Online real estate investment firm 1031 Crowdfunding has a relatively unique model for investing in the senior living industry — and an ambitious goal to grow within it.

The Irvine, California-based company previously shared with SHN a five-year goal of netting $5 billion in assets under management in three years. About 40% of that is expected to come from senior living, according to CEO Edward Fernandez.

1031 Crowdfunding uses an online marketplace where real estate investors can find, analyze and buy a variety of investment-grade properties in a structure called a Delaware Statutory Trust (DST), which was established in the early 2000s as a way for investors to defer taxes on a sale of a given property.

The company will purchase a property and close out the asset within a 1031 trust, with the company pooling investments from multiple backers into the asset. Today, 1031 Crowdfunding has built a portfolio of over a dozen senior living communities in eight states with that approach. The company has overseen senior housing investments for the better part of the last two decades.

Looking down the road, Fernandezis bullish on assisted living and memory care communities due to the demand-driven nature of the product.

“The reason we like those spaces is because it has that barrier to entry, where you can’t just jump in and do this asset type,” Fernandez said in an interview with SHN for the Transform podcast.

Fernandez said that he believes the company’s investment strategy leads to more positive capitalization rates that return a greater yield. The company’s strategy specifically is tied to its ability to grow assets by way of capital improvements and operational investments with on-site, regional operators, and the company retains a management contract agreement of a given community after acquiring them.

“We’re really focused on lowering operating expenses, increasing revenue and producing better returns for our investors,” Fernandez said. “We’re focused on senior housing to give us that core asset which is going to drive our cash flow for investors and give us that potential appreciation for the overall strategy.”

As the year has progressed, Fernandez said cap rates have fluctuated from 7.5% to 8.5%, and he attributed that change in rates to what’s going on with macroeconomic conditions spurred by inflation. Looking ahead, Fernandez said he believes the company will hit $1 billion in assets under management by early 2024 and the $5 billion goal in three years, if opportunities continue to remain plentiful.

Highlights from Fernandez’s podcast appearance are included below, edited for length and clarity. You can listen to Transform on Soundcloud and Apple Podcasts.

An overview of 1031 Crowdfunding’s investment model:

Think of 1031 Crowdfunding as a shopping mall,and the mall has a bunch of different stores: Tillys, Nordstroms, et cetera. And so what’s attractive to the mall is the fact that the mall has different stores, which provides different customers. So when you go to the mall, you can shop where you want to shop. So 1031 Crowdfunding is the mall for 1031 exchanges. So you can come to the mall and you can get a little senior housing, a little multifamily, a little student housing, whatever you want to satisfy your 1031 exchange. So that’s us in a nutshell.

A lot of our products are more for 60 to 90-year-olds and a lot of these investors have experienced or have some interaction with senior housing. So the strategy is specifically tied to the ability to grow our assets in that space because of the fact that the yields are so attractive to investors. If you look at all other asset tags, yields are really still compressed. And at that age from 60 to 90 years old. They’re really focused on income, they want the income to pay their bills, and that’s the reason why the strategy is driven in the senior housing space for us

On the company’s entrance into senior living:

We’ve been doing senior living as a team, and when I say senior living we’re talking about assisted living and memory care, for the last 15 years now. The reason why we like the space so much is because it has that barrier to entry, where you can’t just jump in and do this asset type. What that does is that creates a stabilization in cap rates, and then gives me a higher yield so that I can give it to my investors. We’re tied obviously to the baby boomers and the silver tsunami, and all those demographics. So it’s a good asset type to jump into, especially in today’s market environment.

This space where we exist is very limited. As far as a product, a Delaware Statutory Trust, there’s only us and another sponsor in the space. We’re constantly looking for acquisitions and with debt markets the way they are, we’re willing to write checks and buy these assets in cash and put leverage on that later and we’ve been doing it for a real long time and we’re still in acquisition mode.

The way we’re doing it allows the common investor to be involved in the asset type. But when you get exchanges, investors now can actually buy a piece of an asset, which means more capital coming in and as more capital is coming in, it’s driving more acquisitions. When it comes to operators, we use regional operators, we don’t use national operators because regional operators understand the local market. We’re looking for regional operators that are going to be performance-focused and we have a management contract agreement that says if you do X, Y and Z, you get to participate in the spread. That’s what we’re really focused on is lowering operating expenses and increasing revenue to produce better returns for our investors.

We’re constantly looking for opportunities in geographical locations where cap rates are the driver for us. We’re starting to see the cap rate expand due to what’s going on in the economy as well as the debt markets. We’re going to continue to focus in areas where legislation risk is not a risk that I can put on a pro forma. Real estate itself is risky, and you can’t put it on a spreadsheet to figure out how to quantify a stroke of a pen.

On 1031 Crowdfunding’s asset management goals:

I would say 40% of the portfolio will exist in senior housing because there’s a combination of driving net asset value or appreciation and providing stable income and senior housing assets can produce both. We’re focused on senior housing to give us that core asset which is going to drive our cash flow for investors and give us that potential appreciation for the overall strategy.

By the end of the year, we’ll probably be at $500 million in asset management by the end of the year and I see us hitting that billion dollar mark in early 2024. So that $5 billion mark really doesn’t seem that lofty because we’re constantly in acquisition mode. So $5 billion for us is a very conservative number in that timeframe. My hope is that we can do it in three years.

The outlook for 2024 and beyond is very good for senior housing so that’s why we’re so bullish on it and that’s why we think we’re going to have 40% of our portfolio in that asset type.

On cap rates:

I’ve seen cap rates start expanding a little bit prior to the debt markets. It was hard to find deals and it was hard to find sellers willing to let go of their assets at a certain price point and so today’s market because, as transactions have slowed down, I think transactions have slowed down about 40%, from where they were at the high, a seller still wants to make a deal, they still want to sell their assets. So they’re willing to take a discount.

Transactions are still happening, and we potentially have a strategic partner that has a bunch of investors in their senior housing facilities and these assets need a certain cap rate for an exit. We can give them that certain cap rate while still being able to be fruitful to our investors. This group has about 40 assets they want to unload and we’re looking into that and where we could potentially take all those assets, and if we do, we will definitely hit that $5 billion number no problem.

So most of the dynamics really are tied to does the asset perform without debt on? We don’t want to get an asset where leverage causes negative leverage and it impacts cash flow. Prior to when we first talked, that wasn’t an issue. Today it’s an issue, and so when we transact, we’ve got to look at assets on an all-cash basis. So that’s really what is driving our acquisition strategy is does the academy asset produce the cash flow that’s attractive to investors on an all cash basis based on the cap rate that the seller is willing to sell it.

On navigating the challenging market environment:

You have to be more careful in today’s environment especially with the insurance premiums that have doubled. Right. So if you’re in Florida, and you’re buying assets in Florida, and it’s on the east coast of Florida, what are the insurance costs, you may buy the asset where the insurance has already set in place, but the insurance renews every year. So if it’s one number today, what’s the number next year and is that number double? And if that number is double, what does it do to my cash flow because my expenses have gone up through the roof. So you have to calculate what those costs are going to be when you’re presenting an offer to the seller. The seller can’t tell me or I guarantee you the insurance premium is going to stay where it’s at. Now we have to predict where it’s going to go. And we have to be a little bit more aggressive than conservative to make sure that when we do make an offer, all the numbers work. So yes, due diligence, especially today, is very, very important.

Employment is the biggest challenge right now. Without good people, you have to go to a staffing agency and that makes your payroll go up. We have insurance premiums going up. So now your cap rate and your net operating income is drastically changed. So the challenge today is staffing.

On what the company looks for in partnering with a regional operator:

We need financials from the operator to be GAAP compliant. When you’re a regional operator, which is a smaller operator, sometimes they just have a bookkeeper and that doesn’t work for us. In the future, we want to be a public reporting company. If they don’t have the infrastructure in place, we’ll buy the asset and replace the operator that does have the infrastructure in place. That’s very important to us.

We want to focus on areas where there’s surrounding hospitals so the hospitals are feeders to our facility and we want to make sure that we’re dealing with an operator with tremendous amount of experience because at the end of the day, the sticks and bricks are really not where the value is. The value is where the operator is doing a good job.

Outlook for 2024:

I think there’s so much wiggle room [in senior living] and if we can continue to buy assets on an all-cash basis then nothing’s off the table for us. We can go after acquisitions because we can write a check for it knowing that in the future we will put debt on it and we’ll take our money out. I think the senior housing space for 2024 and beyond is that I think we’re going to be okay.

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