Berkshire Residential — a Boston-based real estate firm with over $8 billion of assets under management — has set its sights on senior housing.
The company has already raised and started to deploy one dedicated senior housing fund, with further fundraising underway. And Berkshire earlier this year hired industry veteran Matthew Whitlock to lead its efforts as managing director, chief investment officer of senior housing.
Whitlock comes to Berkshire after having been a vice chairman at CBRE for over a decade. In addition to work with other financial and real estate firms, he has experience on the operator side, having been senior vice president and director of acquisitions for Brentwood, Tennessee-based Brookdale Senior Living (NYSE: BKD) from 1996 to 2002.
Though he declined to share the amount of money raised or deployed so far in senior housing, Whitlock spoke with Senior Housing News recently about Berkshire Residential’s commitment to the space and how it is approaching growth.
Though it has a stronghold in the Northeast, Berkshire is looking at markets nationwide for senior living opportunities, he said. Ultimately, the firm could split it senior housing portfolio between six and 10 regions. While Berkshire has its own management company on the multi-family side, it is partnering with existing operators in senior housing, and already is working with Newport Beach, California-based Clearwater Living and Norwood, Massachusetts-based LCB Senior Living.
Whitlock recently spoke with Senior Housing News about why he made the move to Berkshire, the opportunities he sees for development and acquisitions, and how he’s reading the tea leaves in terms of the senior living marketplace and the overall economy.
On making the move from CBRE to Berkshire:
The experience I had at CBRE was really great. It was a great platform and did a lot of transactions both from a debt perspective and a brokerage perspective … I’m just looking cyclically, and looking at the macro-economic cycles as well, and I think there’s going to be a tremendous buying opportunity in the seniors housing space going forward. Hopefully, my timing is good to get back on the principal side of things, as opposed to brokerage and debt origination.
On the major near-term investment opportunities:
The building boom from 2012 to 2016 … there’s a tremendous amount of new product that was built during the late stages of that boom, and so far, not all of it has filled up according to pro forma. So, really, I think there are two real investment opportunities in the near future.
The first is newer buildings that have not met the expectations of ownership, maybe under pressure from an occupancy/cash flow perspective or a refinancing perspective — construction loans to bridge loans either not available or coming due. I think that’s a real opportunity.
The second, I think there are a lot of private equity funds out there that have been tactically avoiding older buildings. Let’s call an older building seven years or older. Many of those buildings are still very relevant within the industry. In other words, they’re put in the right place, they have the appropriate amount of common areas, they have the appropriate amount of care services in terms of continuum … I’ve witnessed in the last couple years at CBRE that those properties were commanding a discount relative to the market value of newer buildings. I feel those socially relevant and architecturally relevant buildings are still tremendously valuable … that’s not to say they don’t require rehab or renovation of some sort, but a well-built, well-located building in need of some lipstick I think is a tremendous opportunity.
On pursuing portfolios versus smaller transactions:
I think one of the traps about portfolio transactions is you get some dogs and cats mixed in with very good buildings. I would advise anyone in the acquisition space, you really need to diligence every single [asset] because … I don’t think you necessarily see a rising tide lift all boats.
But we see opportunities in both single- and multiple-asset acquisitions.
On preferred care level for acquisitions:
The acuity level du jour seems to be active adult. There’s a tremendous amount of development activity there. I can’t say those folks are wrong. I scratch my head a little bit from a valuation perspective, because I think there’s tremendous profitability and success for people who have put shovels in the ground, [but] I think there have been reasonably few transactions relative to other asset types and acuity types to really be able to say I know what that market is from a valuation perspective … I think that needs to mature a little bit.
I think independent living or light assisted living — maybe those are the same thing right now — are very much in vogue right now. It’s a choice-based economy.
We’ll look at all acuity types. Generally speaking, and I know this is a cliche, we tend to be interested in more than one level of care. So, whether that’s an IL/AL or AL/memory care, we like the stickier resident and someone who can transition through the community as acuity level increases.
On the opportunities for ground-up development:
Here I am talking about buying opportunities, and yet we have a dedicated fund which is primarily focused on development . I would lead with the cliche that you can do a great deal in a bad market, and you can do a terrible deal in a good market. We’re very focused on operators and our relationship with the best operators in any specific geographic region.
Our intent is to build out a platform of operators … it would not surprise me if we have six to eight relationships with operators who are best-in-class in their specific region.
It is our overriding preference to have more than one level of care on a per-community basis. But again, we’re going to rely on our operating partners to analyze specific markets, and tell us what they think the best product in that specific market is.
On building and acquiring in urban markets:
This dead horse has been beaten quite a bit, but I think the major MSAs are arguably the ones that have received the most occupancy pressure. So, we think major MSAs and [areas] adjacent to MSAs are going to have the most opportunities from an acquisition perspective.
Again, we’re going to rely on our operating partners for site selection, and back up their diligence with our own.
On senior living in mixed-use urban developments:
It’s going to be difficult to find that master-plan type of setting in today’s environment, because it becomes very, very expensive. So, we will certainly not rule out a mixed-use type of parcel and we certainly have the guns and the resources to consider it from multiple angles. I think the opportunity to do that on a grander scale is probably limited right now.
On the influx of capital:
My position at Berkshire is one that is exposed to tremendous competition at this point … A tremendous amount of capital has been raised in the private equity space. There’s a lot of capital that’s been raised and hasn’t been deployed … There are a lot of very smart, very sophisticated acquisitions teams out there competing for very similar products.
What I hope Berkshire relies on me [for] is my familiarity and my relationships within the industry in terms of operating partners, my ability to distinguish asset quality, asset location and architectural relevance.
On the broader economy and impacts on senior housing:
I think that the global slowdown will have an effect. I think the trade tariffs will have effect. One of the things that concerns me most about the senior housing space from an industry perspective is employment. We’re seeing a lot of people walking off the job, and it’s really across all levels of pay. And I think as long as there’s still employment pressure, there is a necessary cost that I don’t think a lot of people necessarily are factoring into their operating statements. And I think it’s driving profitability.
… I think the solution comes from outside our industry. As the global macroeconomic trends continue to move negatively, that’s going to create the release valve. Full employment will be broken at some point in the future if the economy trends the way it’s currently trending.
On prospects for occupancy to improve:
Right now, new entrants and equity raises are outpacing absorption on a retail level. [And] with every year that technology increases and care types evolve, that puts more pressure on senior housing as an asset class.
For example, Medicare Advantage, home health care, any of those kinds of offshoots of our senior housing space puts pressure on occupancy because it provides an alternative to moving [into a community] … take that aside, I think you will see occupancy return back to more normal levels as existing new product gets absorbed.
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