Real estate investment and development firm MedCore Partners has acquired a seven-property senior living portfolio operated by Senior Services of America (SSA), and has ambitions to do similar value-add, middle-market deals going forward.
The 582-unit portfolio consists of five properties in Washington state and two in California, offering a mix of independent living, assisted living and memory care.
The communities will continue to be operated by SSA. They were previously owned by Chicago-based Ventas (NYSE: VTR), according to past property lists maintained by the real estate investment trust. Ventas declined to comment for this article.
The acquisition price of the portfolio was not publicly disclosed. BMO Harris Bank provided the senior loan.
Getting the transaction across the finish line was not easy, due to Covid-19, MedCore Director of Acquisitions, Senior Housing Anthony Fulco told Senior Housing News. Having worked through those challenges, the Dallas-based firm is now excited to invest in the SSA communities and have a platform for further expansion.
MedCore has $800 million in development and investment efforts around the country, with senior living being a particular specialty. So, the firm is no stranger to the space, and Fulco first met the principals of SSA about two years ago. By January of this year, MedCore had a purchase and sale agreement on the seven-property portfolio — then, Covid-19 struck.
At that time, MedCore was working on the deal with a group of equity investors based in South America. Facing barriers to travel and pandemic-related financial and economic uncertainties, those investors were not able to move forward.
In April, MedCore turned to a large pension fund. The fund’s deal team “loved the fundamentals” of the SSA portfolio, given the cashflow and the long-term turnaround strategy for the assets, Fulco said. However, the deal was nixed by a higher-level decision-maker at the fund, who was deterred largely by bad headlines related to Covid-19 in nursing homes — despite the fact that the portfolio is private-pay senior living.
“This was the time when [New York Governor] Cuomo was television talking about their skilled nursing problems every day, and we just were battling that,” Fulco said.
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Three weeks from having to close on the transaction, MedCore found the right partner in Red Bank, New Jersey-based Locust Point Capital, a seasoned senior living investor and lender. Given their experience, Locust Point understood the long-term demographics and drivers of the deal, Fulco said.
While seeking the right equity partner, MedCore continued to keep tabs on how the SSA communities were weathering Covid-19 challenges. So far, no residents and only a handful of associates have been diagnosed with Covid-19 at the communities, MedCore Partner Michael Graham told SHN.
“SSA, as operators, have the highest standards and protocols for infection control, and to this point, they’ve been successful,” he said.
Overall occupancy has dropped about 2% across the portfolio during the pandemic, and net operating income (NOI) has remained constant, excluding the elevated expenses related to personal protective equipment. Expenses peaked in April and declined in May and June, according to Graham.
There is an opportunity to build census within the portfolio as a whole, but the individual properties are a mix of occupancy ranges. For instance, Birchview Memory Care in Sedro-Wooley, Washington, has been 90%-plus occupied since 2010, Fulco said. MedCore is “not bullish” on standalone memory care in general, he noted, but this particular building is a “workhorse” in a tertiary market that is insulated from new competition, with a long-tenured staff and solid demand drivers.
The SSA portfolio attracted MedCore for several reasons, including the quality of the operator, the age and location of the properties, and their rental and care rates.
MedCore believes that Tacoma, Washington-based Senior Services of America is a best-in-class operator, Fulco said. SSA is led by a seasoned management team that includes Co-Founder and CEO Lee Field, a 30-year industry veteran.
Although the communities are well-run, they are in need of physical plant upgrades, and MedCore intends to invest more than $13 million, Fulco said. The improvements will depend on a given community’s needs, but will include upgrades to lighting, carpets, paint and landscaping, as well as roofing, mechanical systems, kitchen equipment and the like.
Even with these improvements, MedCore intends to keep the communities’ rates at a middle-market level. Fulco defines a middle-market price point as $4,000 a month or less, for rent and care. That number would be a bit higher for memory care.
The MedCore team believes that there are other, similar opportunities for senior living investment across the country. That’s because a pitfall of standard triple-net leases is that operators cannot keep up with CapEx as rent escalators kick in, while ownership groups also do not have incentives to deploy CapEx as lease terms near maturity. This is one reason why some industry leaders have questioned the long-term viability of NNN leases, and why some REITs have said they are taking a different approach to escalators and incentives than in the past.
MedCore’s strategy is to seize on opportunities where buildings of a 1990s or early 2000s vintage can be acquired at a low basis, upgraded, and repositioned as an attractive option for the fast-growing ranks of middle-market consumers.
Senior Services of America currently operates 15 assets across Washington, California and Idaho. MedCore could see expanding the relationship with SSA through other West Coast and Mountain West acquisitions, in states such as Oregon and Colorado, Fulco said. A similar strategy could play out with regional operators in other parts of the country.
That said, MedCore is not limiting itself to middle-market properties, Graham explained.
On the development front, the firm is working on a senior living project near a Sun City retirement community near Austin, Texas, that will come in “well north” of $100 million. A $45 million continuum of care project is planned for Norman, Oklahoma, that will include alignment with the University of Oklahoma. MedCore’s first ground-up assisted living community opened near Houston about 2.5 years ago and has reached stabilization; an expansion is now planned.
“We do have a diversified strategy,” Graham said.