In the next installment of Chatting with the Masters, I chat with senior living valuation and market analysis expert Michael Baldwin. I have known Michael for more than a decade, and have watched his dedication to the industry (and especially market analysis) through the years. With my mission to drive smart, thoughtful growth within senior living, I wanted to reach out to Michael to talk about market analysis for new senior living development. If you have any comments or questions, feel free to e-mail Scott McCorvie at scott@srgrowth.com.
Question: Why are there so many different metrics and methodologies out there that people use to analyze if there’s enough demand to develop a new seniors housing community? Sometimes in the same market one person will say to build but another will say not to, so how does anyone know who is right or wrong?
Answer: That’s an important question because it gets to the mental framework of what market analysis is. The goal of a market study is to be as accurate as possible about the market’s health. Demand estimation models are just tools to do that. They’re like funnels, with the funnel’s mouth being the starting point where a total population count goes in, and its stem is the end result of the model, narrowly defining how much net demand exists in an area. With that framework in mind, clearly some models are better than others because they more accurately quantify net demand. The worst methodologies are those where the ultimate level of accuracy is still very wide, like simply testing the subject market’s penetration rate or capture rate against some benchmark range and concluding that the subject’s market is good or bad based on whether the rate is above, below, or within that broad range.
Question: If you don’t use penetration rates, what market metrics do you analyze?
Answer: We definitely use some of the same broad metrics that everyone else is using, such as acuity rates, income levels, and certainly the starting population data with most people using Claritas or ESRI. But the key difference is what we do with those metrics and how specifically we use them. We developed the quantitative piece of our model through many years of reading the latest industry research and building the results of those studies into our models, as well as through our experience doing hundreds of market studies nationwide every year. We also have really geeky conversations with the best in-house analysts at some of the industry’s most successfully growing operators—the ones who we see nailing their market selection almost every time they build a new project. Then after each major improvement in our modeling, we back-test our model’s results to make sure it works. At this point our “funnel” is quite narrow because each metric we use is very specific itself and then is very specifically applied to the subject’s market.
Question: What income and age qualifications do you typically utilize?
Answer: That was something memorable about developing our models because at first it was challenging and then it became funny as we dug into it, that there was such a simple fact about age versus income and acuity that seemingly no one was accounting for previously, and most still aren’t. Age, acuity, and income aren’t three separate variables where any possible combination is equally likely. There are way more old seniors with medium acuity needs and low incomes than say young seniors with high acuity and high income. People know this intuitively, but as we asked around, we found that when it comes to estimating demand people are just applying those qualifiers in a linear way, one on top of the other, without thinking through how much double and triple-counting it creates. We quantify how those multiple levers shake out in a given market, so up to a certain point in our model we’re actually running separate tracks to estimate demand from each age cohort before combining them.
Question: Do you utilize other non-senior metrics when analyzing the seniors housing market strength (i.e., adult children population, housing market, labor market, etc.)?
Answer: A few other qualifiers we look at are how adult children impact demand as well as supply side variables like how many seniors are receiving care from home care aides or adult daycares. We go through several layers of analysis beyond what most market study firms do. That lets us identify those markets where demand is great and getting better faster than others realize, as well as advise our clients where not to build, where at first it may look like there is demand but the affordability isn’t there for the price points they need to get.
Question: With all the reports of oversaturation, how do you analyze new supply coming into a market?
Answer: We have access to subscription-based data services that give us leads on who is building where, but on that point we find that there’s no substitute for old-fashioned legwork. We call all of the appropriate planning and zoning departments to see what other developers have in the works, and we also search local news, but oftentimes the best information comes from driving the market and speaking with the people who live there and work in the industry. Once we feel like we’ve found everything possible, we dig into the projects one by one to assess how likely it is that they end up getting built. The toughest situations are when we find a great market for our client but there’s one other project someone is trying to do, and there’s only room in the market for one—them or our client. In those situations we have to just give our client all of the information and analysis possible and let them make their decision to try to beat them to the punch or look elsewhere.
Question: How do you conclude on the appropriate primary market area and secondary market area for a new seniors housing development?
Answer: We just ask Google, Siri Alexa, and Cortana and see if any two of them agree, and if not, we guess and shake The Magic Eight Ball. Just kidding, of course, but we can dream. After mapping all existing and proposed projects and speaking with existing competition about how far away they draw from ,we're able to hone in on the PMA. We don't put weight on what's going on in the secondary market unless it has a cluster of competition that's pulling from within our defined PMA or if there are proposed projects that will do so in the future.
Michael Baldwin, President, Oracle Healthcare Advisors
Michael Baldwin has specialized in the valuation and market analysis of seniors housing and healthcare properties since 2005. Mr. Baldwin stays directly in touch with the senior housing and nursing care market by visiting hundreds of properties each year to interview on-site management and has personally toured over 2,000 senior housing and long-term care properties across almost every state in the U.S. He has led the development of over 1,500 appraisals and market studies nationwide for lenders, developers, investors, and operators. Prior to forming Oracle Healthcare Advisors he held leadership roles in several national healthcare real estate valuation firms.
Scott McCorvie, President, Senior Living Growth Advisors
Scott McCorvie has over a decade of experience within the seniors housing industry, and has a strong passion to help cultivate smart, thoughtful growth. From 2004 to 2012, Scott worked for one of the largest dedicated seniors housing consulting and advisory firms, where he completed hundreds of seniors housing valuation, feasibility, regulatory, and market analysis assignments in markets across the United States. From 2012 to 2017, Scott worked for two public, non-traded healthcare real estate investment trusts, and was actively involved in the full spectrum of the investment and asset management process. In 2017, Scott launched Senior Living Growth Advisors to assist owners, operators, developers, and investors achieve their desired growth success. Scott has a strong passion for the industry, and strives to combine innovative investment strategy with strong knowledge of seniors housing market and operating fundamentals.
Senior Living and Seniors Housing real estate investment, finance, and operations news
In the next installment of Chatting with the Masters, I chat with seniors housing renovation and reconstruction expert Lucas McCurdy. Lucas is very passionate about the industry, and I have known him for several years. With the recent storms, I felt it would be a great idea to reach out to him so he share some of his experience in responding to storm damage,, along with steps that can be taken before a storm to protect your investment and ensure the resident's safety.. If you need help navigating the seniors housing growth and investment space, feel free to e-mail Scott McCorvie at scott@srgrowth.com.
Question: Lucas, thanks so much for taking the time to chat with me today. I’m sure you are very busy right now, but I also know there are a lot of seniors housing owners and operators that received damagefrom the storms and still assessing their needs. First, what is the initial thing a seniors housing owner / operator should do after a large storm when they notice visible wind and/or flood damage?
Answer: Thank you Scott. I am excited to get this information out to your network. The first step is to develop a relationship with a disaster GC when the sun is shining – makes sense right?! There are unique aspects to working in senior living communities, so it’s important to work with a GC that specializes in senior housing. Ideally your “on call” disaster contractor would have significant senior living experience and not just a few jobs mixed into their portfolio. In many cases a GC may have tons of commercial experience with a few senior living/healthcare jobs on their resume. Its up the owner/operator to decide what level of experience is important to them. This can really come into play if the owner/operators portfolio is heavy in either memory care or skilled nursing. Safety and infectious disease control should be a top priority on every job. SNF and MC communities add a different level of challenges in the event of a disaster, so experience in dealing with AHCA should be a top priority.
Question: Should an owner / operator start performing repair work immediately on their communities, or should they wait for an assessment from their insurance adjusters?
Answer: Getting first responders in to execute water mitigation such as extraction and dry out is crucial. Once water enters you building the clock starts ticking. It doesn’t take long for microbial issues to form so you want to mitigate any further damages. An experienced disaster GC will know how to document every detail of the initial response work in a standard format that is recognized by the insurance industry.
Question: Is there anything that you, or an owner / operator can do to help alleviate the burden and disruption to the residents?
Answer: The safety of the residence is the top priority. Building disasters can cause major disruption if not managed well. That’s why having a plan in place before a disaster is crucial. Coordination between the corporate office, onsite staff and GC will assure the rebuilding efforts have as little impact on the residents possible. Hurricane season is June to November but water pipe breaks, fires, and power outages happen year-round.
Question: What is your biggest concern when you make an initial assessment of the damage after a storm?
Answer: If its water damage (most of the time it is), then assessing what “Category” of water damage, is crucial. Using blowers, air movers and fans are typical in a category 1 water loss but not in a Cat 2 or 3. You can unknowingly cross contaminate you entire community if this is done wrong. If the water damage is suspected or known to be Cat 2 or 3, the owner should immediately bring in an industrial hygienist to do an assessment and work with the GC to write a protocol for remediation. We are experiencing this type of coordination right now in Houston after the flooding from Hurricane Harvey.
Question: Is there anything an owner / operator can do prior to a storm to help mitigate the damage?
Answer: Planning before a storm can be the difference between a confident strategy and a nightmare. Having the right relationships with everyone who influences the decisions will have an impact on the end result. We are seeing disaster resources stretched to the extreme given what has taken place in Houston and the entire state of Florida.
Question: Can you typically make any design improvements and/or renovation upgrades when performing the storm damage repair work?
Answer: This is a very common request but there are challenges. Depending on the level of damage and type of care you offer it becomes a timing issue. Renovations are planned well in advance, but disaster are not. Trying to implement a new design from scratch and cause a major delay in getting your community back up and running. That custom flooring you have been wanting may take 12 weeks to get. Cabinets and millwork may be 6-8 weeks out. You get the point. There are creative ways to help minimize the impact while we wait on material selection and delivery. Nothing a little more money cant fix.
Question: Why should an owner/operator select a specialized seniors housing repair General Contractor vs. a traditional General Contractor?
Answer: Porsche owners don’t get their oil changed at Jiffy-lube. So if you are going to protect your asset and your residents, get partnered with venders that get what you do and why you do it. Everyone that works in senor housing has an obligation to give their best effort to make the lives of our aging population thrive. They deserve dignity, quality care and a safe place to live. Owners/operators should have the proper insurance and relationships in place to make sure every effort is made to get the job done with excellence.
Lucas McCurdy, Senior Vice President, Coastal Reconstruction Group
I am a Husband, Father, and 3rd generation leadership in our family General Contracting business. My grandfather started our company 31 years ago with the owner/operator in mind. Be available to respond when the client needs us. That is the same philosophy my father and I have today as we serve our senior living clients with their property renovation and reconstruction needs. We start everyday with our clients expectations at the forefront. I am passionate about the responsibility our company has in playing a crucial role between the initial investment, and ROI, by transforming a value add or legacy property into a top preforming asset. As a self-proclaimed LinkedIn junkie, I look forward to connecting to anyone in senior housing.
Scott McCorvie, President, Senior Living Growth Advisors
Scott McCorvie has over a decade of experience within the seniors housing industry, and has devoted his entire career to this exciting segment. From 2004 to 2012, Scott worked for one of the largest dedicated seniors housing consulting and advisory firms, where he completed hundreds of seniors housing valuation, feasibility, regulatory, and market analysis assignments in markets across the United States. From 2012 to 2017, Scott worked for two public, non-traded healthcare real estate investment trusts, and was actively involved in the full spectrum of the institutional investment process. In 2017, Scott launched Senior Living Growth Advisors to assist owners, operators, developers, and investors achieve their desired growth success. Scott has a strong passion for the industry, and strives to combine innovative investment strategy with strong knowledge of seniors housing market and operating fundamentals.
Senior Living and Seniors Housing real estate investment, finance, and operations news
In the next installment of Chatting with the Masters, I chat with seniors housing broker, Ross Sanders. Ross has been within the industry for many years, and spent numerous years as an institutional investor for a healthcare REIT. In this series segment, we'll discuss current seniors housing transaction trends, as well as some helpful questions to consider before selling an asset. If you have any segment ideas, or need help navigating the seniors housing growth and investment space, feel free to e-mail Scott McCorvie at scott@srgrowth.com.
Question: How would you describe the seniors housing marketplace right now? What groups are you seeing as the primary buyers of seniors housing real estate?
Answer: The senior housing market remains strong with plenty of capital in the space. There continues to be new entrants with fresh capital coming into the sector which has kept pricing competitive. Several new players have entered the sector, both from overseas and other US real estate sectors. Overall, buyer interest remains strong in the sector with acquisition activity expected to pick up dramatically in Q3 and Q4 of this year. The dominant buyers over the last 12 months have been private equity funds and the smaller REITs. Owner/Operators have also increased their acquisition activity by themselves, or with institutional partners.
Question: How have you seen the seniors housing transaction marketplace change over the past few years? How do you see this changing into the future?
Answer: Notably, the buyer profile has shifted in the current market, between 2013 and 2015 the public and non-traded REITs were the dominate players in the market place. These groups were taking down acquisitions “all cash” with aggressive pricing. The last 12 months have seen much less REIT activity with the prominent buyers being private and institutional capital that often place debt on their acquisitions. These buyers tend to be users of secured financing, which can cause transactions to take longer to close and possibly be an added contingency to a deal.
Construction activity has dramatically risen during the last few years with many new entrants developing in low barrier to entry markets. We are just starting to see several of these new projects not being able to reach stabilization due to poor site selection, design, operator, etc. With this inexperience, a number of markets have become oversaturated by this glut of development. We are starting to and will continue to see a few of these new developments fail to stabilize. Lenders have recently taken notice and construction loans for unqualified developers have become harder to obtain. This has slowed construction activity and may allow market demand to catch up to new supply.
Question: What qualities, acuity, or characteristics are you seeing in the seniors housing marketplace that are bringing the most aggressive pricing?
Answer: Location, location, location, is the most important factor in all real estate classes and senior housing is no different. Infill sites with high barriers of entry are always going to obtain the most aggressive pricing. The most attractive communities are those that have multiple acuity levels on the same campus and are larger in size - 100 units plus. Recently, I have seen communities with both independent living and assisted living in high barriers to entry markets obtain more aggressive pricing than other product types.
Question: Do you see the Big 3 healthcare REITs becoming more active in the seniors housing acquisition marketplace?
Answer: In general, the Big 3 are opportunistic and patient buyers that do not have extreme pressure to make acquisitions. I believe that part of the lower activity from these REITs is due to the lack of quality portfolios and single assets on the market. When these players were more active 3-5 years ago, the quality of available assets was much higher. Should more institutional quality properties become available, I believe the Big 3 will become more active again. I also expect that we will continue to see these large players shed non-core communities as they clean up their portfolios.
Question: Can you briefly describe the process and information needed for a seniors housing owner to list their asset with a broker?
Answer: lt is crucial for a broker to spend the time and learn everything they can about the asset they are selling prior to going to market. The first step is to compile a due diligence for the buyer and set up an online data file for sellers to upload their information. The most critical items are the last two years and year-to-date detailed financials and census, ideally by month. Other items include information on the current debt, regulatory surveys, operating license, current year budget, historical capital expenditures, site survey, rent rolls, etc. Once our team completes a thorough review of the information, we create a detailed proposal which includes pricing expectation, marketing strategy, likely buyers, fee, and timing. If both parties are on the same page, we move forward with a listing agreement and launch the marketing process.
Question: Is there anything an owner / operator can do prior to listing an asset to make the transaction more desirable to a buyer?
Answer: There are a few important items to consider. Just as you do when you would sell your own home, it is important to spend some money on a refresh. Common items include new paint, carpet and complete any deferred maintenance items. Secondly, tighten up your bookkeeping, be sure financials are consistent and accurate, and recently audited financials are a plus. Sloppy bookkeeping, limited details or delays in obtaining due diligence requests can raise concerns by buyers. We also recommend obtaining professional photography prior to approaching the market.
Question: Are there any questions or concerns an owner / operator should clarify before selecting a broker?
Answer: I think track record is important, whether it be on the brokerage or principal side of the table. If the broker completed a similar transaction that is always a positive. I also personally believe a broker should be willing to take the time to tour the asset/s prior to launching a marketing process. It is critical that the broker selected is knowledgeable about the community/ies, as they will be the face of the company when taken to market. A firm that has national platform will also ensure that the entire buyer pool will be canvassed, not just a segment.
Question: What timeframe are you typically seeing from the owner’s initial contact to closing an asset?
Answer: There are a ton of caveats in this question and the general answer is that deals never close as fast as the seller or broker would like them to. Licensure and debt are often the key drivers in the closing time frame. Those aside, it should generally take approximately 45 days from contract signing to closing.
Question: Besides price, what are some of the other transaction terms that you compare and review with your clients prior to proceeding with a buyer?
Answer: Some additional determining factors include:
track record of the buyer and motivation
who the operator will be and how much due diligence they have completed
deal structure (RIDEA/NNN/JV)
financing ability and type
amount of upfront due diligence completed
Prior to selecting a buyer, the seller and representative should always consider completing some level of due diligence on the purchaser.
Question: Like myself, you have ample experience in seniors housing acquisitions for an institutional investment group. How has this helped you in your current brokerage role?
Answer: I hope it provides me creditability from both sellers and buyers. I had the privilege to acquire many senior housing communities throughout the country from small single assets to larger portfolios. I was intimately involved with all aspects of each deal from the initial underwriting, touring assets, document negotiations and closings. I also transacted with most of the brokerage shops in the space and learned a lot about what styles and approaches work the best. When I agree to list a deal I am 100% committed to personally take that transaction from start to finish, just as I had done on the principal side. Having experience on both sides of the table provides me a unique perspective on transactions.
Ross Sanders, First Vice President, CBRE
Ross Sanders is the first vice president for the CBRE National Senior Housing and is based in St. Louis, Missouri. He joined CBRE from American Realty Capital Healthcare Trust Inc., a New York based non-traded real estate investment trust, where he led the seniors housing acquisitions team as vice president. Since the inception of the company’s first fund and two subsequent funds, Mr. Sanders sourced, valued, negotiated and closed approximately 150 senior housing and skilled nursing communities across 28 states, totaling nearly $2.5 billion in value. In early 2014, the REITs initial fund was listed on the NASDAQ exchange under the ticker symbol HCT. Mr. Sanders was later involved in the sale of the listed company(HCT) to one of the Big 3 publicly traded healthcare REITS. Mr. Sanders previously served as a senior housing broker for Chicago based Senior Living Investment Brokerage, where he valued, sold and consulted with owners of skilled nursing and senior housing assets across the country. Early in his career he was involved in the management and leasing of both multi-family and retail portfolios.
Scott McCorvie, President, Senior Living Growth Advisors
Scott McCorvie has over a decade of experience within the seniors housing industry, and has devoted his entire career to this exciting segment. From 2004 to 2012, Scott worked for one of the largest dedicated seniors housing consulting and advisory firms, where he completed hundreds of seniors housing valuation, feasibility, regulatory, and market analysis assignments in markets across the United States. From 2012 to 2017, Scott worked for two public, non-traded healthcare real estate investment trusts, and was actively involved in the full spectrum of the institutional investment process. In 2017, Scott launched Senior Living Growth Advisors to assist owners, operators, developers, and investors achieve their desired growth success. Scott has a strong passion for the industry, and strives to combine innovative investment strategy with strong knowledge of seniors housing market and operating fundamentals.
Senior Living and Seniors Housing real estate investment, finance, and operations news
