It’s no surprise that leaders in the senior housing sector are worried by the specter of rising interest rates—but it may be less obvious why a flow of new capital into the industry is also a top cause for concern. Yet, the capital influx is indeed a major source of anxiety right now, according to survey findings released earlier this week by Capital One (NYSE: COF), a leading senior housing finance provider.
To better understand the survey and get an inside take on the state of senior housing investing, Senior Housing News recently sat down with Capital One’s Imran Javaid, managing director of healthcare and specialty finance, and Keith Kodrin, senior director of healthcare real estate.
Javaid and Kodrin “peeled back the onion” on some of the surprising survey findings, spoke candidly about ideal operator size and explained their preferred types of senior housing assets.
SHN: Is there a recurring message or theme you’ve been hearing from your senior housing owner/operator customers in 2016?
JAVAID: We can point to our survey in terms of some things that are out there, and some results were unexpected. The reason I say it was a little counterintuitive is that everyone is worried about higher interest rates, and I would expect that to always be there. But people are also worried about the continued influx of new capital.
SHN: That seems like a good problem to have.
JAVAID: Generally, it seems like it should be a good problem. We have to peel back the onion a little bit to understand what people were getting at.
I’m speculating, but I think that based on ancillary conversations I’ve had with folks, in my opinion, they’re worried about the multifamily developers who have no experience in the business coming in. They’re not worried about the equity guy coming in, smart equity coming in and doing projects, they’re worried about the dumb money.
KODRIN: I think it really is that. It’s the lenders, the developers who are in now, when they see the demographics, the influx [of seniors], and when obtaining capital—I don’t want to say it’s easy, because it’s not easy—but when times are really good. It’s those lenders that when something goes wrong may run to the hills and never come back, and that may do more detriment to the industry than is helpful now, when times are good.
When I first saw that result, I thought, why is that a problem? You have to kind of think about it. Because more money in the space and more visibility generally is a good thing, but as you peel it back, you really have to think and speculate.
Folks like us have been in the space for a long time and seen the ups and downs, and those that have come and gone. And in some instances, when something happens, the perception may be permanent in some institutions’ minds because of a bad experience, and they never come back. Which isn’t good.
It’s about being prudent, and it’s more important to know who you’re lending to and partnering with them than sometimes what you’re lending on.
SHN: Would you say the industry is being more cautious about who they’re bringing in and working with? I don’t want to say it’s necessarily a rogue multifamily developer, but someone entering senior housing because it seems like an easy play, and operators getting wise and saying I’m not touching that.
JAVAID: We certainly turn those guys away and down. They’ve got the equity lined up and they’re ready to go. So I can see very easily, quite frankly, some banks being a little more staved for assets saying, go ahead.
KODRIN: And some might have relationships with these multifamily developers. And they’ve convinced their lender or even their equity partner of the [favorable] demographics. And you know, the demographics are 15 to 20 years away from truly being the right opportunity. So, I think that may be what we’re seeing, as well. We see it, I think, probably every week, at least. And we’re selective, but we do still see that influx.
We’ve been told by equity sources that they view us as the last line of defense in keeping everything in check. Which isn’t exactly reassuring, on some level, but at the same time, we’re selective in who we deploy our capital to. We protect the balance sheet. For every opportunity, we want to understand the thesis, what risks they see and why they’re comfortable with a certain operating partner or developer, and then, we’re going to dig in as well and verify and confirm. Trust but verify.
SHN: And in terms of those operating partners, is there a need for more good operators in the industry? It seems everyone says we need more good, smaller operators.
JAVAID: I don’t know if it’s better small operators. I think more than anything, there’s only so much talent to go around. It’s the executive directors and all of that. From a holistic standpoint, do you need lots of good operators? There are lots of good operators. It’s staff. Get your local guys trained. Get your EDs and administrators, whatever your appropriate name is, those boots/heels on the ground should be trained.
KODRIN: These are operating businesses and they are operating businesses at the local level. Each facility, and that’s the big operator, the small, are only as good as the folks they have running their ops on site.
SHN: What about consolidation? Will Brookdale’s challenges, and they’ve said it includes problems at the ED level, make people think twice?
JAVAID: By definition, if you get to be a certain size, it’s almost like too big is almost mandatory to fail in some ways. Because you cannot have the same focus. If you have 20 buildings, that’s a different focus than 2,000 buildings. Sure, you can have regionals, but again, the staff piece, you have to have the right pieces. And the problems always end up being local.
It’s a very people-oriented business, always has been, whether it’s your residents or line staff. These two components are what make it work. It’s virtually impossible, in my mind, to be that size and have that focus. I do think there’s a healthy size where you have synergies.
SHN: What is that, is there a sweet spot?
JAVAID: We cater to the middle-market. I like the 20 to 50, maybe 100 buildings scale. Once you get past 100 buildings, you probably are getting to be fairly large and cannot possibly have the same focus.
SHN: Is there a number you prefer not to work with, say, more than 110?
JAVAID: There’s no hard and fast rule.
KODRIN: If you were to look at our portfolio, that’s probably what you would see.
JAVAID: I learn so much from the smaller operators. They’re trying different things. I love doing the building tours. I like going through the building and learning, here we figured out that for the dietary staff, it would be really good if they had pictures of all the residents in the kitchen, so when they go out and do waiter service they know what their preferences are. So no matter who’s in the dining room, they know Mrs. Smith likes a highball. They have that kind of attention to detail. I love those guys, what they’re doing to differentiate themselves. It’s hard to scale that.
SHN: I’ve heard a lot about independent living lately. It seems like independent living fell out of favor for a while but is back, people like it again?
JAVAID: I prefer independent living, actually. In fact, I get a little nervous when it’s just a standalone facility that’s memory care, small. To me, I like the independent living, assisted living, memory care or skilled nursing facility all in one place, because I think from a consumer standpoint it’s really good value.
I’ve seen it, it’s what we prefer to lend on, it spreads your risk. People want to be in their own place.And when you have the phrase independent living, it sounds better than assisted living. Independent is in the name. That transition is easier. And then when your spouse has some sort of an issue, it’s better for the consumer. I think it has a high probability of penetration and costs more to build and the size is bigger. There’s only so many places you can do that and do that well. In a memory care building, you can build it down the road, especially the 40-unit types.
SHN: Is independent living attractive for value-adds, because they can bring in services? Someone says, I can buy this building and keep residents another six months by bringing in services?
JAVAID: You have some of that, we had a very successful project. It has to be the right market. It’s, do I need an IL/AL dual certification, and am I able to provide that service without having to take the person out of their living space? That’s compelling. People hate to move. I don’t like to move.
SHN: So you’re viewing continuing care retirement communities as good opportunities?
JAVAID: We do both entrance-fee and rental CCRCs. We don’t do entrance fee CCRCs for everyone and anyone. But in the right market, with the right demographics, we like them.
I think—I have a bias—if you can have the independent and assisted living, that’s not an easy thing to provide in 2016, but if you’re able to provide a continuum of care, I think that’s going to be a compelling value prop, because so much of the market for standalone memory care might be getting close to saturation. Last year, everybody and their brother was talking about it, and now they’re not. And [stand-alone communities] have their place, don’t get me wrong, but in the right place, the right market, everything makes sense. So you have to be diligent in whatever you do.