What Private Equity Looks for in Senior Living Partners Amid the Pandemic

While the coronavirus pandemic has caused some private-equity investors to slow down and reevaluate their investments in the senior housing industry, there are still plenty of opportunities for new deals to be made.

But forging those deals will likely take close alignment between operators, owners and investors — and senior living companies should come to the table prepared to share intricate details about their operations. That’s partly to do with the fact that private-equity investors are now much more knowledgeable about the senior living industry, according to Carl Mittendorff, who is chairman and CEO of Houston-based Colonial Oaks Senior Living.

“There are quite a few private-equity funds and groups out there that are looking for great operators, and they’ve really gotten smarter over the last 10 to 15 years about what exactly they’re looking for,” Mittendorff said during an Argentum webinar Thursday. The webinar was moderated by Cody Tremper, managing director for senior housing with JLL Capital Markets.

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Short-term pessimism, long-term optimism

The Covid-19 pandemic has challenged operators across the senior living industry, and that has caused some investors to re-evaluate their investments in the space.

For example, global investment conglomerate and Club Med-owner Fosun was bullish on senior housing in the U.S. early on in the pandemic. But as the months dragged on, and infections in the U.S. showed no sign of slowing down, the company began to rethink that sentiment, recalled Federico Lacour, managing director at Fosun Property Holdings.

“We were really optimistic thinking that this would be done by the end of Q3,” Lacour said during the webinar Thursday. “And here we are, we’re starting Q4 next month, and there’s no end in sight right now.”

A similar story has played out for Austin-based Kong Capital, a real estate private equity firm which focuses on senior housing opportunities. Kong closed a deal in partnership with Dallas-based MedCore Partners earlier this year to acquire a seven-property senior housing portfolio sold by Ventas REIT (NYSE: VTR) — but getting there wasn’t easy, recalled Kong Capital Principal Kate Ford.

“We kind of joke around that all deals must die a few times and come back to life before they actually close, but this was on life support several times,” Ford said on the webinar. “We ended up getting a really solid price, having lived through Covid with it, but there were absolutely challenges to getting it done, and it was not without a few small heart attacks along the way.”

Still, while Covid-19 has infused a high degree of uncertainty into the near-term, both companies are still interested in the senior housing and care space. For Fosun, which owns and controls three insurance companies in Detroit, Hong Kong and in Europe, senior housing still carries many attractive features for long-term investment.

“We’re patient capital, and senior housing fits well with the duration of the liabilities of our portfolio on the insurance side,” Lacour said. “I don’t think anybody can deny that senior housing is the place to be … so we are short-term skeptics, long-term believers; short-term pessimistic, long-term optimistic.”

All in the details

When searching for operators or owners to forge new relationships with, both companies value transparency and a partner that is willing to invest time and resources. Kong Capital, which usually focuses on operators with between 10 and 30 communities under operation, likes to get to know its partners across a wide variety of domains.

“We want to get to know the senior team, we want to tour their existing projects, we want to hear about what they’re doing, we want to understand the systems that they use, we want to understand their financials, their growth goals, all of those things,” Ford said.

And with Covid-19, the company is asking even more questions than before, she added.

Similarly, Fosun takes a “bottom-up approach” when forging a relationship with a new partner by asking many questions to get a sense of what they can bring to the table.

“We want an operator that is hungry,” Lacour said. “We need operators that think long-term, operators that bring us deals, and operators that are not conflicted.”

And providers that want to forge these relationships must also be able to prove they’re running their business well, according to Mittendorff. For example, a private-equity investor might judge a senior living operator based on what’s included — or not included — as a line item on its general ledger, as that is often indicative of how fine-tuned the business is.

“How can these operators actually have a handle on raw food; or staffing in nursing versus staffing in maintenance if they have one staffing line?” Mittendorff said, taking the perspective of a deal broker or investor.

When he acquired Colonial Oaks Senior Living after leaving Watermark Retirement Communities in late 2015, Mittendorff updated the 43-year-old organization’s general ledger to include much more detail on its operations, going from 40 lines of budget items to around 700.

“That’s one thing that we’ve done in the last four years to make it institutional grade … and make it ready to scale, so that we can answer to [private-equity investors] and lenders that expect that level of detail,” Mittendorff said. “And a smart operator needs to have that level of detail to really manage the business well.”

And managing a senior living business well takes a keen eye to detail, and a healthy balance between margin and mission, he added.

“Have the best food you can run through your dining services program, but don’t waste it so that your [per-person daily cost] is too high,” Mittendorff said. “Make sure that you’re staffed appropriately … but don’t waste staff if you don’t need it.”

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