How Trent Johnson, Brian Landrum at Harbert Management Corp. Invest in Senior Housing

Trent Johnson and Brian Landrum are senior managing directors and co-heads of the seniors housing team at Harbert Management Corporation, an $8 billion alternatives asset management firm founded in 1993. 

The group has been investing in the seniors housing space for 15 years, raising a $210 million investment fund in 2016 and a $510 million investment fund for the space in 2020. The group is currently on its third fundraise, as they attempt to capitalize on the first wave of Baby Boomers turning 80-years-old in 2016. The duo sat down with Commercial Observer to discuss their careers, how the asset class has evolved, the present and future of the senior housing space, and where the best investment opportunities will be in an increasingly important asset class. 

(This conversation has been edited for length and clarity)

Commercial Observer: How long have you been involved in the senior housing space? 

Trent Johnson: I started investing in the space in 2012, which is where I met Brian at Fortress Investment Group. I actually came from a legal background. I started out as a real estate lawyer, and then I spent a lot of years at an apartment investment and management company, which was a large multifamily REIT based out of Denver, Colo, Apartment Investment and Management Company. I was recruited away to start and lead a seniors housing platform in Dallas, which is where I joined forces with Brian, and we co-headed that office here in Dallas. 

Brian Landrum: I started investing in seniors housing in 2009 at a predecessor firm, Walton Street Capital, which was a diversified real estate private equity firm, and then in 2012, I joined forces with Trent in 2012 at Fortress Investment Group, which is where we began working together, and then ultimately, made a decision to join up at Harbert Management Corporation in 2015. 

How have you seen the senior housing space evolve over the last 15 years?

BL: The product is rapidly changing, especially in light of the changing generational customer cohort that we’ve seen move through our asset class over the last 10-to-15 years. When I started investing in the asset class — even when Trent and I joined forces together in 2012 to start deploying capital at our predecessor firm in the asset class — the silent generation was clearly our customer base. And that’s changing today, with the oldest Baby Boomers in the United States turning 80 this year. And that Baby Boomer generation is looking for senior housing. It’s an asset class or product type that is very different from what the industry was developing 15-to-20 years ago, which, generally speaking, were smaller footprints, smaller unit sizes, less amenitized buildings, than we’re developing today. 

The silent generation was very interested in a lower rent price, so that’s why you had buildings developed that are generally becoming somewhat obsolete today, where 35 percent to 45 percent of the units might be studios. The Baby Boomer generation today is looking for Class-A-to-luxury senior housing settings, with multiple dining venues, all-day dining, rooftop bars, pools, pickleball courts. And they have the wealth to pay for it just given the net wealth of their generation. It’s four to five times the Silent Generation.

Is the capital there to finance these improvements to the senior housing industry?

TJ: Coming out of Covid, we had a lot of development projects that were still in lease-up. So banks weren’t getting paid back as quickly as they had expected. They had assets still on their books, kind of lingering over from COVID. That’s starting to change today. I think these banks now are getting repaid on a lot of debt that they put out, whether it was 2019 debt or early 2021 debt. And I think the capital markets have definitely moved, even in the last 12 months, in terms of availability of new lenders entering this space. There are bigger capital players coming back in terms of the capital markets activity that we’re seeing on the buy-sell side. And so, I think things have become very productive on all fronts, and we’re seeing some really new entrants, even on the debt side of our business, that we had never really seen before, and we’re creating new relationships across those as we speak. 

And, they’re getting aggressive on debt. We’re seeing spreads in debt that we haven’t seen in maybe since we’ve been doing this together as a team, and I think that’s a reflection of where people think this asset class is going, just given the supply demand dynamics that we have right now. People are willing to pay for those nice, new-amenitized buildings, and their elasticity with respect to being able to restore margins in those types of buildings is a lot more than it would be in a smaller building, where you have the predominant number of units of studios. It’s hard to move rents when you don’t have a highly-amenitized building. That’s not to say that we don’t need all forms and sizes of senior housing, but we’ve seen a real uptick in those types of buildings and the groups that are willing to finance them. 

What’s the fundraising front been like? 

BL: The fundraising environment is very constructive today for senior housing. The LP community’s knowledge of the asset classes has greatly developed since we raised our first fund, which was a 2015-2016 vintage fund. At that time, a lot of the initial conversations and initial meetings, you spent a lot of time educating the potential investor about the asset class and what senior housing is, and what are the various acuity spectrums within the asset class and services that are provided at the asset level for operators, etc. 

Fast forwarding to Fund II, it certainly felt like in 2019 and 2020, the asset class was a little more understood by the LP community. But now, today, we’re getting inbound phone calls, just given some of the institutional research that’s been published about seniors housing in the last 12 months. It’s one of the only commercial real estate asset classes that you can really point to has, for the next three-to-five years, a very positive demographic story outlook, and double digit projected NOIs compared to other real estate subasset classes 

What specific assets of the broader senior housing space do you invest in?

BL: Within our fund business we focus on independent living, assisted living and memory care, and that could be standalone properties, or campus settings, where a resident’s able to age in place, and so you’ve got independent living, assisted, and memory care, obviously, all under the same rooftop, or the same address. Independent living is very much a lifestyle decision for a senior, in addition to being housing, they’re obviously getting transportation and meals, housekeeping, socialization. And then when you move through the acuity spectrum in terms of assisted-living, that’s where you start having daily assistance with the activities of daily needs. For example, getting help in terms of medicine management or feeding, and then dementia-care would be typically a perimeter-protected location for residents with dementia and dementia-related diseases under memory care. 

TJ We don’t dabble in senior apartments, the age-restricted 55-plus senior apartment buildings have a totally different investment thesis. And likewise, we don’t do any skilled nursing. And so once you bring in skilled nursing, you start talking about Medicare, heavy medical, 24 hour nursing, we just don’t dabble in that area. 

How are those assets more complicated for investors? 

TJ: What I can tell you is that once you start bringing in government reimbursement risk into the equation, you’re risk is the stroke of pen, in my opinion, in terms of whether or not that program’s gonna be going forward or not, whether it’s Medicaid at the state level, Medicare at the federal level. Each Medicaid program is run differently, every state has a little bit different view of how that works. I think that adds some complexity to the investors. And then you’re just talking about heavy medical, and it’s a totally different view of the world, as it relates to the number of nurses on staff, doctors, providing that kind of care, whether it’s getting out of hospital, going through heavy rehab. Usually, those types of people, if they make a recovery, then they’re being discharged to a property like ours, which is assisted living or memory here. 

What recent portfolio moves have you made? 

BL: We did sell a five-asset portfolio in February of this year. In terms of a post-Covid environment, I think it was our first harvesting of a large, high-value, senior housing portfolio from our funds at Harbert. The demand today from new capital interests is clearly looking for a product that’s performing well. The five-assets that we sold were highly-occupied, Class-A, senior living communities across four different states, with three different operating partners. And the buyer was looking for that type of transaction because it’s a large real estate investment platform and they needed something to help them move the needle. And whether it’s a private equity fund or potentially a publicly-traded REIT or a core fund that’s looking at the asset class today, they’re clearly looking for scale and size, and they’re looking for consistent, reliable, durable cash flow streams. Because many of these groups don’t have a seven-person senior housing team to execute on a value-add acquisition or ground-up development, which is historically where we spend a lot of our time in terms of placing capital as a team. 

What are the tailwinds for senior housing over the next three-to-five years? 

TJ: Demographics are obviously the biggest tailwind we have. We’re gonna go from 14 million people over the age of 80 years old this year to over 28 million over the next 15 years. That, in and of itself, is the largest tailwind we’re probably going to ever see in our careers, across any real estate class. At the same time, our new development in our space has basically set new records for lows, in terms of the new number of units that are being developed. Compared to 2019, we’re down about 85 percent on new starts. From a supply and demand dynamic, there’s just not another asset class that has that kind of tailwind behind it, and that is where the asset class is gonna continue to grow. 

Also, our penetration rate in seniors housing has always been relatively low. It has grown slowly, but one-out-of-every-10 people live in a senior living facility today. As it becomes a more accepted form of living, and these places have become nicer, and offer more amenities, with better food and an improved quality of life, I think that penetration rate moves up, and if it does, we’re gonna be wholly underdeveloped. If that goes up, we would need to be building over 100,000 units per year, and we’re building less than 10,000 per year today. So there’s tremendous opportunity on the go forward. 

And the biggest headwind?

BL: I think the biggest headwind for us as an asset class over the next decade is capital because of the supply and the demand imbalance. We’re building about 10 percent-to-15 percent of new senior housing starts per annum this year versus where we need to be based on the explosion of the 80-plus demographic cohort. The asset class will certainly have a significant shortage of purpose-built seniors housing unless we ramp up that development pace, and that’s gonna require a few things. 

It’s going to require experienced development teams, and some of those teams simply didn’t make it out the other side during the pandemic. Because as starts went to zero, revenue in the door became nil, and therefore, some development platforms were no longer going to be concerned. So we’re gonna need that human capital, in terms of development expertise, to resemble, and circle back to the industry, and that certainly will happen with an opportunity set that is senior housing, and then we need debt equity capital. And we’re in the early innings of that formation, in my opinion, for the significant seniors housing needs to match the demand from the baby boomer generation over the next 15 years. 

Brian Pascus can be reached at bpascus@commercialobserver.com.