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190: Michelle Clark

From senior living design and architecture expertise to capital markets, Michelle Clark, Managing Partner at AIIM Capital Corporation, discusses what products should look like during the funding process.

Lucas

Welcome to Bridge the Gap podcast, the senior living podcast with Josh and Lucas. A great exciting show on today with a good friend of ours, Michelle Reese Clark. Welcome to the program.

Michelle  

It’s nice to be here. Thank you.

Lucas 

Yes. Great to see you. You know, you are a BTG Ambassador, which is really awesome. We’ve had fun the last probably year or so, getting to know you and a handful, a dozen or so other ambassadors as we’ve created relationships and helped to pursue our mission here at Bridge the Gap, which is to inform, educate, and influence. We appreciate that. And we also saw you at the VIP event in Nashville. How did you like that?

Michelle 

It was great to see everyone. It’s been a really long time since I’ve seen many of my friends in the industry. So that was absolutely fabulous to get to see them and catch up and see how they were doing. So it was great. 

Lucas 

You know, I consider you kind of a Jack of all trades. You’ve got an architecture and design background and that’s probably, many people know you from that arena. You’re really an expert in that field. But obviously you’ve got a lot more gears because now you’re on the capital side with AIM Capital, and you’re getting to kind of spread your wings somewhat and see it from a different lens so to speak. Right now, we are seeing a big shift in the marketplace with different portfolios selling. You see some of the big REITS, or some of the big operators, they’re transitioning some of that stuff around. There’s some value and opportunities. There’s  challenges with ground up. I mean, the whole marketplace is just filled with different challenges, which creates a ton of opportunities. Speak to us now from this new lens that you’re looking through from the capital side, what are you seeing happen in the deal markets?

Michelle 

There’s a lot of activity right now. I think on the construction side, there’s several projects that we’re looking at that are shovel-ready, or close to it, because last year a lot of the capital markets just were quiet. If a bank or private debt group didn’t already have a long term relationship with a potential developer that they needed to be successful because they already had money invested in them. They just weren’t doing transactions. And so now what we’re seeing is everyone’s catching up there. They need to do some deal flow. If you’re on the equity side, they need to invest. If you’re on the debt side, they need to put money out because they’ve brought too much money in. So we’re seeing a lot of action. And I think the fear of the construction costs is becoming a little bit more comfortable. I think we just realized that this is the situation.

Michelle 

I mean, there are still issues with getting materials and products. That’s not as big of a deal as I think when you’re looking far out. On the refinance or other transactions where people are selling product, we’re not participating as much in that. I know that there are some transactions going on. Some people are getting in and out of the skilled nursing space. Some people have found that they maybe, they own too many properties. They need to address that. But we’re mostly focusing on the construction side right now because there’s a lot of interest in construction.

Josh 

So Michelle on the new construction front as you’re now coming from a very, I would say eclectic background, you have a wide array of experiences that have prepared you for now entering the capital side of our industry. What are some things that might be either changing, or have changed, or you see on the horizon that operators or developers that are wanting to do new construction, they need to be ready to check the underwriting boxes to get these deals done. What are you seeing changing in that front?

Michelle 

Yeah, I don’t think that there’s been as many changes, but I think things are becoming more clear. There’s been instances in the past where people have been funded that didn’t bring a strong operator with them. They didn’t have a third party market study done. They didn’t have a lot of these things that are really important for us to have and be able to underwrite a project. And now without that, you just cannot get financed. I had this conversation in fact, with an organization yesterday that has several really great projects that they have not, they haven’t gotten a third party market study. They did their own internal one, which is great, but that’s like me going and doing mine internal one, which I do on every single project before we consider it. I have my own places I go to see what the market looks like, what the census in the area is, what’s potential long term is. But without having that strong operator, that has extensive experience, not just with that product type, but sometimes even in the state that you’re working in depending upon the licensed care that you’re considering. Independent living and active adult clearly is a little bit easier to deal with as far as that’s concerned.

Michelle 

And still, you want a good operator that shows that they can fill the building in an appropriate amount of time. But as far as the licensed care is concerned, that is very, very specific to that particular area. So having that operator that is a good partner, and has experience in that space, and has shown that during COVID, they’ve been able to stay full or at least bring their census up once we had more control over the vaccine, and what was going on with the with COVID over time. So right now we’re looking at groups that have been able to get their census up and repair to the eighties, at least. Unfortunately some people aren’t there, but that’s really what we’d look for. Independent living honestly stayed pretty steady during COVID and during 2020 and into 2021, especially because I think people were finding that they didn’t want to be in their home anymore and they wanted to go and move in. So that’s a very easy product for us to finance. The only thing right now that we are not looking at is standalone memory care. We just don’t have debt sources that are interested in stand alone memory care at this point. 

Josh 

That’s really interesting. So let’s touch a little bit on the different sectors. You mentioned independent assisted memory care, and I think you might’ve even touched on the active adult ,that kind of 55 plus product hype. You did mention that memory care, there’s not a high level of interest maybe with you guys or maybe the industry in general. Touch on that a little bit. What are some of the reasons why people are maybe not as interested in, in chasing after the, the freestanding memory care product right now?

Michelle

Freestanding memory care has always been a tricky product. And the reason why is generally by the time somebody moves in they’re a lot farther down the path of having some kind of dementia, which means that their average length of stay is between 18 to 24 months. So your marketing is very very important. And during a time of sickness, regardless of whether or not it’s COVID or influenza, which we deal with on an annual basis, that particular demographic is not going to be able to wear a mask. You can’t keep them from going up and giving each other hugs or interacting with each other. It’s a much harder group of individuals to help when there’s something going on that could potentially cause them to become ill. So the census in a lot of those stand alone memory cares hasn’t been very great. I think the COVID lens has made people even more nervous about the long-term census of those buildings within their portfolios. So it’s not that people are not interested in memory care, but they’re just not interested in the memory care on its own.

Josh 

Yeah. So memory care on it’s on, do you see it being well, let me back up. So obviously there’s such a growing, I guess, need for memory care as more and more people are developing different types of dementia, Alzheimer’s, but you have your challenges. It’s a difficult group. It’s a difficult diagnosis. It’s a difficult population to provide care for. There’s higher turnover. As far as unit turnover, as far as the residents are waiting longer to move in, and then they’re there for shorter amounts of time. So all of that makes sense, but with the growing demand you mentioned that maybe one of the options for those developers out there that are trying to meet the needs of the population. Are you saying that they’re combining that with assisted living and, or independent living product, or what do you see as the alternative to meet the growing needs for that population?

Michelle 

Generally, the most popular product to provide capital for is when you have all three products together, independent living, assisted living, and memory care. And on the design side, where I come from, if you actually really do the numbers properly, and you think through the long-term life of the building, if you build the right number of AL memory care with your independent living, after probably the second term of those two products, AL memory care, the independent living will continually supply enough people to fill your AL memory care. The first couple of rounds, because you feel that building about a third every year, after you fill it the first time. And once you get through those first two rounds, it’s just really easy to keep the census up, or easier. Let’s just put it that way. And, also you’re sharing a lot of the expenses among all three areas.

Michelle 

So you only have to have one commercial kitchen versus if I was stand-alone memory care with 30 to 60 beds, cause you really don’t want to go too large with those. You’re having to support that kitchen on its own, which has probably 30 employees that you have to support. And then you think about the number of employees, if you do memory care, and you look at the ratio that you want to have for your memory care of like one to four, one to five, one to six, at the most of, staff to resident ratio. Your costs just go up exponentially. So by having independent living and assisted living there, you’re being able to pass those costs along on the operation side and on the construction side at the beginning to those other areas.

Josh 

You obviously have a lot of background in design and understanding even how the operations work in senior care, which has uniquely prepared you to provide great, great insight to your company as a capital provider. Do you see that the design, the physical plant is a growing discussion and a topic among capital providers where they’re really evaluating that? Or is this still just looking at the numbers on paper? Or are there things that they’re looking for in this kind of COVID or post COVID era, whatever era we’re in that now the design of the building is being more looked at and considered when funding a model, or does that matter at all?

Michelle

I do think it matters. I think that even more today, the whole team, the contractor, the architect, everyone that’s involved has to have experience. And then on the building, as far as the building itself, we started this industry as a clinical model. It was just an extension of hospitals starting off. And so it looked like a hospital with these long hallways. And it was very expensive to operate, and it wasn’t really resident focused. And Greenhouse changed that a long time ago. And we’re still seeing improvements as time goes by. But what we do know is that if the building is designed right, you have a higher yield because there’s less staff requirements because I don’t have as much waste of someone walking from one end to the other building. The building itself is more efficient. And I also know that I have higher staff retention because the staff has a more, they’re spending more time actually caregiving and less time rolling someone around in a wheelchair. Which in the old clinical kind of K-model that we’re all familiar with.

Michelle 

Eventually someone that is walking will not be walking because it takes so long to walk them down that long 150 foot hallway that they just put them in a wheelchair and eventually they don’t have the ability to walk. Whereas now that we’ve figured these things out, and we’ve created the neighborhood solutions for especially AL memory care. The distances are so much shorter that the residents are thriving. And in fact they live there longer than they have in the past. So I think the people that look at underwriting projects these days are a lot more in tune with what the product needs to look like. And that’s one of the challenges when people are looking to sell some of the existing product that’s available on the market, it’s really hard to convert that to a high quality building that can be run efficiently. And so in a lot of cases, it’s almost better to start over than it is to try to rehab a building that has a design that’s so hard to operate and so expensive to operate that the yield is much lower. I do think that funding sources are a lot more sophisticated than they were previously because they’ve seen the value add of a properly designed building.

Josh 

So one more question kind of relating to what models that the dollars are chasing for lack of a better term. One of the things that seems to be happening is, and it may be following similar logic to why it’s not as easily funded of a model like memory care, maybe like it used to be the freestanding memory care. Do you find that a lot of existing operators, developers,  owners are moving downstream in the continuum and, and trying to get the higher functioning residents at more of the entry point, like moving into active adult or independent living that had traditionally been mostly assisted living memory care? Is that what you’re seeing, or is that not accurate?

Michelle 

That’s actually a great question. So on the funding side, we have groups that are only interested in active adults, maybe independent living. And then we have groups that are only interested in independent living if there’s an assisted living and memory care component. So it really depends on what their comfort level is, and what their portfolio consists of. And if they’re on the acute side, which some REITs, some ownerships, and some banks are more keen to, then that’s what they’re going to be interested in funding. And same on the equity side, I have family offices that are only interested in that. And I have family offices that are like, “I am so nervous about something that’s licensed. I really just want to be in that active adult and independent living space.” And those individuals tend to be ones that either one, one, have never been in that, or coming from maybe a multi-family background, or they invested in one that maybe wasn’t the right team and didn’t get licensed quickly or never did get licensed.

Michelle 

Even though it was purpose built, the purpose had to change. And that does happen. If something is not appropriately designed and built, and doesn’t meet all the regulations within that state and community, it can’t open. I don’t think there’s people moving away from one thing or another, it’s just they have a preference. I do know that those of us that have been in the space for a long time realize that assisted living looks like the skilled nursing of before, as far as the resident demographic. And independent living is looking more and more like assisted living as it ages in place. And so the individual that would have been looking to move into independent living walks into that building and said, “these are not my people.” And so that active adult product is really filling a need.

Michelle

And it’s been around for a long time, it just hasn’t been as common in the senior housing communities. And I do think that you’re going to see more and more the CCRCs putting in a new product. And whether or not they call it ‘active adult,’ or they call it ‘independent living light,’ or whatever they call it, it’s a product intended for the group that they use to capture for independent living. Because of the fact that as these products have aged in place. And honestly, the person who is active really doesn’t need three meals a day. And they don’t want to pay for that. And they don’t want to necessarily eat in the dining room. They want to go out to eat. And that independent living model was really packaged around making money off of the food service because there’s a cost there. Once you put that kitchen in, and once you hire all those employees, you have to pass that cost off. So I do think that there’s a great need for that product for a variety of reasons. And it is interesting on the funding side, some people just really have a comfort level with one product or or another. You don’t really see groups that do both. 

Josh 

Interesting. So Lucas, we’ve talked about these topics in a variety of different ways on our show throughout the years. But it’s always interesting. We talked about the importance of having the right team. Regardless of what care type, or whether you’re new construction, or rehabbing. This conversation kind of validates that. And I think it’s very interesting. With the challenges that come from these, I would say outside factors, like the economy and the environment and things that are happening to senior living in and around us, and you see senior living operators, developers, owners, adapting, and changing. It creates new opportunities. And it probably is going to create some gaps in the market that someone’s going to have to figure out how to feel. With that change we can choose to be frightened by that, or we can choose to be excited at the opportunities and try to create new environments, exciting environments and opportunities for this aging population that we serve. This has been a great conversation, Michelle and I know our listeners are going to love to connect with you.

Lucas (

Yes, yes, totally. 

 

Michelle

I appreciate it. 

 

Lucas 

Well, and Josh, couldn’t agree with you more. And I would say if you’re listening right now, and maybe you are a college student. We do have a contingency of college students that listen to us. Or you’re working in some capacity and you’re dipping in to Bridge the Gap to check out what is happening in the B2B space of senior housing. These challenges, like Josh said, create opportunities. And we need some smart people to come into this industry to help solve these issues. And you will never find a more rewarding place to work around the best people you can find. So we highly encourage you to continue to lean into Bridge the Gap to learn more about the senior housing industry from people like Michelle. Michelle, thanks for your time today. We really appreciate it. Thank you again, we’ll put all your contact information in the show notes and thanks to all of our listeners for listening to another great episode of Bridge the Gap.

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190: Michelle Clark