to be able to find enough land to do that [kind of community], but in the major markets that’s not always available.
[In our current development projects] there’s a predominance of assisted living and memory care, because some of the projects we were able to jump on were already fully-entitled and zoned.
We will continue to do that product where there’s a site available—to always pair memory care with assisted living. We believe in that product type. We also very much believe in finding independent living with assisted living and memory care. Independent living got a little bit of a knock because of how the housing market has impacted it probably a little bit more than the assisted living/need-based aspect of marketplace.
Long-term, customer themselves, along with the adult child, will want a full-service campus, with on-site health and rehab services. That’s really where the future of the industry will head.
That doesn’t mean going into market and “niching” in higher-acuity AL/MC doesn’t work. But, we don’t do freestanding independent living apartments. There’s not a big difference in age between independent living residents we’re seeing and assisted living; on average there’s only a two to three year age gap.
When you go into lower-acuity, you’re not providing for aging in place. You’re not really addressing that even independent living people in our marketplace are moving and still have needs, and are looking to have those met. In one expansion project, an independent living-dominated community is adding assisted living.
The projects you’re involved with are pretty spread out; are you noticing any particular geographic or demographic trends?
Our strategy when creating a business plan was making a decision to align with high-quality management companies, both at regional or national level, and not do [management] ourselves, even though the principals of my company have a lot of experience [as former EdenCare executives].
We have a background in operations and have done that, which is advantageous to us as developers and investors now. But we would prefer to align with whatever the best-of-class operator is, where we saw opportunities, and keep nimble to be able to go to the kinds of markets and sites we thought were the best fit. That’s kept us flexible to be more national, rather than being attached to an operating company and be stuck in their region.
The current projects have a lot in common: they’re all full-service product, targeting demographics fairly affluent and able to pay for a full-service product. It’s a different way of looking at demographics than a lot of classic market penetration studies: We placed a very high rating on adult child demographics, even more than senior demographics. We have seen that be a more successful indicator for the upscale product we do.
The dynamic we look for, we’re weighting the income-qualified demographics of the adult child probably three times more than the adults themselves.
We can go into markets with four to five competitors in six mile radius, but we come in with a new project with nicer floor plans, better amenities, new construction, and we can penetrate that market very successfully. It’s sort of a false myth that existing senior living residents won’t move; they will go to a nicer community.