Paul Wang, Vice President Asset Management, joins Greg Puklicz, President of 12 Oaks Senior Living, to discuss 12 Oaks Senior Living’s rapid growth, successful management of distressed communities, and their outperformance of budget expectations. They also explore future market opportunities, with 12 Oaks poised to capitalize on increasing demand for senior housing and regional expansion.
You’re listening to The Roots Podcast by 12 Oaks, where we’ll be joined by industry leaders to discuss and highlight the character, competency and care that is required to successfully manage senior living portfolios.
Greg 00:14
Welcome to another edition of The Roots Podcast, brought to you by 12 Oaks Senior Living. I’m your host, Greg Puklicz and I’m welcomed today by our Vice President, Asset Management, Paul Wang. Paul, how are you today?
Paul 00:30
I’m good. How are you?
Greg 00:32
I’m fantastic. Thank you. All right, so, Paul helps oversee our business development efforts. He’s involved in working with a lot of our ownership groups on transactions, be they acquisitions or dispositions in those transitions, and also doing a lot of financial analysis for us, running our CapEx programs. Is there anything you don’t do?
Paul 00:57
No, I think it’s pretty much it. I think you’ve covered it pretty well.
Greg 01:00
Awesome. All right. So, you know, 12 Oaks has experienced tremendous growth over the past couple of years. We went from mid-teens, number of communities to 40 communities in just a couple of three years, right? So we had tremendous growth and a lot of that growth wa, acquisition of distressed communities, our basket of spiders as we like to say.So how goes the taming of the spiders?
Paul 01:34
Well, certainly you would know better than me, right? Like you as president. But I think we’ve done a great job. I came in, I guess it was right at the end of May, June as part of the, 20 onboarding. Not with them, but, I came in to assist and certainly been a whirlwind of change and growth here, and a conversion from basket of spiders to your basket of kittens, right. We’ve done from 78% occupancy on the 20 that we brought on just sitting at over 85% today. Right? So I think we’ve done a really nice job, kind of just, managing for our ownership groups and performing, as we said, and above what we promised initially.
Greg 02:16
Yeah, and how are we doing compared to budget, for example?
Paul 02:20
Performing to budget, I think we’re sitting around 40% higher than budget. So we’ve certainly done better than what we had promised our ownership groups and hopefully that’s making them happy.
Greg 02:30
And what do you attribute that success to?
Paul 02:33
I think it’s really just, kind of a multifaceted approach, right? Part of it is we’ve really got a lot of the operational needs to manage effectively in-house, right? From our P.O. programs to our, our SOX, certified accounting team, to our Regional Vice Presidents managing at a more controllable size of 4 to 6 communities versus a 10 to 20. So we really get hands on. And then certainly from a top line revenue perspective, our relations selling. We really focus on selling some time, making sure we’re really, truly qualified the residents that are moving in.
Greg 03:14
That’s great. And it’s been a very successful year. We’ve seen the communities perform very well and everybody’s really pulled together, and as we continue our quest to meet Best in Class, I think we’re seeing that in the results of our communities.
Paul 03:34
Yeah. Totally agree.
Greg 03:35
So we don’t want to stand still. We don’t want to rest on our laurels. It’s been a while since we’ve onboarded a new community, a while and in relative terms. Right? And I know we’ve been busy looking at a lot of opportunities. Given the fact that we’ve looked at a lot of communities and, frankly, a lot of communities that most people weren’t interested in, what’s your kind of view of the markets and what’s out there and what are people looking for?
Paul 04:13
That’s a great question. I actually just got off the phone with some, prior to here as you remember, I was at a brokerage, and so I was talking to some of my friends over there and just seeing what they’re seeing in the markets and, kind of across the board, the bid ask spread is kind of narrowing, right? There’s kind of the disconnect of where people are willing to pay versus what people are willing to receive for their building, right? And that’s really kind of tightened up. And, so the kind of the basis, as you said, people are creating new funds to, to reset their bases on these new buildings, so that creates a lot of opportunity for us to come in as people are looking to deploy capital that’s been sitting as dry powder for some time. And certainly from a regional perspective and if there’s opportunities to take down a 4 or 6 pack of communities, that gives immediate skill for a buyer, it presents us an opportunity as a regional operator to pick up to provide our coverage of any kind of the south southwest market.
Greg 05:10
So you say the bid-ask spread is narrowing, but it still exists?
Paul 05:15
It still does. Right? There’s still, certainly if a developer comes in at arbitrarily 500,000 per unit, and then, they’re going to hope for 500,000 per unit as a bare minimum, right? But if they’re not operating efficiently and they haven’t met what they had proformative initially plus with interest rates still, while hopefully coming down per the inflation data that came out today, kind of tempering and I’m sure you know as of today, you’ve seen the stock markets doing quite well. And with the expectation that inflation is coming down, there’s still going to be a little bit of that leftover thinking. This is what it was worth, and I think this is what it’s still worth. So from the ask perspective there’s still that little bit of a hangover from that.
Greg 06:02
But cost of capital remains high. Interest rates are still high as time of recording here. And we keep hearing they’re supposed to come down, but they haven’t yet.
Paul 06:12
Well, from what we saw again to being today, near the middle of August, there’s inflation data came out that was really quite lukewarm, so, optimistically, the expectation of the market today certainly has been positive of an expectation of an interest rate decrease coming in the next, call it two weeks, hopefully.
Greg 06:34
So 2024 has been a year of continual rebuilding, right? We saw a lot of transactions, a lot of distress hit the markets, values plunge. Interest rates go up 22, 23, 24. It seems to be a year of kind of reset and rebuild, at least from an operator point of view, right? Because we have experienced good occupancy growth, OPEX seems to be mostly under control. I know, looking at some of our metrics up, OPEX is actually down 4% on a T6 basis, right? So that seems to be stabilized largely because staffing is better. I wouldn’t call, I don’t know if I’d call staffing stable, right? But it’s a lot better than it was six months ago. And way, way better than it was a year ago, right? And so in 24 we’re kind of resetting rebuilding, occupancy grows, OPEX kind of stabilizes. And it’s a time to recover our margin on communities. And I suppose that will set the table for 2025 in terms of transactions, cost of capital and interest rates come down, communities performing better. Values should go up?
Paul 07:57
Yeah, I think that I think that stands to reason, right? Like your cap rates have kind of been floating from a middle market perspective in somewhere from the eight to even nine range, right? I think as interest rates come down then naturally the cap rate should come down. Some of the middle market groups that have been hoping for the right time to exit may find an opportunity to exit. And as well, with that, there’s probably opportunity for other groups that are newer players in the market that are looking to come in. There’s certainly going to be more hit in the market at the right price point for both the buyer and seller.
Greg 08:32
So, let’s look long term a little bit here. Let’s look at the future of the industry. And what are the expectations as we move forward in senior housing? So we know that oversupply and with Covid and rate hikes have done, have driven senior housing valuations to 14 year lows, right? America’s population is aging unlike ever before, right? We’ve got baby boomers beginning to turn 80 next year, right? So that silver tsunami seems to be upon us. Supply growth is approaching all time lows. Covid interrupted development, rate hikes made construction loans unaffordable. So it seems, as the supply has flattened and even maybe reduced demand in some communities have repurposed, right? Demand is about to really take off. What are your expectations in terms of market conditions for the next 5 to 7 years, let’s say?
Paul 09:49
I think it’s very positive, right? I think just in general, commercial real estate is a very cyclical kind of four phase, growth and contraction. And we’re about to head back into the growth phase, right where as industries come down, input costs for new buildings come down, and the demand for seniors, I think we discussed there’s something like over half a million units shortfall coming in the next call it 7 to 10 years. You’re going to have a lot of expansion on the sale price, which is because the buildings that are in existence are going to be worth more and you’re going to have a lot more competition for development all at the same time.
Greg 10:28
Right. And greater demand for the product, right? Lack of supply. We know that should positively impact pricing on communities. So what about affordability? That’s a hot topic as well, right? Is senior housing going to out price itself?
Paul 10:50
No, I don’t think so. I think there’s still certainly enough supply in existence, right? A building doesn’t just get demolished, right? That building still will exist, right? And people will still have opportunities as new buyers come in and existing buyers start looking at additional opportunities.
Greg 11:06
So where do you see 12 Oaks Senior Living’s kind of role in this as the market will hopefully kind of go through this recovery and expansion? Where does 12 Oaks Senior Living fit in?
Paul 11:23
I think we’ve done a great job sitting in this little sweet spot where we can know our region. We know our regional as far as across the United States kind of this the south/southwest Texas, Oklahoma, Arizona market. We’re good at that. We are great at managing expenses within this region. We know what things cost, we know the scale we can get for vendor contracts. And so sitting in this middle market where more and more seniors are aging that can’t afford the $10,000 per month rent, this is a great opportunity for us for expansion and growth.
Greg 12:09
Good. So the future seems bright for 12 Oaks?
Paul 12:12
I think so.
Greg 12:13
Excellent.
So as I said, when we look at 2024, we haven’t had as much expansion in the portfolio. We had that growth come in. We’ve had this kind of growth and stabilization in the portfolio. And that’s given us the opportunity to launch some new initiatives: value based care. We’ve been able to hire within the organization. We’ve been able to internalize some functions. And 12 Oaks has built a really, really good team here. And we’ve been able to develop bandwidth to kind of take the next step, right, that next iteration of growth. As we prepare ourselves for the upcoming market, transactional activity that we think is going to be significant. So, how do you see 12 Oaks in the last year, those steps we’ve taken? And how is that going to put us in a really good position to help ownership groups as they look to acquire communities?
Paul 13:20
I think this is a great position. Just since I’ve been here, I’ve seen how much we have grown and refined our processes, right? We just went through regional realignment to make sure the RVP, Regional Vice President, alignment is set up for future growth. We’ve worked through bringing on August Health and, obviously the value based care looking at some different possibilities without disclosing too much of who talking to. But, to really set us up for the right opportunities, and so that whenever we do bring on new owners or new properties, we can quickly integrate at a better margin or better performance than even we had done before.
Greg 14:05
I agree, and that’s what we’ve been kind of focused on this year and kind of sets us up for our next chapter which I’m really interested to flip that page.
Paul 14:15
Yeah, I am too.
Greg 14:16
Well, thanks, Paul. I appreciate you participating in yet another successful podcast here with 12 Oaks and thank you all for listening to another podcast brought to you by 12 Oaks Senior Living, The Roots podcast. Thanks for listening.
Paul 14:34
Thanks.
Speaker 1 14:36
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