Someplace in Ohio is a pile of lumber owned by Confluent Senior Residing — and that isn’t regular for the Denver-based developer.
Stockpiling wooden to make use of in future development initiatives is “not a danger we might sometimes take,” and one which the developer most likely gained’t take once more, in keeping with Confluent Managing Accomplice John Reinsma. However powerful instances name for sure measures — and with the price of building materials at historic highs, these are certainly powerful instances for senior dwelling builders.
“It was what we felt was needed to be able to proceed to satisfy our financial thresholds and counteract among the craziness that’s occurring in commodities pricing,” Reinsma mentioned throughout a latest look on the Senior Housing Information podcast, Remodel.
The sky-high price of constructing supplies has slowed down and even halted among the developer’s ongoing initiatives. However, the silver lining of that slower tempo is that Confluent was in a position to drill down on neighborhood design and collaborate with its challenge and working companions on new concepts. One results of this work is the creation of what Confluent name its Entire Well being Commonplace.
“What we’re actually attempting to do right here is consider the design of senior housing that retains the consumer and the patron in thoughts and permits the operator to ship well being care and hospitality in a wholesome and bodily helpful method,” Reinsma added.
On how 2020 went for Confluent:
It’s been a tough 12 months and a half, to be trustworthy.
Sadly, our working portfolio was not proof against the identical impacts that each one the opposite teams throughout the nation much like us handled, with respect to occupancy and restriction points.
I believe with respect to improvement, we’ve actually been specializing in two separate issues. One was the initiatives that we had been engaged on. Going into early 2020, we had 4 initiatives that we had below land management that we deliberate on breaking floor on. And given the uncertainty of the world and absolutely the chaos we had been all dwelling in, we felt like we wanted to place them on maintain to see how the whole lot was going to play out.
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We efficiently renegotiated three out of the 4 land contracts that we had. After which we now have subsequently damaged floor on two out of these three, with the third one to begin development in June.
So for us, this was an enormous accomplishment, and one thing we’re actually happy with. There have been loads of hurdles to drag that off. The best I’d say was most likely placing collectively the capital stack. We had loads of conversations with our traders, however in the end, they got here to the identical conclusion that we did: that the senior housing business was going to shortly rebound from the pandemic and the basics of the asset class as an funding will maintain sturdy as soon as the disaster got here to a conclusion, which we’re seeing proper now.
So, we had been ready to determine the fairness facet of issues. The lenders had been a distinct story.
As soon as we had the fairness lined up, we nonetheless wanted to search out debt for all three offers, which as you’ve heard many instances, was an unlimited problem. And I believe the truth that we had been in a position to safe three separate loans for brand spanking new development in 2020 for ground-breaks that occurred early 2021 is an actual testomony to the management of Confluent — our CEO, CFO and our finance group — and their capability to leverage previous relationships and use our observe report. That was a tricky however good thing that occurred with an excessive quantity of arduous work and decision-making.
The second space of focus was a bit of a bit of tougher, as a result of it concerned us giving up management. It was actually specializing in our operators and the initiatives that we had below asset administration or had been below development. And we discovered actually shortly in February and March that one of the best factor that we might do to assist our operators was to get out of their manner. Allow them to do what they do finest, which is deal with the residents.
Since we now have put all these initiatives on maintain, we used that pause as a possibility to reevaluate our design requirements and protocols, and decide, do we have to make a basic change to the best way that we’re approaching senior housing improvement and design?
We arrange conferences or Zoom calls with each architect and inside designer that we’ve labored with since we began doing senior housing improvement, and we sat down and simply listened to them. We wished to listen to what kind of concepts that they had, what different ideas different builders or operators had been implementing. We pulled collectively this actually fairly lengthy checklist of ideas and design concepts that we heard from them, and we’ve mentioned all these with our operators. That led to one thing that we’ve referred to as the Entire Well being Commonplace — we’ll discuss that later. However it’s actually an progressive plan for us to reevaluate senior housing improvement in our portfolio throughout the nation to construct wholesome areas and buildings.
On how senior dwelling improvement has turn out to be tougher in 2021:
It’s difficult in a brand new manner, which has to do with construction and commodities prices and all of that craziness that’s occurring.
The ways in which it’s nonetheless difficult with respect to the pandemic, we’re nonetheless coping with some notion problems with what senior housing is. It’s actually dissipating, however loads of the tales that got here out early on within the pandemic, and loads of the confusion in regards to the distinction between assisted dwelling and a talented nursing facility or hospice relative to impartial dwelling — there was loads of confusion, broadly, throughout the nation. That has gotten so much higher.
We’ve got some nice business advocacy teams which have performed some nice work. I do know you guys have covered the People of Seniors Housing (POSH) initiative. We had been a supporter of that very early on. Loads of that work was essential and made some actual inroads, however we’re nonetheless coping with an absence of full understanding of how protected our residents are in our buildings and the way protected they’ve been over the past 12 months and a half. In order that’s an space the place it’s nonetheless powerful.
I need to refer again to these initiatives that we placed on maintain from 2020. I believe that there’s a line of demarcation, and it’s the initiatives that had been priced and began earlier than the economic system began roaring again; and those that had been began [after the economy improved], the place we’re at now. So on these three initiatives that I discussed earlier, fortunately, two of them broke floor earlier than lumber went loopy. After which the third one goes to interrupt floor subsequent month, and that one is type of a tweener. So fortunately, we had loads of that priced out and dedicated to from the subcontractors forward of time — that is in Ohio.
However we actually bought hit with the lumber. I don’t know what it’s at at this time, however it’s actually 4 to 5 instances greater than it was after we priced the deal initially in 2019, earlier than we put it on maintain. One factor that we’ve performed on that challenge particularly is that we’ll not have a assured most worth on that deal from our normal contractor for an additional most likely three weeks, however we’ve already purchased the lumber.
So we now personal a complete bunch of wooden that’s sitting in a warehouse in Ohio prepared for us to interrupt floor and use. That’s not a danger we might sometimes take, and one which I don’t anticipate will take once more. However it was what we felt was needed to be able to proceed to satisfy our financial thresholds and counteract among the craziness that’s occurring in commodities pricing. In order that’s type of what’s occurred prior to now. We don’t see this altering anytime quickly.
There will probably be a reduction valve right here, we are going to discover equilibrium once more within the senior housing improvement world that may come from each the provision and the demand facet. However as of proper now, and within the close to future, that is actually problematic. And it’s stopping initiatives from being economically viable.
On what has gotten simpler because the begin of the pandemic:
The very first thing that involves thoughts is the flexibility to search out websites and the flexibility to barter phrases.
In 2019, I’d say that on simply purely the event facet, our greatest headache and our greatest hurdle to beat can be to search out land websites that each met our standards with respect to demographics and site and met the professional forma with respect to the associated fee. And even for those who might work out each of these, then you definately needed to cope with land sellers who actually had felt like, and doubtless did have, a majority of the management in that negotiation, and so had been requiring phrases and shutting and escrow cash that we simply weren’t comfy with. That has modified.
We simply put a website below contract lately the place we had been in a position to obtain developer returns. We’d not have gotten these in 2019. I wouldn’t say land has gotten cheaper by any means, however we’re seeing the flexibility to barter land contracts in phrases which are a bit of bit extra favorable and provides us a bit of bit extra time to get by means of the method.
One other one which involves thoughts because of the final 12 months and a half is interplay with cities and going by means of the entitlements course of. I believe it’s turn out to be extra clear than ever how necessary, how crucial, senior housing is to the flexibility to maintain seniors protected within the communities the place they’ve lived, labored, raised households and worshipped in. I believe the training has elevated with cities, and so they have a look at senior housing much more favorably than they did prior to now, which is certainly a profit.
On the connection between builders and suppliers:
The connection between the developer/proprietor and the operator is completely crucial to success on this business.
I can’t over-stress how wonderful MorningStar Senior Residing and Harbor Retirement Associates (HRA) have carried out by means of this disaster. The quantity of stress and duty that they’ve handled and the obstacles that they’ve overcome is completely astounding. Our relationship with each of these teams has been years within the making, however we couldn’t really feel extra lucky to have been aligned with them.
We’ve all the time considered our operators as companions, and that partnership begins on the very starting. We don’t put a website below contract with out our operator, having already checked out it and vetted it and labored on it with us.
I type of alluded to this earlier than, however one among our foremost tenets at Confluent Senior Residing is that one of the best ways that we are able to exceed expectations of our traders is to construct buildings that set our operators up for fulfillment. And the one manner we are able to accomplish that’s actually by means of true partnership that has the operators weighing in closely on design and website improvement, however actually on design, to be sure that we’re constructing buildings that get them what they want with respect to well being care and hospitality.
As residents and households work together with a constructing, and so they have questions on Covid — what have we modified? How are they protected if one thing like this had been to occur once more — the flexibility for us to have that partnership and know that we’re delivering buildings that our operators can stand behind and may reply these questions with readability and positivity has actually turn out to be extra crucial than ever.
I believe the primary and doubtless most important factor [is to] just be sure you are aligned with the operator on how they will run the constructing, what the related lease-up projections are, the margin expectations — have all of these crucial conversations upfront.
There’s two issues. One, is just be sure you’re on the identical web page that, as a developer, you perceive what the hot-buttons are on your operators. What are the issues that it is advisable to be delivering, and what are the questions that it is advisable to be asking them early on to once more to just be sure you’re delivering buildings which are setting them up for fulfillment?
On Confluent’s Entire Well being Commonplace for design:
We’re defining the Entire Well being Commonplace as a holistic and progressive design method to senior dwelling improvement that includes improvements to make sure residents’ bodily and psychological well being. And the top product is a wholesome atmosphere for senior employees and guests, each bodily and mentally.
This idea was born out of a design effort that we had been engaged on with Morningstar already on two initiatives: one in Mission Viejo, California [pictured above]; after which one other one in Observatory Park right here in Denver. We had been already collaborating with them to work on bringing some cutting-edge applied sciences into the constructing and making these as a part of our design requirements. We had been in the course of that when this pandemic hit, and so we realized that we wanted to take this to the following stage and work out — with on a regular basis that we spent with architects and inside designers — what adjustments we have to implement into our current buildings and the buildings which are below design or below development. After which, what must make it into the design going ahead?
What’s attention-grabbing is that loads of the elements or loads of the highlights that we landed on are behind the partitions, if you’ll. So, there are issues that will not be instantly apparent to you whenever you walked right into a constructing. For example, with the HVAC system, we’re utilizing this far UVC gentle area which helps scale back the unfold of airborne mediated microbial illnesses. We’ve got antimicrobial principally the whole lot, comparable to countertop surfaces, and so forth cetera. There’s a kiosk system for seamless and distanced sign-in. The operator Morningstar took on telehealth coaching for an infection management. These are loads of issues that you simply don’t see whenever you stroll into the constructing instantly.
We additionally made some actual adjustments to what’s apparent. Probably the most notable one is an actual concentrate on outside house for eating. We’re particularly programming outside eating house, whereas prior to now, we would have had a patio with some chairs that had been near the eating room.
Now, we’re saying, ‘Yeah, we’re going to have outside eating as a part of our culinary providing,’ and it’s extra than simply an outside grill. Having outside entry for residents within the type of items, patios, extra indoor-outdoor house, wherever potential, that’s an actual change and one thing that we’re already seeing an excellent response to from residents and from households.
So, you mix all of this, and it’s this Entire Well being Commonplace. What we’re actually attempting to do right here is consider the design of senior housing that retains the consumer and the patron in thoughts and permits the operator to ship healthcare and hospitality in a wholesome and bodily helpful method.
I heard this from from Matt Turner, [managing partner] over at MorningStar: What we don’t need to do is redesign our buildings for the 100-year flood, that means we’re not going to make these basic adjustments to the best way that we method design in order that, in 5 years, any person walks into one among our buildings and says, oh, man, this factor should have been designed in 2020, and have a look at what loopy issues they did for Covid.
All the adjustments that we’re implementing ought to be accretive to the design, and one thing that will probably be long-lasting in a helpful manner. That HVAC system and antimicrobial air filtration system, that is one thing that you simply’ll by no means see, however it’s one thing that you simply’ll have the ability to discuss with residents and their households. That’s not one thing that’s going to have some detrimental impression on design. After we got here up with this Entire Well being Commonplace, we had been very cognizant of precisely that — of not making adjustments now which are so short-sighted that may make our buildings out of date within the near-future.
On the prospect of recent improvement in 2021:
Of the three that we’re engaged on now, we now have two below development which are simply wrapping up. One is finished and ready for licensure. One other one will probably be performed within the subsequent six weeks. We’ve got the three that we broke floor on this 12 months, that are Mission Viejo, Observatory Park, after which the third one which I discussed in Ohio is in Shaker Heights, which is a suburb of Cleveland. That’s all we’re going to have the ability to pull off this 12 months, sadly, due to the commodity pricing.
We had a challenge that we had been engaged on the place we really simply terminated the contract, as a result of it was slated for a 2021 groundbreak towards the top of the 12 months. And we simply can’t work out a strategy to make that pencil. That mentioned, we additionally lately simply put a brand new website below contract. By the point we get by means of entitlements and design, it’ll be a mid-2022 groundbreak. We actually really feel like by that time, we’ll begin to see some reduction.
Going again to that equilibrium remark I made earlier, we’re actually nonetheless energetic. And as a response to what we heard from our traders and what we’re seeing within the capital markets, I’d say, in some methods, we’re extra bullish than ever on the house.
I’ll do a fast facet observe right here: Confluent Senior Residing is a subsidiary of Confluent Growth, which is a bigger, full-service industrial actual property improvement agency additionally based mostly right here in Denver. We don’t simply view the world by means of the senior housing gentle, we additionally do industrial and mixed-use and retail and hospitality and multifamily, et cetera. After we have a look at the world of economic actual property with respect to all of the asset courses that we work in, we’re simply as if no more bullish on senior housing than we ever have been.
In actual fact, I’d say we now have spent the final 10 years preparing for proper now. We’ve been within the senior housing house for 9 years, and we now have spent these 9 years getting ready for what’s about to occur to us from a requirement cycle proper now. And that features the whole lot — creating long-lasting relationships with our operators and taking 20-plus buildings by means of the total improvement cycle.
We’ve gone by means of a handful of gross sales to show the idea to our traders and perceive what the returns can seem like. And we’ve actually turn out to be college students of senior housing on the entitlement facet, the development facet, the asset administration facet. All of that work has been for us to be able to be an especially forward-thinking, aggressive senior housing developer, as we put together for this child boomer wave that everyone knows has not even confirmed up but.
On what capital suppliers are on the lookout for in 2021:
After I hear capital, I consider each debt and fairness, and they’re two completely different animals. I’ll do my finest to reply this as our CFO would with respect to debt.
As I discussed, we’ll do three new offers this 12 months, all three of these are with completely different banks. They’re all conventional development lenders, so we didn’t go down the debt fund or the mezzanine route. And whereas phrases are not so good as they had been, in 2019, the hole actually wasn’t that massive with respect to a development mortgage that we might have signed up for a 12 months and a half in the past. I’d say that leverage has come down from pre-pandemic ranges. Recourse has stayed the identical or possibly even gone up. LIBOR flooring have turn out to be commonplace, and there are nonetheless loads of giant gamers which are on the sidelines. So after we went by means of these three initiatives to line up the debt, we actually obtained much less time period sheets than we might have prior to now.
I consider that is beginning to change. I’m listening to about increasingly lenders coming again. With the prevailing lenders that we now have, we’ve heard a number of instances that they’ll turn out to be extra selective on who they’re lending to, on which initiatives they’re lending on. Relationships have turn out to be much more crucial. And the large factor that we’re listening to is that previous efficiency actually is turning into a gating merchandise. So it’s altering on the lending facet.
With respect to fairness, we’re engaged on one challenge proper now with an institutional associate, which goes rather well. However the remainder of our initiatives have been capitalized by means of a mixture of personal excessive net-worth and household workplaces. And we’ve gone by means of three high-net-worth or private-equity fundraisers. The third one was really accomplished this 12 months, in 2021.
As you’ll be able to think about, we had loads of questions on Covid and operations and the way forward for senior housing. We positively did some educating for a few of our new traders on the variations between ranges of acuity and the way the operators are dealing with the pandemic. We bought that fund closed. In actual fact, I believe we would have even been oversubscribed. And that’s one thing that we’re actually happy with and a testomony to our management. However I believe it’s additionally a testomony to the will of traders to proceed, or in some instances for the primary time, be energetic within the senior housing asset class.
One factor that we heard that may be a change because of the pandemic is that it actually looks like traders are chasing and on the lookout for yield wherever they’ll discover it. And improvement is one house the place they see that chance that they’re not discovering in loads of different actual property asset courses or actual property investments. So, that has been a change — the main target and questions concerning the yield of the initiatives and the money flowing capabilities.
We had been type of already on this observe earlier than, however the high-barrier-to-entry is one other capital focus that’s shifted. And we’re actually seeing loads of questions and loads of demand for the high-barrier-to-entry, and that time period will get thrown round so much. We view that to imply websites and initiatives which are troublesome to get performed. That may come within the type of a protracted rezone of a extremely tight website that takes some actual artistic design or initiatives that take time and power and funding to get them out. We’re already seeing that work and that funding ends in greater NOI and decrease cap charges. And that has actually been a shift from our traders, to concentrate on these sorts of initiatives.
On the highway forward in senior dwelling improvement:
The pent-up demand that everyone’s speaking about is actual, at the very least from our perspective. March and April had the very best quantity of move-ins that we’ve ever had in our historical past. I believe for the following three to 6 months, that pent-up demand will proceed. However then after that, it’s going to slowly transfer again and taper off to our conventional move-in velocity.
On a 12-month timeframe, one factor I’m very involved with is the provision of and the price of labor in our business. I don’t see that fixing itself, and positively not within the subsequent 12 months. There’s some know-how that we are able to make some adjustments on the periphery. However that’s one thing that may have a 12-month-plus impression. Despite the fact that that’s on the operation facet, that does movement into improvement, as a result of it impacts the best way that we underwrite initiatives and it impacts the margins. That’s a longer-term concern.
With respect to only pure improvement, the following three to 6 months are going to be actually powerful for all the explanations that I mentioned earlier than. I talked about how we had to purchase lumber — and we don’t personal wooden, that’s not what we do. In order that’s the kind of stuff that has to get performed within the subsequent three to 6 months.
Longer-term, I do consider that we’ll discover a reduction valve. It’s actually a query of elasticity. Development pricing and labor can regulate so shortly and a lot faster than the flexibility to regulate charges and margins. It takes time to search out that equilibrium. And I believe that that’s a 12- to 18-month cycle.
Now that mentioned, if we proceed to see the the quantity of recent begins plummet as we now have for the final 12 months and a half — and it’s unlikely that may proceed sooner or later — we may very well get again out of equilibrium inside you recognize, the 24- to 36-month timeframe as we see demand begin to outpace provide. As all the time, it’s a pendulum that’s swinging. However it should recuperate and that’s the principle motive we proceed to aggressively pursue new markets and new offers.