By Steve Moran
I have debated for a couple of weeks whether or not I should write this article because it is kind of insulting to much of the for-profit senior living sector and will be used by at least some in the not-for-profit sector to say . . . “See we are better.”
And yet . . . In light of the reshuffling that many of the REITs are doing, it is worth talking about.
Four things before I get to the heart of the topic:
This is an example of what we all know and that is that often, emotions drive decisions, even huge ones and we then go on to justify them with logic that often is not very logical.
There are some fine companies that use a REIT-based capital structure that works just fine for everyone.
The not-for-profit folks should not be too smug about this for a few reasons: 1) If they could use the REIT structure they might have done the same thing and 2) They are not perfect, they have their own set of challenges, they are just different.
This is about learning and growing, it is not about pointing fingers, which is common in our society but not nice.
The Faustian Dilemma (A Deal with the Devil)
It was the perfect storm for greed to cause people to make unwise decisions:
Capital to develop senior living was nearly non-existent, then as the economy improved there was a flood of capital looking for high rates of returns.
Because there had been almost no senior living built for a number of years, the demand was crazy good in almost every market.
Adding to the opportunity was a growing awareness of the need for dedicated memory care communities and units.
As the early units got built they filled up way faster than anyone had projected, making every operator look like an expert.
And then . . .
Everyone wanted to get in on the goldmine. At one NIC conference, the big buzz was that the demand for memory care communities was so massive, it was impossible to build enough capacity to meet the need.
All of a sudden there were more operators and more money than there were communities or development projects. It FELT like the gravy train would never end and this gravy train was doing the holy work of caring for the elderly of this country and providing jobs to those on the bottom of the employment stack.
So buildings were selling for stupidly high prices and REITs, in particular, looked around, found operators who were achieving amazing results (which was almost everyone, because of the market not necessarily expertise).
All of a sudden really great operators looked around and realized that they were being left behind in their cautiousness. Good markets were being gobbled up and they were in effect missing out on the opportunity. The found themselves saying, “If we are going to expand, we have no choice . . .”
The Harsh Reality
I used to think the REITs were mostly innocents, meaning they were just doing what REITs did. But in reality both the REITs and the operators ignored reality:
Never is demand endless
Every economic boom ends with a contraction
Even a slight wrinkle in occupancy, operating costs, market conditions and the economy would make the deals they were doing unsustainable
Only unrealistic rate increases would make it possible for the communities to be able to meet their lease obligations
A Cautionary Tale, the Good News, and I Don’t Know
I Don’t Know -- I find myself wondering if those who got caught up in all this REIT financing will, because of their expanded size, decide that it was better than being cautious. I think the jury is still out on this question for many/most operators.
A Cautionary Tale -- This probably goes without saying but perhaps the most important lesson is that sometimes being cautious is better. That looking forward and asking, “what happens when . . .” has great value.
The Good News -- At least for some, the best operators, the REITs will need to fix the problem and fix it with those operators they have a good relationship with. This will serve everyone well.
My guess is that we are not past the worst of it and will see much more frothiness in the next year or two, but I continue to believe we will all come out in better shape.