Stuart Keller  0:00  

If you were to say, Okay, those age 75 or older 20% of those individuals either want or need to live in a senior living community by 2030, there’s going to be anywhere from a 1 million to one and a half million unit shortfall within the United States. Now, you might say, Okay, well, you know, that’s, that’s really interesting, but isn’t there a lot of development going on? Currently, there’s anywhere from 40 to 50,000 units being delivered each year. That million 2 million and a half unit shortfall number already takes that into account. So there is going to be a either huge supply shortfall or a significant demand surplus, which is going to drive the demand for senior living communities.

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J Darrin Gross  1:11  

Welcome to Commercial Real Estate Pro Networks, CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio. 

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Today, my guest is Stuart Keller. Stuart is currently the head of Investor Relations syndication division, focused on senior living communities throughout the US. And just a minute we’re gonna speak with Stuart about senior housing. But first, there are a couple things you can do to help us out if you like our show. You can like share and subscribe to CRE PN Radio. And also, if you’d like to see how handsome Our guests are, be sure to go to our YouTube channel. You can find us on YouTube at commercial real estate pro network. And while you’re there, please subscribe. With that, I want to welcome my guest, Stuart Keller, welcome to CRE PN Radio.

Stuart Keller  2:42  

Thank you so much for having me really looking forward to catching up with you on all things senior housing.

J Darrin Gross  2:48  

Well, I’m looking forward to myself. Before we get started, if you could take just a minute and share with listeners a little bit about your background. 

Stuart Keller  2:57  

Yes. So you know, just kind of high level I’ve had a very unique blend of both asset management, financial analysis operations. And as of about three months ago, stepped into the investor relations space. So right after grad school, got a job, as you know, absolutely greener than green asset manager doing acquisitions, Asset Management dispositions. This was in 2010. So we were buying a lot of stuff, you know, REO foreclosures from, from different banks, we’re reviewing their bank tapes, I did that for a few years moved over to operations overseeing some multifamily properties as a regional manager, and then as a regional vice president, then about three and a half years ago, took over the Asset Management Division here at Lloyd Jones, successfully built that led the acquisition and then in 2022, the disposition on a little bit more than $800 million in assets. And now I’m in the process of building out our syndication platform, which is actually going to allow accredited investors to own a piece of a senior living community. In the United States, we’ve definitely taken a bull position with respect to senior living communities, especially where the demographics are changing with the United States with kind of what they call the silver tsunami of baby boomers.

J Darrin Gross  4:32  

So let me ask you, I guess the first thing that comes to mind is how do you define senior housing?

Stuart Keller  4:39  

So senior housing is going to be really broken down into four facets. The first is age restricted communities, just anybody, you know, 55 or older. It’s going to be a lot of activities for the residents. Very similar in terms of underwriting to multifamily But the 55 Plus you’re going to see an average residence day of seven years versus one or two years in a multifamily. From there, you move up into what they call Independent Living, which is 55 plus, but you’re going to have more enhanced amenities such as a salon, a barber, more regular activities and actual classes. And you’re also going to get three to four meals a day. And those properties typically come with a full commercial kitchen. The next level of care is going to be your assisted living, which is your, your independent living with a medical component to it, where they will be actually giving the residents medicines, being able to take them to and from the hospital for their appointments. And then the next kind of step is memory care, which is typically going to be on the same kind of property or community as an assisted living. But it’s going to have its own weighing with much higher level of skilled care nursing, Director of Health Director of wellness. So there’s going to be definite, higher rents, but you’re also going to have a higher operating expense. So your operating margin is actually going to increase as you increase within the levels of care.

J Darrin Gross  6:26  

Got it. So one of the curiosities I have is that, in typically when I think of real estate, and like a syndication model, if you get a group of investors to acquire an individual property, the the operations are fairly straightforward, and is that it’s a managed management issue. And it could be third party, you could outsource out or if you have your own in house management, you could manage that. But but the management is more about just keeping the property full, keeping it maintained, maybe renovating, if that’s part of your plan. And it sounds like in that senior housing the or the first option you gave there, the 55 Plus kind of the age restricted community, that may be more of kind of the similar model, like you mentioned, and in multifamily. As you get into the more involved levels, like you have the independent living, assisted and memory care, obviously memory care at the top there, but how do the is just a function of the fact that has the care level increases? So do the the receipts, and so do the expenses? Or are you operating these? Or do you do purchase the property in one entity and then have an operator as a second entity, that that’s actually providing the care and and all the day to day with the residence?

Stuart Keller  7:58  

Yes, so great, great question. So just kind of starting with your last point there. So typically, to kind of mitigate risk, these properties are purchased under what they call an operating company and a property company, the property company is going to have your licenses, it’s going to carry heavier insurance, whereas the operating companies actually going to be the the building the site, the assets. And there’s there’s typically going to be a lease agreement between the Opco and the prop CO. Now, taking it a step further, the level of kind of granularity and difficult nature of managing a senior living property generally increases pretty pretty substantially as you increase the levels of care. Now, to kind of add something else to that each state is going to have its own regulations, and its own staffing requirements. So you know, and this is just completely hypothetical, let me I didn’t memorize the statistics. But, you know, within let’s, let’s say, Florida, for every one independent living resident, you might need, you know, point to five caregivers or something. So as you increase the number of residents, you’re going to have to increase the number of maybe nurses it for you know, for assisted living. Maybe for every five residents, you need one more skilled nurse. So each of the states is going to have its own requirements. And we’ve actually, here Lloyd Jones in 2019. We started our own operation side of the of the company called Aviva senior living where we’ve actually hired within the four different regions, a COO and a CIO, CIO to oversee For all of the assets within their within their region, so they’re going to become market experts, be able to closely oversee the day to day operations of these properties and make sure that we’re in compliance with both state and federal regulations. But from a from a from a staffing standpoint, you know, staffing is probably one of the key metrics and benchmarks that you’re going to evaluate when you want to invest in a senior living community.

J Darrin Gross  10:32  

Got it? And the the demand, you mentioned the the silver tsunami is that just a pure function of just as the population ages, the you know, more people are going to need the care? Or are there specific areas that you recognize the numbers to be more significant? Can you?

Stuart Keller  10:59  

Absolutely, yes. So. So starting in 2019 10,000, baby boomers started turning 65 Every day. Now, that was the leading edge. In 2022, those same baby boomers started turning 75. So if you were to say, Okay, those age 75 or older 20% of those individuals either want or need to live in a senior living community by 2030, there’s going to be anywhere from a 1 million to one and a half million unit shortfall within the United States. Now, you might say, Okay, well, you know, that’s, that’s really interesting, but isn’t there a lot of development going on? Currently, there’s anywhere from 40 to 50,000 units being delivered each year, that million, 2 million and a half unit shortfall number already takes that into account. So there is going to be a either huge supply shortfall or a significant demand surplus, which is going to drive the demand for senior living communities. The development that is going on here within the United States, a majority of the development is taking place in the five major Sunbelt markets, although what those developers are not taking into account is that 70 to 80% of seniors will actually move back to their hometown, to actually, you know, live in a senior living community. So they might spend, you know, 10 years living in Florida enjoying the beaches, when it comes time for them to transition to an independent living or assisted living community. They’re gonna go back home. Now, even if that back home means a smaller town in Indiana, where we actually purchased a property in Valparaiso, Indiana, you know, just looking at that small cohort of demographics. You know, there’s five communities there. There’s nothing in the pipeline. And as of today, there’s anywhere from a 80 to 200 units shortfall of available senior housing, based on the existing demand. So that’s kind of the forward looking demand curve that we’ve identified. And we’re taking very much a philanthropic private equity approach to our investment strategy, understanding that the developers are going to be targeting the top 10 or 20% of earners in the country, the middle market that 60% is being largely ignored. And that’s what we’re aiming to do, whether it’s through acquiring Senior Living properties, doing a light renovation, and still maintaining its affordability based on the income demographics or actually going through and doing hotel conversions. Typically, you know, militarize single building extended stays that have a little kitchen already in them, and converting those into independent living communities. Now,

J Darrin Gross  14:17  

that makes sense from a, you know, feasibility, I mean, just the bones are there for like a hotel conversion kind of thing. That makes sense. It’s interesting, you know, the statistics there about the 70 to 80% will return to where they’re from. And I guess it makes sense. I hadn’t really thought of it that much, but or, when you say home, is it where they’re from? Or is it where they have family or or is that are those the considered to be the same?

Stuart Keller  14:54  

Typically both. Now, if a family you know, for example, My wife and I, we live in north northeast Florida. You know, when it comes time for her father, if and when he needs to live in an independent living or assisted living community, he would move up here. Now we’re not from here. You know, she’s from New Jersey, but it’s mainly where the main cohort of the family is located. But typically what we’ve seen, especially in Valparaiso, Indiana, populations 35,000, we’re actually seeing an 11% net emigration of those 75 or older, so, you know, those those seniors are coming home to kind of where their roots are.

J Darrin Gross  15:40  

So from from an identifying, you know, when you set out to try and identify a market, you’re not looking for job growth, per se, you know, how do you identify a market that has that inward migration of the silver tsunami,

Stuart Keller  15:59  

so we’re actually kind of taking a kind of full, full, well rounded approach to the underwriting, you know, we are looking at, you know, average equity in home values, seniors will typically leverage the existing equity in their homes, to be able to pay for or, you know, fund their, their new home. We’re also looking at the average income of the children and family members, the potential residents, you know, typically in senior living, we’re not marketing to the future resident, we’re going to be marketing to them, as well as their family members. So it’s very much a family decision. Whereas in apartments, it’s more of a one on one transaction with the resident. You know, and then I think most importantly, you know, we do utilize a system called division LTC, which is a a paid service, that will actually break down not only the demographics, but actually the demand surplus, in each of the different age cohorts that you can filter out whether you want to see number of potential residents, you know, over the age 65 with net worths of x, or their kids net worth or average incomes of why. So you’re able to kind of take a full, full faceted approach to understanding what good investment opportunities are, and then be able to back in to your pricing and your underwriting and your business plan development to make it a successful investment.

J Darrin Gross  17:45  

Got it? As for the numbers, I know like in you know, multifamily per se, typically you underwrite to a 50%. And why? I mean, this is a back of the napkin kind of thing. Obviously, you want to try and do better than that, if you can. Is that a similar? You? Or is there a benchmark for underwriting for net operating income based on income and operating expenses?

Stuart Keller  18:16  

Yes, so Senior Living is heavily focused on operating margins. You know, their occupancy is typically geared towards what they would call a census as opposed to occupancy. Now, some of those some of those rooms or units will actually be able to house to residents. So there’s going to be a second person fee may be in a one bedroom or a two bedroom unit. So pricing is going to, you know, fluctuate a little bit differently. But as far as the kind of benchmarks relative to multifamily, you know, I wouldn’t be lying to you, if I if I knew what those key operating margins were, because it’s going to vary not only by asset class, asset size, but then also the ratio of Il Al and memory care units. So it’s going to be a kind of three or four pronged approach to what a good operating margin is, you have a property that’s 10, independent living 20 assisted living and five memory care, you’re gonna have to mold all those together into what a effective operating margin is. Whereas if you had, you know, a deal that we have on CrowdStrike right now, you know, it’s, it’s ADA assisted living and 24 memory care. So that’s going to have its own set of benchmarks from there.

J Darrin Gross  19:44  

Got it? So, you mentioned a couple of different sizes of properties or just in the examples you’re talking about, is there a sweet spot for you guys or is there a minimum size of an asset that you are Developing or acquiring?

Stuart Keller  20:02  

Yeah, so typically, I mean, our recent acquisitions, we’ve closed on 14 So far in 2022. Really the the average asset size is anywhere from 80 units up to 130 to 140. The the the number of staff is going to grow pretty substantially. Now, typically in multifamily, you would have a one per 100 ratio in independent living, or I guess, moreover, assisted living for a ad unit property, you might have 20 or 25, staff members on that property. And that’ll grow. So the sweet spot, the Nexus, between your staffing ratio requirements, and your occupancy is really something that you that you would need to optimize, getting that one extra resident might mean that you have to hire a whole nother full time person. And your net operating margin would actually go down. Right.

J Darrin Gross  21:09  

And you said that those numbers are governed by the state regs Is that Yes, sir. That’s current level of care. Yeah. Got it. So you mentioned some hotel conversions. Is there a specific strategy you guys have in acquiring properties? Are you developing any new Is it primarily by existing and, and rehab or just by operating assets and, and make them work better?

Stuart Keller  21:42  

Yes. So you know, right now, we are looking at hotels, typically single building mid rise, they typically or kind of what we like to see is that they already have a little kitchenette. So they have the plumbing available for an independent living. Community. Elevated is an absolute must. We are also looking at we’re actually doing several ground up developments, COVID supply chain issues, and inflation in the debt markets have all taken a you know, center stage in, in kind of changing how effective it is to do ground up development right now. No,

J Darrin Gross  22:32  

no, it’s a little hard to get a real solid plan when everything’s changing. So

Stuart Keller  22:39  

yeah, absolutely.

J Darrin Gross  22:41  

So investors, what’s the what’s the interest been, like for investors when you’re raising capital?

Stuart Keller  22:50  

So the the biggest thing, you know, the lightbulb really goes on. When I compare where we are in senior living today is where multifamily was 12 years ago, you know, multifamily. 12 years ago, you could see the, you know, Gen X, the Gen Y and the Gen Z all needing to move out of their parents homes and into college, those then move into apartments. We all saw it coming. But we never addressed the housing shortfall. Now rental rates, I mean, it’s making the news every day, you know, rental rental rates are going up anywhere from I think last year was 30 or 35%. It was absolutely insane. So from that standpoint, you know, definitely a as far as a investor interaction, it’s a combination of providing additional education for them. But then on the investment return side, what really piques their interest is we’re buying these properties, and, you know, high single digit cap rates, you know, yields on these deals are typically, you know, anywhere from a 7% on the low end to 11% on the high end. So, you know, COVID, as horrific as it was for our aging population, the occupancies dropped pretty substantially from 20 2019 to 2022. A lot of these REITs and major institutions have actually elected to exit as opposed to continuing throughout the lifecycle of owning the asset. So we’re actually buying these properties at a deep discount. So that’s that’s what’s really driving our big push explaining to the investor the business plan, and we’re actually getting a lot of favorable feedback and interest especially on the deal that we have on crowd Street. I think it was 2 million raised in the first five If days, so from that standpoint, and that’s minimum investment of 25,000. So, the more education the more people learn about the future of senior living, the more impactful it’ll be and the more widespread it will become, as a you know, choice investment for people with the disposable income to be able to invest.

J Darrin Gross  25:26  

As far as strategy goes, you’re acquiring operating what’s the expected hold time on these snowflake syndications? There’s usually a, an advertised exit what’s your, your typical hold time?

Stuart Keller  25:41  

So based on the investment, you know, we have a couple that are just absolute, you know, true opportunistic plays. Typically three years will be on an opportunistic, we’ll, we’ll buy it all cash will stabilize it. And then we’ll recapitalize it, whether we put it onto a syndication platform, or whether we bring in an outside JV for our syndicated deals. Right now, we’re underwriting to a five year old. And typically, how we underwrite to make a deal, you know, see if see if it’s truly a good investment is to be as conservative as possible, and still get north of a 7.5 to 8% yield, and a 20% deal level IRR, which typically will result in a 17 net IRR to the investor.

J Darrin Gross  26:37  

That’s, that’s always impressive when you can reach those kind of numbers. You mentioned, what was it 2020 or 12k? Remember how many assets you acquired this year 1414? How long have you been doing this long enough to to have some assets have gone full cycle?

Stuart Keller  26:59  

Not as of yet. So we have we have some assets, I mean, ones under contract right now. We just when we started underwriting it, it’s at it was at 7075 76% occupancy, we’re closing on it in November of this year. Property is already at 88% occupancy, just based on the current domestic demand of that market. And prior to us even taking over we’re already seeing surpassed performance relative to our year one underwriting which is which is fantastic. This year, I did take 12 assets through the disposition process, they had all kind of reached their five year benchmarks were went through led the disposition efforts on those average realized net IRR to our investment partners was because a 48. With with more than a 3x equity multiple. So I mean, it was definitely we definitely take a conservative approach to underwriting. But no, we have not taken one of the senior deals full lifecycle as of yet. Got it.

J Darrin Gross  28:09  

So far, investors are pleased it sounds like you’re any lack of interest. I mean, just say 2,000,005 days, that’s pretty, pretty good. Yeah.

Stuart Keller  28:21  

Yeah. I mean, you know, as far as the the interest, it’s, it’s more over, you know, typically these deals are gonna have smaller equity checks, maybe up to 10 or 12 million. Some of the more some of the larger institutional investors, they need minimum equity checks of, you know, 50 million. So, you know, there’s being able to package these in the future into portfolios, I think is going to be very attractive.

J Darrin Gross  28:57  

That’s all good stuff. Or if you had to identify as their one challenge that you been in the time you’ve been doing this, that is one of the larger challenge or or, you know, for just across the board is or is there a challenge or is it all just good, good stuff.

Stuart Keller  29:22  

You know, I would say the biggest challenge that that we’ve had to kind of circle up is is going to be on site staffing. I mean, labor markets throughout the US are a challenge. So being able to develop kind of what we’re calling transition teams to be able to go in and fill the gaps of the on site staff is crucial. That’s that’s probably been the the single largest challenge. You know, second to the rapidly rising costs of construction and interior renovation come But he’s relative to underwriting. So being able to figure out what truly the residents need or want, versus what we had planned, you know, maybe they don’t really care about, you know, changing out the backsplash in their in their little kitchenette, you know, they would rather have a washer and dryer put in their unit.

J Darrin Gross  30:22  

Yeah, no, definitely finding those. Those things that people want, as opposed to those that they don’t really care about is definitely, that’s kind of key to marketing, make sure you get that right. Yeah, I get it restored. If we could, I’d like to shift gears here for a second. By day, I’m an insurance broker. And as such, I work with my clients to assess risk and determine what to do with the risk. And there’s three strategies we typically consider, we first look to see if there’s a way we can avoid the risk, when that’s not an option, and we look to see if there’s a way we can minimize the risk. And when we cannot avoid or minimize the risk, then we look to see if there’s a way we can transfer the risk. And that’s what an insurance policy is, it’s a risk transfer vehicle. And as such, I like to ask my guests, if they can look at their own situation. It could be clients, investors, interest rates, inflation, tenants, whatever, you know, however, you can take a look at your situation and identify what you consider to be the biggest risk. And for clarification, while I am an insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Stuart Keller, what is the Biggest Risk?

Stuart Keller  31:46  

You know, I would say, you know, I think what we all experienced, experienced collectively as a nation in 2020. And 2021, was, you know, a pandemic, that disproportionately impacted the senior population, you know, the impact to you and I was a lack of availability to get a haircut, you know, some small mom and pop a lot of a lot of small stores, and, you know, mom and pop businesses went out went out of business. For for the senior living population, there was COVID restrictions, not allowing new movements into the resident into the communities, you know, just a a significant impact, which hurt both occupancy, which drove down the net cash flow, but also the ability for new residents to want to move outside of their homes where they felt, you know, safe and secure. So I would say definitely, you know, if there was a repeat hope to god, there isn’t of 2020 I would say that that’s probably the single single biggest risk factor and senior living.

J Darrin Gross  33:00  

No, I hope we don’t go there again. And I know that the, as we record, there’s a another surge of whatever the latest variant is, but it seems like the you know, the how to manage it. I mean, we’re a little bit more capable of managing just hopefully it doesn’t. Her new one doesn’t come out. And repeat. So yeah, I’m with you. They’re historic, where can listeners go if they’d like to learn more connect with you?

Stuart Keller  33:33  

Yeah. So we have a our on our website, Lloyd Jones, llc.com, that’s LloydJones.llc.com. Or if you’d like to get in touch with me directly. If you visit Lloyd Jones investments.com, you’re able to go in, get in touch with a member of our Investor Relations Team. Or you can simply email invest@LloydJonesllc.com. And that will be forwarded to me, where we can actually use my calendar link and schedule a one on one call to catch up.

J Darrin Gross  34:13  

Awesome. Well, Stuart, I can’t say thanks enough for taking the time to talk today. I’ve enjoyed it learned a lot, and I look forward to doing it again soon. 

Stuart Keller  34:24  

Absolutely. Thank you very much for having me, Darrin. 

J Darrin Gross  34:26  

All right. For our listeners. If you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow? That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CRE PN Radio.

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