I recently asked someone whose firm is considering REIT investments who he thought was doing an outstanding job in the senior living sector. The answer was shocking.
By Steve Moran
Maybe once or twice a year I will get a very out of the blue call from an analyst or researcher who works for a multi-billion dollar investment fund that is either looking at investing in the senior living sector or has already invested. The questions are typically about the industry in general and about specific operators.
A couple of weeks before Christmas I received one of these calls from a person whose firm was particularly exploring the possibility of investing very significant dollar amounts in REITs that are focused on the senior living sector. He had questions about a number of senior living organizations that are operating REIT-owned properties.
My Bias — Not a Fan of REITs
I am not a fan of how deeply embedded the REITS are in senior living. At the end of the day, their mandate is to deliver financial returns to their investors and because of this will — from time to time — face difficult decisions about people v. profits. While most senior living operators have dual master of people and profits, that is less true with REITS.
At the end of the day, the REIT proposition is a bit like taking out a mortgage where the rates and payments are guaranteed to go up, there is no principal paydown, and when the property is sold, all the profits go to the mortgage holder. And because they are taking a higher risk, the effective interest rate and, therefore, payment rates are much much higher than more traditional debt financing.
The problem with all of this is that the REITs and owners assume the economy and the marketplace will keep going up forever. Over the long haul this may be true but there are cycles and I worry a lot that a downturn will leave even good operators struggling with enough cash flow to care for residents and pay their lease obligations.
When REITs Make Sense
It is not that I see no place in the industry for REITs. I think there are at least two scenarios that make some sense:
As an Exit Strategy — Over the last few years we have seen some REIT transactions where the owner received a massive per door price for their communities. In most cases the owners have used that cash to pay for further development. With any appreciating asset, the big payoff comes from selling that asset. While good for the owners/investors I am not so sure it is good for teams or residents.
Hot Market Opportunity — The development landscape has seemed like The Field of Dreams. As a way to free up cash to take advantage of those opportunities would seem to make some sense as long as they don’t dominate the senior living organizations portfolio.
The Best Operators
We spent close to an hour talking about various REITs, publicly traded senior living companies and many of the privately held organizations. I talked about which ones I thought were doing the best job and then I turned the tables on my caller.
I asked him to tell me who he thought was doing an outstanding job. The answer was shocking . . .
He went on to say that he sees operators that have good buildings and not so good buildings within the same organization. He does not see a single organization who has it dialed-in across their enterprise.
This is not good. It suggests that no one has really cracked the senior living culture change. I am thinking many would argue it is not possible to do because it is a 24/7 business, the margins are not really that high, and because of all this wages are low for frontline staff, which means it is all hopeless.
It makes sense, sort of, except that money is only a tiny bit of employee culture. More importantly there are millions of folks out there who work at low paying jobs. Most of them are not much fun and carry with them little or no meaning or purpose.
Senior living organizations have this unparalleled unique opportunity to give these individuals a sense of purpose they can get no place else.
We are such a great industry we could be so much better. We could be, we can be amazing.