Bridge Seniors Housing CEO Chapin: Acquisition Prices Very Concerning

Having recently acquired an operating company, private equity firm Bridge Investment Group also plans to expand its portfolio of senior housing communities managed by third parties — although current high M&A prices are a concern.

“We’ve seen pricing continue to get richer and richer and it is very concerning to us,” Bridge Seniors Housing Fund Manager CEO Robb Chapin told Senior Housing News.

In addition to making value-add investments, Bridge is taking a more active role in managing its large portfolio, with a particular emphasis on building occupancy through better sales and marketing, Chapin said. He spoke with SHN at the recent Senior Living 100 conference in Laguna Niguel, California, in a conversation that also touched on workforce initiatives, the potential for active adult investments, and the need to consider more innovative health care plays.

Bridge is currently deploying its second senior housing fund. Currently, that fund has a portfolio of about 35 properties across 15 states, with 15 different operators. The portfolio for Bridge’s first senior housing fund consists of 58 properties across 24 states, managed by nearly 20 operators, mostly doing assisted living and memory care, with some independent living and five continuing care retirement communities.

The following has been edited for length and clarity.

What are your top priorities at the moment?

I think for 2019 it’s really about really shoring up occupancy across the portfolio.

I think we’ve all, as an industry, been impacted by all the new inventory that’s come in over the course of the last three years or so. Starting to see that level out a little bit, but what we’ve really recognized are the gaps with [some of our] third-party operators we work with. And that’s really the inconsistency on how they approach sales and marketing, to get the leads, to get the tours, to get the move ins. So I think trying to really smooth out those gaps, if you will, for us has been really a big focus for 2019. And to see some pretty significant impacts across occupancy as a result of that.

Can you elaborate on how sales and marketing can be improved to shore up occupancy?

Even with all this new unprecedented inventory that’s coming into the market the last 36 months, the industry has absorbed it at a healthy pace. It hasn’t absorbed it at the pace at which it’s come in, because it’s not been a healthy pace coming in, but it’s absorbed it at 2.5%, 3%, which is pretty stinkin’ healthy. If we didn’t have all that new inventory, [occupancy] would be in high 80s, low 90s across the board. We wouldn’t see this unprecedented dip in occupancy that we see today. We’re covering, what, around 86%-87% nationwide in seniors housing?

That’s why, to me, if you as an operator have a great sales culture, and everybody’s in sales, and you have the right leadership that’s driving that, you’re going to have success. So that’s a big thing that we look at now with third-party operators. What’s your sales culture? Help us unpack how you generate leads. How do you assess the market? How do you get that lady in here for a tour? What’s your conversion rate from lead generation to tour, from tour to move in? And really get into that granular detail. We didn’t do that five years ago with operators.

Is part of the sales and marketing puzzle relying less on third-party referral platforms? I was just talking to The LaSalle Group. They’re going down that path.

Technology’s starting to evolve in a way that’s allowing us to do that and to remediate those placement agents. Those services are so stinking expensive. You hate to have to use them. And I think the industry’s evolving to where we can control a little bit more of it, not all of it, but more of it. And those that I think that really can win at that are going to win the day. As long as you’ve got the right community, the right culture inside it, you’re going to have success, there’s no doubt in my mind.

Bridge recently acquired an operating platform, Somerby Senior Living. What drove the decision to become an operator?

The first thing you need to know is Bridge Investment Group is a 30-year-old investment management real estate company and … they’ve always managed their own investments. So they’re an owner manager in multifamily. We’re an owner manager in office. And I think from the get-go, when we launch the senior housing vertical, that there was this desire to incorporate that same culture of being an owner/manager in seniors housing.

Now, they also realize the inherent barriers to do that well. Seniors housing is very different than office and multifamily … It’s taken us some time to get there. I would say that it’s always been on our radar screen to do it, it’s really a matter of when, and I would tell you that in 2018 as a board we strategically reached a decision that we were going to be very intentional about trying to either buy or build and operating platform.

We just felt like that on a go-forward basis that it was to our benefit and it most aligned with our culture as a company. And as we know, operations is really at the core of the success of the investment of seniors housing.

We’re very excited about to have an integrated operating platform that not only will manage properties for us directly, but they’ll have a lot of influence across everything that we do as it relates to how we think about operations for working with a third-party manager.

But with our scale and size we don’t, at least at this point in time, see ourself ever managing everything that we own. We think there’s probably gonna be a good balance to that.

Our thinking now is we’ll probably be using our new operator, Somerby Senior Living, as part of the assessment of how we look at new property acquisitions and doing a lot of the triage … to help us really bring continuity on how we want to approach gaining operational efficiency. And the things that they’re doing really well, what they’ve done well in the past, how do we transition those things and transfer those into new investments going forward, and even older investments? Helping partner with our third-party operators, with this kind of new resource to them.

So, I’m thinking that 2019’s all about gaining optimization in occupancy-build in our existing portfolios as well as making some really good strategic value-add investments.

What are you seeing on the dealmaking front? We’ve been reporting that prices just keep going up.

We’ve seen pricing continue to get richer and richer and it is very concerning to us. We’re just not sure where it ends.

As an investor that’s trying to buy the right type of product right now, be competitive, we have really tried to differentiate ourself by being the acquirer of choice because we’ve always done what we’ve said we do, we’ve never re-traded a deal. I think our ability to, once we go under contract we close, from an efficiency standpoint, all those things, we’ve proven to the market that Bridge is the highest quality buyer out there, and there’s a lot of buyers out there but a lot of them don’t really know what they’re doing. So that drives the price up, creates a lot of friction and frustration, it changes the deal up from where it starts to where it ends. So with us, you know what you’re gonna get. I think we’re professional as anybody, so that helps us, but pricing continues to just be very toppy, and I’m more concerned about that as it relates to finding the right deals.

And at the same time we’ve just gotta be entrenched in these relationships and hopefully we can ward off some of that value creep by having the right relationship with the seller. They’re just more comfortable with us — even though they might be getting another 50 basis points in cap rate more, they want to work with us because of the proven track record and they’re just more comfortable doing business with us.

What do you think about active adult opportunities, especially given Bridge’s multifamily experience?

We are paying attention to it. We currently do not have a mandate in any of our active funds to do active adult communities. So we’re focused on the current mission, but strategically, Bridge is always looking at how we might evolve our investment styles.

I would say that were actively looking at it … but today it’s something we’re looking at closely to see how it’s doing, how it’s going to perform, how it’s being received in the marketplace, and is that a part of how the baby boomer generation in particular is going to engage and congregate on a go-forward basis as a kind of a first level, and then where do we play in that? I think it’s just too early to really figure that out.

To your point … we have a structure around multifamily congregate living anyway, so it’s a natural for us probably at some point to be in that space, for sure.

How is Bridge thinking about the evolving health care system, and the potential opportunities for senior living providers to take on more financial risk and upside by getting more involved with Medicare Advantage plans or health systems?

We are a lot more open to optionality around things … but we’ve not had any operators come to us with any kind of nuanced ideas or creative ways to think about the business, outside of the typical ways that we think about things of that nature that really drive our fundamental underwriting on a property and how we track the success of that underwriting.

In today’s environment and going forward, you have to be very flexible about considering new ways to do business and execute the business, to measure value creation of the business. And when getting up ahead of it, we can’t do it as a degradation of the return threshold we have to maintain for our investors. But, at the same time we are I think in a great place as a platform to be able to consider being very creative.

Do you think that operators need to become more sophisticated and data-driven?

Our experience with operators kind of runs the gamut and so I can’t really tell you that, you know, here is the absolute core essentials that make up a great operator. You think that they’re x, y and z, but they’re really not. It really comes down to the character and integrity of the leadership of the team and their ability to really want to drive their culture, whatever it is that’s gotten them to the success that they are [achieving], continue to drive and evolve and grow that culture without diluting that culture by going out and doing other things outside of what their core business of operational excellence is.

So I would tell you that for us, and we’ve now become one of the larger institutional investors of seniors housing, we need to have baseline financial reporting. But what we’ve done is, we’ve said we’ll build a lot of that into our own systems. So our own property accounting group and our office at the management level can support a lot of that for them.

We want you to really be good at knowing the local market. Be great at sales and marketing. Being great at having that world class team and always having the best executive director in that area, in our community. And that person will attract a great team around them and retain that great team around them. If you’re doing those things, we’ll handle all the other stuff that can be more commoditized.

The art of being successful as an operator, as we see it as an investor, is … to take that great culture that they built in the specialized markets that they’re in and do what they do. That will win the day every time. I don’t care, you can say, “Well, you have to give them extra financial incentives, do they have to have their own money in the deal to make it make sense before they do what they’re supposed to do?” No, it really comes down to that one thing. And that’s the leadership group.

What’s your level of concern with staffing and any strategies you’re working on with your operating partners?

I think that’s certainly an overwhelming thing and concern. And a great concern, a great focus for us to have …I think as we continue to bring more awareness of our industry to the general career opportunity spectrum, the better.

And that’s going to happen, I think, in a lot of different ways but intentionally and I think more organically as people, they’re dealing with it with a loved one and they say, “Well this is an interesting business, I never thought about getting in it.” We’ve just got involved in partnering with UCF, University of Central Florida, they’ve got I think [the No. 2-ranked] hospitality school in the country behind Cornell. And they just started a degree program in seniors’ housing, which we’re really excited about.

So if you wanna pursue a career in seniors housing operations, they’re now going to have a degree program. So, we’re partnering with them to help [endow] that, to get that first group in, of students for that degree program.

What I’m hearing is more and more prominent universities are starting to consider that or have already launched a degree program in seniors housing.

I think you’ve said that investors are less enamored of senior housing today than they were a few years ago?

When we launched our first fund, the returns were 150 to 200 basis points higher than multifamily. And you lay on top of that this recession resistant aspect, because it’s a need space … and then you put on top of that this huge demographic imperative that’s coursing across the country right now into this need, that’s what really attracted investors.

You looked at interest rates, even back then, five years ago, they were spread toward maybe 75 to 125 basis points higher in seniors than in multifamily, so you were getting very efficient financing. Today it’s almost right on top of each other. I would say the returns are pretty similar now too. Maybe the one element that’s still there is the fact that it’s recession resistant.

But look, there are going to continue to be many capital sources that come into the market for the sole reason of the demographics, the demand that’s going to continue to grow. And I don’t think any of us can fully appreciate, call it six to eight years from now, how significant that need is going to be. So, properties today that are struggling to get occupied, in eight years from now, six years from now, I don’t think that struggle’s going to continue to be there.

But, you know there’s a lag between now and then, so in that lag, you go from being a coach to a player. You gotta get in the game and influence the outcome. You can’t just coach from the side lines, “Hey ya’ll, do this, it’s all good.” You’ve got to get in the game and be a part of it and influence the outcomes. And that’s what we’re doing. We’ve shifted from being a coach to being a player/coach … and that’s why we bought Somerby.