In January, Sculptor Real Estate added 16 senior living properties to its portfolio — and if the company’s overall plans come to fruition, there will be more growth to follow.
The portfolio includes six properties in New York, Connecticut and Maryland and nine in Florida, Kentucky and Alabama. The company tapped operator Peregrine Senior Living to manage the Northeast communities and Vitality Living to manage the communities in the Southeast.
Although this is not Sculptor’s entrance into the senior living industry, the recent acquisition does represent a new strategy at play for the global alternative asset manager. Sculptor first began investing in senior housing properties in 2011, but by 2018, the company pulled back from the sector with regard to new investments as construction and operating costs rose.
Three years later, Sculptor began eyeing portfolios of middle-market Class B properties for acquisitions, and looking ahead, that will make up the core of its strategy in the senior housing space, according to Nicole Sermier, head of residential investments at Sculptor Real Estate.
“We’ve decided to re-engage,” Sermier told Senior Housing News.
Since its founding in 2003, the firm has invested in more than $17.6 billion of real estate assets in 26 different real estate-related asset classes, including direct equity investments, preferred equity structures, senior loans, mezzanine loans and ground leases.
In addition to its 16 newly added properties, Sculptor also has six other senior living communities in the Boston, New York and San Francisco metropolitan areas.
Sculpting a portfolio
Sculptor’s first entrance into senior housing came a little over a decade ago, originally with operating partner Benchmark. The company’s strategy revolved around investing in and developing Class A properties in high-barrier-to-entry markets, such as continuing care retirement communities (CCRC), along with independent living, assisted living and memory care communities.
The company initially took a focus on investments and developments in the Northeast and the West Coast, where occupancy rates were strong and conditions were tough for other developers to assemble and entitle new sites.
“We chose to develop because we looked at the spread between the return on cost and the cap rate, and we thought it was particularly wide and attractive, especially vis-a-vis multifamily development spreads during that period,” Sermier said. “We focused on the high-barrier-to entry market, because … we were concerned about high levels of supply coming online in lower barrier-to-entry markets.”
But by 2018, the fundamentals for development shifted as construction costs continued to rise, narrowing the development spreads Sculptor was seeing. The company also was concerned with the rising cost of operations, particularly as it related to payroll costs.
For the three years that followed, Sculptor pulled back from making large investments in the sector as occupancy and net operating income (NOI) “decreased substantially.”
“It was a triple challenge of elevated new deliveries, high wage inflation persisting, and obviously, also the Covid-led demand shock,” Sermier said.
Then, in 2021, Sculptor leaders noticed a “reset” in occupancy and NOI amid the pandemic, indicating that it was time to jump back in.
At the same time, Ventas had engaged JLL’s (NYSE: JLL) capital markets investment sales and advisory team to sell a set of communities. JLL’s team approached Sculptor and the deal went from there.
“What attracted lenders to the financing was the quality of the sponsorship, the equity going in, the cross-collateralization and scale of the deal,” Joel Mendes, managing director and co-head of JLL Capital Markets’ seniors housing debt platform. “We went asset by asset, and Sculptor and their partners did a great job articulating the opportunity with each one.”
In February, JLL closed on $145 million in acquisition and capital improvement financing for Sculptor’s purchase of the two senior living portfolios with Vitality and Peregrine. Although the properties were well-maintained when Sculptor bought them, the company does plan to invest in cosmetic upgrades for the majority of the 16 properties.
With a newly expanded foothold in the U.S. senior living industry, Sculptor is focusing on acquisitions of Class B properties. The company is particularly interested in communities with 90 or more units — as those have economies of scale — and communities that can meet growing middle-market demand.
Like other senior living operators, Sculptor’s leaders see more opportunities to buy middle-market or more affordable properties than they do building them from the ground-up.
“We feel there are opportunities for us to buy [at] well-below historical pricing levels,” Sermier said. “There is really no way to build a new product today and meet the middle market, given where construction costs are.”
Current demographic dynamics related to the incoming wave of baby boomers “should make senior housing a very compelling and an interesting strategy for us to continue to invest in for the foreseeable future,” she added.
Looking ahead, Sculptor will continue to evaluate different opportunities in the senior living industry, and the company is eager to create new operator relationships and expand on the ones it has.
“We’ve very often partnered with regional operators,” Sermier said. “Historically, we’ve seen that inferior properties from the physical plant perspective with a great operator can outcompete a newer, more attractive property.”
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