Why is senior assisted living an interesting asset class? What makes for a good operator? What are the challenges in this space? AdaPia d'Errico is a principal and VP of strategy at Alpha Investing, a real estate private equity firm that offers multifamily, senior housing, and affordable housing commercial real estate opportunities to their network of private capital investors.

Tell us a little bit about you.
Professionally, I am a principal and VP of strategy at a real estate private equity firm called Alpha Investing. We syndicate affordable housing, multifamily, and certain Senior Living investment opportunities to our private capital network. We work with a very select group of sponsors that we highly vet. We underwrite a lot of different opportunities and bring about nine or 10 a year. So we're very selective, we're very picky, we bring those to our network and we're able to raise capital for these projects. These days, we're writing four to $10 million checks. A lot of times, we're the primary or sole LP partner to our operators. It's been a very fun past few years. I joined in 2018, and before that, I was actually one of the people who helped to launch real estate crowdfunding back when it was getting started in 2013, I joined one of the very early firms as a founding member. I was an evangelist for the industry. So I've been in online capital raising, real estate syndication since about 2013. Prior to that, my background generally is in financial planning, financial services and investing.

Why did you decide to focus on the senior living asset class?
Our portfolio, because of the amount of deals in multifamily, is primarily multifamily, but we do focus on Senior Living acquisitions. We don't do anything that's development, and I think a lot of times that we think about senior living, we're probably thinking development, because we know that, demographically speaking, there is the silver tsunami, there are 10,000 people a day turning 65. And there's this expectation that by 2030 the entire baby boomer generation will be 65. And that's 21% of the US population. That's a lot of people needing senior living. So there's a lot of development.

We're actually focused with the sponsors that we work with on acquisitions. It's part of our business plan, we like in place cash flows, we like value add, we like the yield. And I have yet to meet another firm that works in senior living acquisitions the way that we do with our sponsors. And the reason is, there are opportunities, the challenge is that there are very few sponsors that can execute at the level that we're seeking because it's a very fragmented industry for what is in place. It might surprise a lot of people to learn that a lot of senior living facilities, because they tend to be smaller unless they're big institutional facilities, are run a little bit in that mom and pop space. And there's no real efficiencies economically or operationally. And a lot of that has actually been highlighted throughout the pandemic, where it's been challenging for a lot of smaller operators to really keep up with with what's been going on because they lack the infrastructure to do so.

So we see a lot of opportunity in the space because of the demographics, because of the way that people are seeking to change the way that they live, there's a lot of options as we age, there's aging in place, there's independent living. And where our focus is actually on assisted living and memory care, we don't necessarily go up the acuity scale to skilled nursing, we have done it in the past. But generally we're looking at assisted living and memory care, there's a need there where the residents that would have to stay in these places don't or cannot age in place in their home, and they're not long term care that they have to live at a hospital or a bigger type of an institution, they're looking for something that feels a little more personal, that feels a little more like home.

As the firm that is fundraising and looking for an operator and a really good property. What do you look for in the operator to partner up with?
What we're looking for in an operator is a lot of experience. The operator that we are currently working with, and we've done 18 deals with them thus far, they're a national company, they have the reach, they have the operational capabilities they have in house management. Vertically integrated is really important. Not just a sponsor that wants to purchase the building, because they think it's great cash flow, or they're going to flip it at a profit later, the management of the operations is really important. So we like sponsors that are also operating, because that vertical integration is really important to fully realize the value that's in the transaction. Because it's not just the real estate, and yes, there's cash flows, but you can really add value, and you can maximize those cash flows through a reduction of expenses, through making sure that occupancy is stable and steady, which is one of the biggest challenges in this space, occupancy, in addition to labor.

There really has to be an understanding of how to operate it, there has to be an understanding of the local area as well, because although you might think that you can just apply one big giant national brand, to something like senior living, the truth is that you actually can't and that's just proven out, where it's very localized. There needs to be an understanding of that local market, how it operates, who's there. A lot of research needs to go into that. Our sponsor, that we're currently work with, and we're evaluating a couple of other ones, they understand this. Primarily, they have a depth of expertise in vertically integrated management of senior living. And that's why they're so hard to find, because there are so few who actually know how to do this. There are some newer sponsors that have been starting to build this portfolio, build their capabilities over time. And those are very interesting to us as well, because we can get on board with them a little bit earlier in their life cycles. Where for example, on our with our multifamily, our operators at a minimum, they have a billion of AUM transactional experience. So we set a very high bar for that that may not be appropriate or even possible in the senior living space. We understand, there's flexibility there. We're really looking at their expertise, their ability to understand the various moving parts, this is far more complex than a multifamily operation.

What are some of the biggest challenges in the space?
Some of them have really been highlighted because of COVID. Some of the challenges arise from maintaining the expenses within range. And COVID really exacerbated expenses in multiple ways. Just PPP alone, was a much bigger expense, like all the extra safety and medical equipment that was required. Labor is a big thing. There are some some facilities that really were unable to keep it all together because they couldn't keep staff for various reasons. And although COVID was a very acute thing to happen to the industry, it did highlight some weakness there and the importance of labor, the importance of the staff and their safety. You have your nurses and your people walking away because they don't feel safe. Your residents are not getting care. This is a people business at the end of the day. We're investors and everything like that. But you need to place a primary focus on the quality of life of the residents. And that's something that we know our operator does. And it's really important to us when we invest with somebody, because that piece is what's forgotten, is the people that are there. And that's not okay.

I'll give you an example from our operator when COVID hit, they really doubled down on staff and making sure that the staff was doing well so that the residents were doing well. And so they were buying them lunches, they were really taking care of them. They were helping them with schooling their children, just whatever they could do to make sure that they were okay. Because if they're ok, the residents are okay, it's really heartwarming. And that's the right way to do it. And if you are, a smaller operator that that's running on a really thin margin, maybe you're buying your own groceries, which some people do that, they just go to the grocery store, and they're buying groceries instead of having a system where you can manage expenses, because that's the other piece of it is, all of these other expenses that come operationally, food is a big expense. And that's a simple one to think about. You might not think about it, but if you're just going to the grocery store twice a week, that's not really efficient, and how does that work? Simple things like that, like having certain systems in place, that really helps with the expenses. And then obviously, the most important is going to be occupancy, your residents. There's challenges across all three of those categories. And the occupancy, especially now is going to be a function of do people feel safe, which goes back to how are you spending? And what are you doing to ensure not just their health and longevity, but their safety, that has become paramount through the pandemic.

It sounds like an asset class with a ton of moving parts. And also at the same time, it sounds like a great time to get into it, from what I'm gathering.
Historically, Senior Living has some of the strongest performance relative to other asset classes. Senior living has actually outperformed every other asset class over the past 10 years, except for industrial. Industrial has actually generated higher returns in a one, three, and five year period. But senior living has outperformed everything over the past 10 years. And even though, the question is how's the impact from COVID-19 going to affect returns? There's going to be and there has been and there is some short term pressure, but you really can't ignore and you can't unsee the demographics over the next 10 years.

AdaPia d'Errico
Productive Intuition: Connecting To The Subtle