Interested in Senior Housing as an asset class- Looking for perspectives

I have 12+ years in senior housing (more if you count the years I was moonlighting trying to buy assisted living communities on the side, and also helping to start an active adult development program at work).  I was a caregiver for my dad from my mid 20’s to early 30’s and he lived his last year of his life in an assisted living that I once managed.  Co-founded a couple companies.
 

- What’s your overall conviction level in senior housing right now?  
 

Medium-high.  Better than luxury multifamily development, which I used to do.  I’ve become overall more risk adverse (personally), so I don’t have as much conviction for anything that requires recourse, partners, and lots of money to sink.  But I love being an operator. 
 

- Has the asset class already become institutionalized with PE-backed operators and inclusion into firms' buyboxes? 
 

It’s become more institutionalized.  I’d say, 2015 was a major shift.  In 2010-2012, we couldn’t get capital to buy at great prices.  I found great deals including a “deal of the century.”  Post-2015, I saw people overpay for functionally obsolete deals that lost money.  Some institutionals love the sector, others are scarred by it.  I’m generally the type who gets turned off when a field gets crowded or in-vogue and I naturally wander somewhere else.  I’m kind of at that point and have been for a few years (hence my pivot).  But I’m good at what I do and still spend a lot of my time operating.
 

- How do you think about the long-term fundamentals: demographics, supply, labor issues, acuity mix, etc.? Where does supply and the under-construction pipeline sit, how much more compression do these cap rates have, any threats to the demand side of the equation, e.g. a new trend in in-home care? 
 

Demographics: I notice older people everywhere.  It’s kind of like if you have a specialty license plate on your car, you start noticing other peoples’ plates.  Older people are the wealthiest generation, and only getting wealthier compared to other generations.  They don’t have to care about AI and work that much, just as long as the stock market keeps growing. 
 

Labor: has stabilized.  We had a difficult 2022-2023 with staffing.  Chain migration is a major source of CNA, caregiver labor.  We desperately need this labor pool.
 

Supply: the pencils down on new development is a positive for the projects that do get green lighted or are opening now (in supply constrained markets).  One project I’m working on is 50% pre-leased with base rents over $10,000.  This robustness isn’t everywhere though.  Go where the money is in supply constrained markets.
 

Cap Rates: you know I don’t have a good feel for this since I’m more of an operator vs someone constantly thinking about exits.  Mid 6% for core urban city assets with independent living, assisted living, memory care.  Add 100 bps if no independent living.  I’m not exactly on top of it. 
 

Demand side threats:  seniors have more options compared to the past, including in-home care.  But me personally, as someone who saw my dad watch CNN at home all day by himself - suffered a stroke and developed vascular dementia - I would rather live in a senior living and have socialization.  Many people will want to stay at home, but definitely not me.  Especially if I’m wealthy enough to not have to sell my home, have my kids live there or rent it out.  I want to be at the bar and eating chef made meals at the senior living and going to fitness classes and swim in the pool, while creating my little college football watch parties.  In-home care is boring.  I get to design new senior living developments and really envision living there (I’m in my 40’s).
 

Acuity: people in general are moving into senior living older and with more care needs.  People with money are going to find that their friends moved into a nice community and they are going to want to hang out.  There are network effects.  I think that’s going to create a greater discretionary pull to bring healthier seniors into communities, especially in independent living (and lighter acuity assisted living).  
 

Back to higher acuity move-ins, the issue with that trend is the residents don’t live as long in the community as they once did in the past because they moved in when their were younger and healthier. I’m a believer that life expectancies will rise due to medical advances leading to longevity over the next 10 years and keep getting better and better.  And I believe there will be many more seniors with a few million saved up and distributing 4% of their principal to pay for senior living without having to sell their house.  Furthermore,  the tax deductibility of care costs is going to be a positive. 
 

- What actually makes a strong operator vs. an average one?
 

I know how hard it can be to be an operator, so I don’t throw stones.  I think strong operators have a super power or two.  Good sales and marketing - that’s something we have.  The communities’ positioning on the competitive set also plays a big role, and how good is the market.  There are factors the operator controls and there are external factors.  Having good clients/properties/ownership groups is a big factor that makes you look good.  Strong executive directors and marketing directors are key. 
 

- How do you underwrite/monitor performance when the ops side matters so much? 
 

Monitor sales/absorption, employee FTE (full time equivalents), and non-labor OPEX using spend downs.  During 2022-2023 I created very detailed FTE tracking down to the department and day of the week.  2024 became the industry’s “Year of Analytics.”  
 

- Where do you draw the line between “real estate value” and “operating business value”? 
 

That’s an interesting question because I used to own 20+ year OpCo NNN leases on facilities. The way I valued those was with a NPV.  Now, this is an art because the market for leases is smaller than the market for real estate (to make real money, I think you need to bundle leases in a portfolio).  Investors on their purchase and sale agreements will often separate OpCo and PropCo value.  I think real estate sales comps are a guide, replacement costs, and the durability of the asset’s position in the comp set.  5 years ago, my PropCo investors wanted a 7% yield.   You can do the math. 
 

- What opportunities are you seeing in the space today, especially at the smaller or sub-institutional scale? 
 

Few years ago, people wanted me to partner up on the affordable senior side, but I don’t like carrying a lot of accounts receivables from the government  (this was before cuts to Medicaid, I don’t know now).  But, some operators are doing well in this specialty.
 

I’m a big fan of and have been developing large senior living communities (200+ units) in wealthy, hard to build (or even find a site).  I’m not a developer, I’m a 3rd party operator so I help developers (but I was once a developer).  This is more institutional.
 

Smaller/sub-institutional.  Well, I started my entrepreneurial journey 9 years ago renovating single family houses to become assisted livings.  But, I had the benefit of a partner with money, a rising RE market, and less competition (it was competitive, but even more today).  SBA financing ($2.3 million total capitalization for 20 units in 2017).  Like I said, I owned 20 year NNN leases. Co-founded a management company. And then bought distressed properties using OpCo-PropCo structures with LP’s, JV’s to covert senior living into an adjacency use (mental health/behavioral health) and created scale at the early innings of that sector.   
 

I feel like timing is everything.  I wouldn’t do it today.  Mainly because I’ve changed risk tolerance wise, but also I don’t like competition and things are harder (ie more comps, uncertain RE market, higher cost of everything, need to go more luxury just to get margins but how deep is the market?). All that scares me. 
 

- Anything you wish you knew earlier before touching the asset class?
 

I’m glad I was naive when I started.  I would have scared myself out of my dream to operate senior living that I had since college.  I had so much energy and innocence.  I had great experience in CRE.  I was a consumer, worker, co-founder.  I worked for $15 per hour at age 36 (one kid and another on its way) to learn the business as a worker in an assisted living (this was 2 years after earning an MBA and 6 months after getting laid off from a traditional RE job). My wife said I was chasing “unicorns, rainbows, and leprechauns.”  She’s glad I did. 
 

This industry helped me go full circle with my dad’s experience, be touched by the lives of many wise and nice people (most of them have passed).  I’ve held their hand when they were dying (one lady’s blood oxygen level went from high 80’s to mid 90’s with a touch of the hand).  You learn a lot about life and what is important.  I entertained them.  I treated my staff well. I get to develop resorts for people like me one day. But I also got turned off by the adversarial side of the business, but I think these are common themes with most businesses when the money gets real.  
 

I was like you, reading books on senior housing, talking to the guys in Atlanta who worked on the senior fund while I did acquisitions for a large REPE.  
 

What I wish I knew?  This is more general advice. If I hold up three fingers in front of you, and I point to my index finger - that’s the business.  Everyone asks about the business.  Nobody asks about your relationships with your internal and external partners (the middle finger and ring finger).  You need all three to actualize the money.  Whether it’s the RE biz or any other biz.  Learning this for yourself, you will be a changed person, wiser, hopefully richer and more resilient.