Spectrum’s Giant Senior Housing Pipeline to Boost Portfolio by 25%

Spectrum Retirement is on pace to increase its senior living portfolio by about 25% next year with more than a thousand units either under construction or in the pipeline for 2014 as part of its strategy to grow by new development rather than acquisition. 

“What we’re doing over here at Spectrum is controlled growth—predictable, controlled growth,” says Jeff Kraus, who along with John Sevo is the co-owner and manager of Spectrum Retirement.

The company started with approximately 800 units in 2003 before it began developing new properties across the U.S. in 2005, quadrupling in size after building about 2,400 units.

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Spectrum Retirement currently has an approximately 3,000-unit portfolio comprised of independent living, assisted living, and memory care. 

“We’ve been busy,” says Kraus. “We think we can control our growth better through development versus acquisition. We see more people trying to enter the development arena, but for the most part, a lot of companies prefer acquisition, because it’s immediate growth for them.”

In August, Spectrum sold an approximately 500-unit portfolio located primarily in Oregon along with one property in Washington, giving the company added ability to grow, according to Kraus. As part of the transaction, Spectrum divested its Medicaid business, becoming 100% private pay going forward.

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While public companies tend to go the acquisition route for deals that are immediately accretive to earnings, Kraus says his company’s private status allows it to pursue a different strategy. 

Development can be more challenging for public companies driven by the need to produce earnings for investors, but Spectrum uses private equity and five or six “stalwart” construction lenders, including Bank of the West, PNC, and Wells Fargo. 

Spectrum typically gets bank financing for 70% of its projects, on average, and contributes the remaining 30% equity.

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“We like to put a substantial amount of equity in our deals,” says Kraus. “It gives us a safety factor. We plan to keep on doing this for a long period of time; we think it greatly reduces our risk.” 

While some companies saw construction activity slow down as a result of the economic downturn, Kraus says Spectrum’s construction pace has remained steady. 

“We’re comfortable with building anywhere from four to 10 deals a year, with deals averaging 100-120 units,” he says, adding that anywhere from 600-1,200 a year has been Spectrum’s growth pattern. 

Each community costs roughly $20 million for 120 units of independent living, or for 90-100 units of assisted living, according to Kraus. Five projects would cost in the ballpark of $100 million. 

The company currently has six projects under construction and plans to break ground on four more deals before the end of 2013. Current and pipeline projects are located in Indiana, Illinois, Arizona, Missouri, Colorado, and Oregon.

While Spectrum hires third-party independent contractors for each project, it also has a construction and development platform that includes an in-house staff of eight professionals, including architects, landscapers, and construction experts who are in the field checking out sites, along with two people in charge of construction draws. 

That gives Spectrum a broader market than a lot of its competitors, Kraus says, especially those without the advantage of keeping construction costs down thanks to an in-house platform. 

“Since we manage our own construction, and have our own marketing department—and, we’re not the highest-cost provider in the market—we have an advantage,” he says. “We don’t have to get the highest rents in the market.”

Written by Alyssa Gerace

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