Here’s a word of caution for investors considering a foray into the bustling senior housing/healthcare investment marketplace: “Business is booming, but not all deals in this dynamic industry are created equal or have the same chance for success,” says Cambridge Realty Capital Companies Chairman Jeffrey A. Davis.
“Invariably, the success of any investment in this industry is inseparably linked to the operational and financial success of the owner’s clinical business, which accounts for about half of all operational expenses. To assure a desired outcome, investors and owners need to come together in a cooperative arrangement that effectively aligns mutual interests,” he believes.
Cambridge is one of the nation’s leading FHA-approved HUD lenders, with $5 billion in closed senior care transactions. The company acquires properties through its Cambridge Investment and Finance Company subsidiary and has acquired 16 senior care properties to date, with several acquisition deals in process.
“Unlike commercial real estate, where location and building quality are the primary considerations, investment risk and reward in a senior housing/healthcare transaction is more dependent on the operator’s management skills and business acumen. Typically, institutional investors attracted to this industry will want to work with an experienced ownership group that fully understands the nuances of the business.
“An active, hands-on asset management program is a prerequisite for the investor who hopes to consistently outperform the market,” he said.
Mr. Davis says verbal affirmation that the parties are on the same page is never enough, and well-crafted lease or loan covenants will not get the job done, either. Needed is an all-encompassing asset management strategy that addresses common goals and expectations.
“Lacking this, a deal should probably not progress beyond the talking stage,” he said.
Mr. Davis believes the interests of all parties involved in a transaction can’t be aligned if ownership doesn’t have a clue regarding what management is up to. Also, an operating company is not going to perform well if the financial results of its actions aren’t clearly understood.
The parties need to make certain that economic assumptions are compatible, with everyone pulling for the same things. Usually, the goal is to achieve mutually-beneficial long-term rewards, but the goals can be whatever the parties agree on, he observes.
“But whatever is agreed upon, transparency is essential,” he stresses.
Mr. Davis believes the ownership group should provide a series of metrics that function as an early warning system for potential problems. There should also be a plan in place to correct problems before they can escalate.
Monitoring contract compliance, analyzing financials, and reviewing clinical inspection reports are important ownership staff functions. And so is the need to routinely inspect the property’s physical plant, review the licensure agreement and address marketing and occupancy issues, he said.