Ep. 5 Portfolio Update with Paul Wang

Oct 16, 2023 | Podcast

2023 has been shaped by phenomenal growth for 12 Oaks Senior Living. Listen to Greg Puklicz discuss 12 Oaks’ approach to revamping communities in the middle market with Paul Wang, Vice President of Asset Management.

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You are listening to The Roots Podcast by 12 Oaks, with host Greg Puklicz, 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 00:15

Welcome to another episode of the Roots podcast, brought to you by 12 Oaks Senior Living. My guest today is Paul Wang, our Vice President of Asset Management. Paul wears many hats in the organization. He helps us on asset management. He’s on point on business development, helps on some of our capital programming, helps a lot on our transitions inbound and outbound. So Paul’s a valued new member of the team and we’re really glad to have you. You’ve got a wealth of experience for your time as an asset manager at Eclipse, to an underwriter with senior housing brokerage and many other things. Welcome Paul. It’s great to have you. I wanted to begin by giving some of our listeners an update on 12 Oak Senior Living. So quite a bit of activity here and a lot of it’s been reported through the press and through our social media links.

Greg 1:16

It’s always been our goal to be a regional best in class operator. And to that end we put together a business plan a few years ago to try to get us to grow to a level that we felt would be sustainable, number one, but secondly allow us to continue to utilize our high touch management model to ensure that our culture wasn’t impacted by the growth, and ensure that we could apply our core values both to our corporate office and to all of our communities. 2023 has been a year of tremendous success. We’ve been able to grow our portfolio from 19 communities at the beginning of the year to now 39 communities. And so we’ve had phenomenal growth, essentially doubling the size of our managed portfolio. And you know, to that end we’ve really achieved that first stage of our business plan, which was to grow to achieve a certain level, to provide a foundation of economic stability for years to come.

Greg 2:36

So we’re quite pleased with that. And that growth obviously comes with challenges. We’ve had to expand our corporate staff, number one. And our corporate staff has grown from 29 employees to 54 employees here at our home office. So that’s been part of our growth plan that has allowed us to ensure that we continually are able to service these new communities we’ve onboarded. We now feel we’ve been able to successfully transition them. And over the course of this year, we are going to see a couple communities roll off, which when you get to certain level that’s expected, so three communities will be rolling off. But we have a new community rolling in October 1st that we’re excited about. And why that one’s exciting to me is it’s coming in specifically because of the success we’ve had in the middle market, deploying the middle market strategy and one of the concerns in the industry is what do we do with all these older vintage dated communities that haven’t been able to achieve census at their current red levels? And deployment of the middle market model, where we reduce rents and change our operational model, has proved very successful for us. And Paul, maybe I can turn to you, maybe give us a little description of that middle market model and what that looks like and how that can be deployed to certain underperforming communities.

Paul 4:21

From what I’ve seen you bring a great point. There’s kind of this middle market that you’re describing that I think is a great underserved asset or community for both investors and opportunities for 12 Oaks as well from a perspective of operating kind of the the middle market, right? So I think there’s things where you can evaluate such as first thing, obviously, rents, guaranteed income, study income that will help provide and afford the rents that are typically needed for this middle market. Typically you don’t need to chase incredibly high food costs that residents may need you can maybe slide into some sort of nice sized, without giving like specific numbers, just the right per resident day cost that would suit that specific market. And then where I think 12 Oaks operates really well is because we know this Texas market extremely well. We know what they like to eat. We know what best serves the residents within these little sub-markets that we have our expertise in.

Greg 5:30

Yes, well said. With the focus on operating margin and if we’re going to reduce rates to drive census, reposition these communities to a level of affordability for the fixed income earners, like you mentioned, right? Obviously the operating model needs to change, right? And the food service and staffing are our two most expensive controllable expenses. So to the extent as a best in class regional operator, we can impact those line items. We can manifest success at the communities by way of improved operating margin. Right? Now we also recognize that perhaps the overall NOI number won’t be as high as the theoretical NOI number. And that’s the part that a lot of the ownership groups, I think need to come to grips with.

Greg 6:29

If they’re struggling at a 74% occupancy and they can’t get over that hump, is it better to be 74% occupied and maybe breaking even at best? Or is it better to be 95, 98% occupied at a lower rent? However, earning positive, significant positive NOI at a decent margin, albeit less than the theoretical earlier model, which simply can’t be achieved given the current state of that community. Maybe CapEx requirements and all the rest of it, or the demographics have shifted in that area. The pivot into those kind of communities I think has served 12 Oaks really well. And for us that’s the decision we made coming out of Covid when the transactional market fell apart during Covid transactions. We’re at an all time low, and even Q1 2023 transactions in senior housing are at a historical low again, right? So communities are simply not transacting. So you’re in the business development side of this, right? Tell me why are communities simply not transacting?

Paul 7:53

So you have a rising interest rate environment where there’s lack of ability to fund from a liquidity perspective, from a ability to find bridge financing. When you’re talking about kind of from previous capital market experience where you’re seeing bridge financing somewhere in the S Plus 400 or 500 range, right? And banks can’t underwrite something like that. So you’re certainly getting compression of cap rate versus interest rate. There’s kind of that, what you alluded to earlier, kind of like the old model, right? So people will have these expectations of price per units that were somewhere in the 100, 200, 300 range, where now in reality, you’re starting to see things in the sub 50,000 per unit range. So there’s kind of a bid ask disconnect in today’s market that we’re kind of seeing. And so I think with, as interest rates begin to settle, you’ll see people able to reprice and air go start transacting again. But until that tumult is kind of settled it’s really hard to see and hard to price accurately.

Greg 9:02

And how’s your crystal ball? When’s that going to happen?

Paul 9:06

If I knew that I’d probably be working for the Fed instead. So there’s no telling.

Greg 9:11

I’m not so sure the Fed knows.

Paul 9:13

Yes, right? I think it’ll get there, but certainly we’re seeing some tightening or I guess I wouldn’t say tightening, but, kind of like, it’s stabilizing a little bit. So it’s ultimately just a function of being able to price accurately, engage accurately until the rates stop rising, whatever it lands at, once it stops rising, then we’ll be able to price it effectively.

Greg 9:35

I’m much older than you, so I’m going through my fourth financial crisis in my professional career. So the one thing that we know for sure is markets are going to go up and markets are going to go down. So we have to decide as an operator where’s our place in those markets? And for us hthe success and growth we’ve had has been largely built on stepping into some of these distressed assets and figuring out how to fix them. And in some regard, we become a fixer. Coming into a community, stabilizing leadership building culture is exceptionally important. Regaining census, adjusting pricing, pushing renewals increases to grow revenue and grow RevPAR where we can. And then attacking operating expenses, discretionary and controllable operating expenses where we can and that’s been really important. And that’s been the opportunity for 12 Oaks here recently. And that’s what’s really fueled our growth.

Greg 10:46

And I imagine that’s what’s going to continue to fuel our growth and success here for the next year or two. However, as I said earlier, markets go up, markets go down, at some point in time we hope to see a return to normalcy, but our crystal ball is a little fuzzy, so it’s hard to to know when that happens exactly. And it will come around at that point in time 12 Oaks, based on our reputation as a best in class regional operator, we’re going to look for the opportunities to curate our portfolio. So as we kind of fix communities and make them transactable, right? So that the owners can achieve their objectives on the exit. We’re going to look to continue to turn the portfolio and bring on more stable, larger communities. I think those opportunities are going to emerge. So the industry generally, let’s step back, maybe take a macroeconomic approach, let’s look at the overall supply and demand. Where do you think the industry’s going to go and stabilize over the next five to 10 years? Kind of look way down the road aside from this turmoil we’re trying to navigate right now, what do you see as the longer term kind of thesis for senior housing?

Paul 12:18

Wow. So that’s a really great question. From a macro perspective you’ve certainly seen supply been pinched over the last two, three years, right? There’s certainly fewer, fewer units coming to market with that, right? As there’s kind of still pension supplies, certainly there’s people are trying to ramp up, but as expenses, input costs are so high right now, and in previous capital markets, I was seeing, new doors coming up at something like 400,000 a door, right? That’s not sustainable. So there’s going to be a shortage of long-term supply, but from the demand side, you’re certainly still going to have, as many people have just discussed, a like kind of the silver tsunami, right? That’s still coming. It’s imminent. So there is going to be an opportunity to increase rents based on a kind of a macro perspective of increased demand with limited supply. So in a five to 10 year range, if that’s what you’re looking at, that’s kind of what I’m seeing and that’s what I imagine the majority of the industry would believes in, knows, is coming.

Greg 13:27

And I think if we look at it as simply as that, right? Pinch supplies, you say with we know we’re at the leading edge of the boomer population, the increased demand, as long as we’re not out pricing the market, that’s important. You mentioned input costs, and that is a concern, but also we talked earlier about the middle market as an opportunity as well. So maybe that’s how the existing stock gets addressed. And there’s always room for the one percenters, right? The one percenter deals will always do well, as long as there’s not too many of them. Right? but the rest of the housing stock, right? The 80% of the market, right? I think perhaps middle market is going to be a big play there. And I feel 12 Oaks is in a good position to capitalize on those opportunities if we’re going to have to wait five to 10 years for all this to happen, right? For this normalization for the bid as spread to dissipate, right? For transactional volume to reemerge at regular consistent levels. What do we do in the meantime? What is 12 Oaks going to do in the meantime?

Paul 14:41

I think we do exactly what we have been doing, right? We’re a best in class regional operator, right? Our focus is really in that middle market, right? We don’t need to chase the top, and we certainly aren’t the bottom, but we’ve slotted perfectly our expertise in this regional market where we can increase occupancy and manage rate and really focused on operating expenses. And that’s where we kind of have carved an incredibly solid niche to provide value for both owners and residents. Yep.

Greg 15:13

Yes. I think you’re spot on. So we are going to make the best out of what we’re given, and we’re going to make a community perform to the best of its ability, given all the market conditions and situations it finds itself. Thank you. And that wraps up this episode of The Roots Podcast, brought to you by 12 Oaks Senior Living. Thank you, Paul.

Paul 15:36

Thank you.


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