Lucas: Welcome to Bridge the Gap Podcast, the senior living podcast with Josh and Lucas. Got an exciting topic today and an exciting guest. One of our good friends here in Nashville, we got Don Husi on from Ziegler Investing. Welcome to the show.
Don: Thanks, great to be here.
Lucas: Yes. So glad to have you back on, you know, Don, there are a lot of things going on with M&A, a lot of things going on in debt, a lot of things going on in lending. We’re going to try to tackle some of those, maybe not all of them today. I think for me, as I think about those different options that we can go into the M&A market is something that personally I’m interested in. Can you tell us some updates on the market that we are in currently?
Don: Sure, so as you can imagine, the M&A market is down a little bit from 2019, actually more than a little bit. Although not as much as you’d think. So 2019 was a record year. We had about 450 transactions for a total of about $16 billion of transactions in the space. And that’s independent living, assisted living, memory care, skilled nursing, CCRC, and everything except affordable housing. They’ll have their separate statistics there. So looking at this year, our volumes are going to be way down in terms of total dollar volume. It should be somewhere between $11 call it to $14 billion of what we call announced transactions that we can find the data on and confirm. And that’ll be about 300 transactions total. So that’s about what we’ve averaged between what I call the post great recession period, through to 2019. So it’s definitely down, deals are getting done. People are seen through the pandemic, everything is taking a lot longer. So in our shopper and stents, we had three deals that basically were shut down completely. We have eight deals that have moved into 2021 or were extended for various reasons. Right? Think about getting people to view sites, doing third party reports, the banks have been a little more cautious and more difficult to lend into the space. All of those are combined to delay transactions and take a longer period of time.
Josh: Now on those, is there a difference between the for-profit side and the not-for-profit side, or are you seeing similar market trends?
Don: So that’s actually a really interesting point, Ziegler as one of the few companies out there that does work in both the for-profit and the non-for-profit side. So on the not-for-profit side, we call our merger and acquisition sponsorship transitions. In that space, there’s been a trend post great recession of a significant consolidation in the not-for-profit sector. So we’ve had over 600 out of call it 7,000 total properties combined and sponsorship transitions over that time period, that’s about 750 properties are about 10% of the total base has consolidated in that space. Now it’s very hard to get dollar volumes there because really they’re taking on another organization’s debt, combining boards, realigning and management teams and management controls. So there’s typically not a financing transaction there, but we currently have about 12 active engagements on the not-for-profit side and actually that same number 12 active engagements on the for-profit side right now, as well.
Lucas: Interesting, so different, but it sounds like that there’s quite a bit of alignment there.
Josh: Well, another curiosity and so we may chase a lot of rabbits here, cause there’s only so many opportunities. Lucas, we have Don in front of us to pick his brain on a microphone, but one thing to me and, you know, just let me know, this may be more of a gut response, cause I don’t know how much of this is actually tracked. But leading up to this year, it seemed like there were just a ton of new operators entering the market. Many of them inexperienced, dollars coming in, new real estate developers maybe coming from other verticals, other industries so forth. This year, it seems like most of the M&A that I’ve been hearing and most of the anything that is new develop that is still moving forward. I’m not hearing as many new names and it seems like it’s more of the people that have been established, the operators that are in the industry. Do you have any read, has the pandemic impacted new people coming into the industry at all, from your opinion?
Don: So that’s an interesting question. And again, I would like to separate the two silos that we work in. We work in skilled nursing, which is a separate risk profile of investors of banks. Mostly the government pays a totally different risk profile versus our senior housing and care, which is mostly private pay, a private sector money coming into the space. So I would say, there’s certainly no lack of private equity, continuing to look at the space, continuing to affect new players, coming into the space, looking at it. When you look at real estate overall and you look, there’s basically four main food groups, we call it in real estate, right? You have office space, you have retail, you have industrial, and then you have multifamily. Well really we’re kind of a side arm of the multifamily space. Office is going to be out there for a while. Not sure how that’s going to look. Some recent statistics that I’ve heard are that about 30% of people are going to work permanently from home. Another 50% will do some combination and then about 30%, 25% to 30% will be in the office at all times. So that is you know, until we work that out post pandemic that has an impact on the real estate sector. Multi-family markets continue to do well. Although the single family market is really having an impact on that as well. You have a number of companies that are buying homes and renting those at very large scales. So we’ll see how that impacts the world. Retail, it’s pretty clear. You know, Amazon is going into industrial, which is, that’s the one area that’s doing well. If you look at the demographics for senior housing and we only hit 10% of the market, right? 90% of the senior living market stays in their own home. It’s a great demographic ride as we get through the next, call it, to two years, which is what it’s going to take to go through our post pandemic sites. So definitely new equity players coming in banks are backing away. New operators, I would say the relatively new operators, particularly some developer focus types have some issues simply because they got over their skis a little too far. You know, if you have five to seven properties in Philip at this point in time, you’re typically looking at a million dollars of operating losses. If you extend the Philip period, another 12 to 18 months, that’s another 700,000 to a million five of operating losses that you didn’t plan on. So your piggy bank has to be pretty full to cover that cashless
Josh: So, 2020 has been an interesting year to say the least, and I’ve always been hearing from guys like you; the importance of a great operator. I’ve also been hearing, I mean, we were just talking with an insurance broker and they were kind of forecasting that they think there’s such a growing shortage of good operators. What is 2020 kind of done to the importance of the operator in the industry? And what are you guys sizing that situation up in any of your underwriting divisions as you’re looking at deals of who all the players are, or is it pay to play and you can get in the business if you get the pockets or is the operator still like a huge critical piece?
Don: Well, I think the operator equation has become even more important, frankly in 2020. And I’m very impressed at the ability of our industry to take on the COVID challenge and learn quickly how to control the virus, how to take control of the virus. It costs a lot of money, a lot of hardship for families, for staff members. We just appreciate all the frontline caregivers out there. I operated communities for about 15 years and I know how hard it is out there when you have to deliver the care and you don’t have the supplies to do it. You don’t even know how the virus is being transmitted. So I think our industry has done very well actually. I think the importance, and in fact, I would say the value of the operations is becoming more important and I think our operators, this is really a pet issue of mine. I don’t believe operators can make money; can make the kind of money that is necessary to drive value in their operating business at a 5% management fee. I think you have to do things differently. You have to look at your capital stack. You have to, if in fact the real value is from the operator, which we know it is, right. You go in and turn a building around like I’ve turned many, many buildings around. It’s not easy, it’s hard. And that’s the special sauce and you should get paid for it. And a lot of our operators just aren’t doing that.
Josh: Well, so great point. I could talk for five days on that topic. So but talk to the operator for just a minute, we’ve got a very diverse audience. But talk to the operator that’s sitting out there cause I think there’s a lot of them that are out there trying to be competitive, right? Because they’re trying to provide the best quality that I think all operators are trying to do and the best services and build the best culture and the best teams. And then they’re also thinking, how do I compete for deals that I can get to operate? I’ve got to keep my price kind of competitive and they’re thinking, okay, well I think 5%, maybe 6%, I could stretch to that. How do they need to present themselves to show that it’s a value proposition for them to be able to earn more, to be able to provide and justify what they’re putting into this? I mean, if you’re talking to the operator, how do you sell that? And maybe what are you seeing as the norm for operator fees?
Don: So talking to the operator, it’s a little bit about a two edged sword, right? Because you know, when you sell your properties, we look at a cap rate at the business, but that includes the operating business and the real estate. Now because of the influx of REITs, really for the past 30 years, that’s kinda mixed up the value equation between the operating entities and the real estate entities. So with private equity coming back into this space and frankly some more sophisticated investors coming in, I believe there’s going to be more attention spent to real estate, the value of that real estate and then the value of the operating entities. So talking to the operators, I think of it this way, when I was operating businesses, the one thing we just did not want to do is offer concessions, right. But there would be companies out there in our marketplace offering concessions, right. To get people to move in which reduced it, it may have increased the occupancy likely not though, frankly. But it drug the whole market down. Well, the same thing is true with the value of your services. If you believe in the value of services, we would switch those concessions around and say; well, this is the price for our lowest price unit, but if you come over here, you’re closer to the elevator, you have a beautiful view. You know, this unit is priced at Y dollars per month. I think more people are doing that. The same thing happens with your company. If you want to hire the right people and you want to drive that value, we’re talking millions and millions of dollars of value here. Y’all have to sell your operations, the amount of particularly the marketing expertise, the how sophisticated, the digital marketing social interaction is become. That’s a really technical piece of the equation. Also technology is driving a lot of quality of care and efficiency in the marketplace, that’s worth something. And I think the industry has to work through that. And again, differently in both silos: our skilled nursing silo versus our senior housing silo, but I believe there’s additional operational value theren and at some point in time that’ll be proven out
Josh: Well, that’s going on my repeat on my shuffle and we’re gonna like every meeting I go into, I’m just going to hit repeat; “this is from Don Husi, did you guys hear that this is not me saying that”. So I think that’s great and Lucas and I have talked about this, that you had a lot of positive say about the industry. Because you get to see it from a very global perspective, you get to talk to the skilled nursing operators, the for-profits, the not-for-profits and all in between. And unfortunately there’s been a couple of stories out there about our industry that have made national press, and that’s not a new thing, right? The pandemic year was just adding to that. But it seems like so often one or two negative stories, Don have dominated our industry and I look at other industry verticals and I think, gosh, what if you know the automobile industry nobody wanted to buy cars because of a recall. It’s like, so I kind of equate that to our industry. You know, you might have something unfortunate that happens. And then the next thing, you know, the whole industry gets a black eye. So Don, what are some of the things going into 2021 as we’re in it now and thinking and looking that we can say that we’ve learned from 2020 and some of the themes of stories that operators and owners need to be telling people about our industry that you see from your unique position.
Don: So you’re just hitting all my hot buttons today. That’s definitely one of the pieces. You know, the New York times stories, the Washington post stories, they can only deliver negative press, because that’s what supposedly readers want. Now, I’m not sure what readers want these days, because I’m not sure what’s news and what’s fact, and what’s real, right. I think there’s a lot of industry efforts going on to really build back our brand. So just a few that I know of, there’s a company direct supply that has a Facebook page called “tell us your stories”, talking about all the good stories that are happening in the business. There’s just a lot of incorrect information that’s being delivered through these media types that we have to fight back and I actually just saw an article in the Wall Street Journal last week that I responded to the person it’s great now, right? You have social media, you can respond directly to that person. Hey, you might look at these facts, this is incorrect. This is incorrect, go to this study here. There’s a way to really combat that and you know there’s other folks, there’s a lot of groups of people in senior housing that are looking to drive the positive story of the business on Facebook and Instagram. So I think vendors around the space, I think if the operators are trying to tell it themselves, it doesn’t have as much of an impact because you’re just trying to tell the negative story in a positive way. Whereas if it comes, if it’s coming from the family members, from the caregivers directly, it’s a different story. It’s not a personal interest story and that’s where I think we have to really spend some more time.
Josh: Well I love that. So there are several takeaways that I took from there. But one of the things, I think the last thing that you said that I would kind of say it like this. I think too often, we get concerned in our industry at surface level about marketing and telling this story about maybe about real estate, about the amenities, the finishes, the dining experience and all that. Which all that’s really, really important, but you’re not really hearing about any of that positive or negative in the national press. What you’re hearing is human stories and they pick out a couple of those. So we know for a fact, there’s so many positive human stories from the team member side, from the family side, from the resident side. So I think one of the things that we can take away from what you just said is there has to be a certain accountability from everybody that touches the industry to tell about the good that is happening from a variety of different angles. And so that’s part of why we’re here. That’s part of why we’re here. So it’s great to hear that from your position where you get to look into the industry as you work in it every day.
Lucas: Yeah, well, you know, Don, I’m glad that we were able to hit some of those hot buttons, any final thoughts as we try to wrap up,
Just getting back to that point, public relations is key. And we spend a lot of time on digital marketing and social media, but we don’t spend as much time telling the stories that we need to. And frankly, if you tell those stories, you have a PR effort; it doesn’t cost a lot of money. It’s good for the family, it’s good for the caregivers, it’s good for the entire community. You know whether it’s a social media post or an article in the newspaper or a blip on the local TV news. It’s great for the business, it’s great for the industry, especially in these times when people are, I mean, folks are burned out in the communities. The caregivers, the entire staff from the executive director down to the dishwashers and the housekeepers, just everyone’s burned out. It’s tough out there, we know that, we realize that, and we appreciate that. We gotta tell that story better and at a faster pace than what’s being told right now, and you guys are helping that with the podcast and all that you’re doing in the space. So thank you.
Lucas: Yeah, we appreciate that, Don. And thanks for reiterating a point that we try to drive home; is that everybody in the industry; know that you’re not forgotten. We’re thinking of you, we’re going to continue to put out great content to educate, inform, and influence here on the Bridge Gap network and bring on great people like Don to talk about it. You know, so many stories, there’s so many stories from 2020. There’s some real big challenges, and then there are some real amazing things that have taken place. And a lot of that in our industry.
Josh: Well, Don, thanks for joining us today. Thanks to Zieglar. You’ve always been a friend to us since we just started this podcast several years ago. Always gracious to give us your time and thanks for your support. Our listeners are gonna want to connect with you. And so Lucas, I know we’re going to connect our listeners through our page.
Lucas: You can access all of our social media accounts, also in the show notes we’ll connect to Don and to our website. Thanks everybody for listening to another great episode of Bridge the Gap.