Aging Gracefully, Investing Wisely: Featuring Focus Healthcare Partners

Greg Dowling: (00:01) Welcome to the "FEG Insight Bridge." This is Greg Dowling, Head of Research and CIO at FEG. This show spans global markets and institutional investments through conversations with some of the world's leading investment, economic and philanthropic minds to provide insight on how institutional investors can survive and even thrive in the world of markets and finance. Today on the "Insight Bridge," we have an investment for the ages. Paul Froning and Michael Feinstein from Focus Healthcare Partners will be joining us for a deep dive on investing and senior living. Father Time is undefeated. That means everyone is likely going to deal with senior housing for themselves or for their loved ones. In fact, the 80-plus demographic is expected to massively increase by 2033, providing a great tailwind for investing. But can you make great returns while providing excellent service for grandma? And how specifically do you do that? What are the operational and regulatory risks, and who exactly are the competitors? Do not get senioritis. Listen now. Paul and Michael, welcome to the "FEG Insight Bridge." Would you please introduce yourselves?

Paul Froning: (01:16) Sure. Hello, Greg. Thank you for having us. My name is Paul Froning from Focus Healthcare Partners.

Mike Feinstein: (01:19) My name is Mike Feinstein, also from Focus Healthcare Partners.

Greg Dowling: (01:24) All right. Usually we end the podcast with a few fun facts, but I'm going to start with a fun fact. Paul, I've heard that you may have spent more time sleeping in senior housing facilities than any other person under the age of 65. Is that true?

Paul Froning: (01:40) Greg, that is absolutely true. I stopped counting more than a decade ago at about 120 facilities, so yeah. And by the way, most of those are multiple night conference, but not for creepy reasons, I do feel compelled to say.

Greg Dowling: (01:58) All right. All right. Not for creepy reasons. All right. On the record. Real quick, would you mind, and maybe, Michael, I'll have you do this, just who is Focus?

Mike Feinstein: (02:07) Sure. We are a institutional senior housing investment manager. We're based in Chicago, and we invest in private-pay senior housing properties across the United States. That spans the range from senior apartments to independent living, assisted living and memory care, and we do that on behalf of an institutional investor base.

Greg Dowling: (02:29) How does one get into this business? Do you grow up saying, "I want to invest in senior housing?" How did this happen?

Paul Froning: (02:31) Well if you were smart, you could come back 30 years ago. The answer would be yes, but I think all of us first were exposed to the space, as were most people, through family members. I remember my grandmother going into a senior housing facility in the early '90s, and that was really my first exposure. Professionally, what I would say is I started out in the '90s doing general real estate, private equity investing and got into senior housing. What I found was at the end of the day, it was the only kind of private equity and real estate investing where at the end of the day, I was only going to be successful if someone's mother lived longer, healthier, happier, and that's how we make successful investments. That's the senior housing business.

Greg Dowling: (03:18) All right. Michael, how did you stumble across this business?

Mike Feinstein: (03:18) Similar. My grandmother lived in a suburban Chicago senior living community. I was responsible for driving her to work every day before high school. So I had a firsthand view into that property and then ultimately ended up studying real estate at the University of Wisconsin and started my professional career working for Brookdale Senior Living, which at the time was one of the larger senior housing operators of class A independent living properties in the U.S.

Greg Dowling: (03:44) Well, you kind of answered this already, but I'm sure this comes up. If you're investing, you want to make great returns. So can you make great returns and still feel good about it, still provide that excellent level of care? Can you or should you feel bad about making money off of grandma?

Paul Froning: (04:06) Well, if you are providing grandma significant services and giving her the opportunity to live longer, healthier, happier, you should absolutely feel good about what you did. When I was restructuring or investing in bulk industrial distribution warehouses in Nevada in the early and mid-'90s, you'd go home at the end of the day, and I didn't necessarily feel like I made anyone's life better, even if we were profitable. But the only way we are successful investors in senior housing is if someone's mother lives literally longer, healthier, happier. You can't cut expenses on your way. You want happy employees. You want happy residents. You want happy family members, the only way you're successful.

Greg Dowling: (04:46) That's a question that would arise at any committee level or just like, "Hey, how do I feel about this?"

Paul Froning: (04:52) I would tell you that we gauge our success by creating value for the resident. And if we're creating value for the resident, they're happy to pay for it because we're creating value in their life. One of the things we do when we walk into a building, as cliche as it may sound, we count the smiles. We're determining whether or not our customer base is happy, and we can also tell on competing buildings when they're not, and those are opportunities for us to fix.

Greg Dowling: (05:18) Got you, and this is not a homogeneous space, right? There's a whole spectrum of offerings here. What does that look like in the kind of senior living space?

Paul Froning: (05:27) If you think about it as a spectrum, and you start sort of in the lowest care component, which is really a no-care component, and we just target private pay, so we don't want anything to do with government. We don't want Medicare or Medicaid. We're not in that business. So you have apartment buildings that are just apartment buildings. They don't look any different. It's the same unit mix. It's 300 units. It's one bedrooms and two bedrooms and some mix, no real common areas are specific to seniors, but you have to be over 65 to live in them. We call those age-restricted. Those are, for all intents and purposes, apartment buildings, margins like apartment buildings, occupancy like apartment buildings. But then for senior specific, you start adding services. So what we call independent living, you would add hospitality, dining services and housekeeping. You're getting into activities. You're not doing any real care. You don't have any nurses.

Greg Dowling: (06:24) Is that bingo?

Paul Froning: (06:27) Yes, but no. What you really want is you want real activities. You want to be adding to people's lives. Bingo, people do enjoy, but we're taking busloads of residents to ball games. One of our buildings, we arranged to have all of the choir group go and sing at the Cubs game, so they were out on the field singing. It's that kind of stuff. It's great to sit around and watch "Matlock" reruns. I participate in a lot of Hallmark holiday movies myself, but that's not really what we're getting paid for, and that doesn't improve the resident's life and give them that value that Mike was talking about. Then you get into what people think more as kind of the care component, which would be assisted living and memory care. Assisted living is where you have nurses. You have care aides. People need help getting dressed. People need help going and remembering to take their medications, going to meals. It's much more hands-on experience. That business is a component of what we do, but it's not our primary focus. What we like, what we think is the best sort of value proposition for the resident is all of that together in one building. People can move in, in independent living, and as they age they can go through that cycle. It's a more efficient building for us to run. It's a better resident experience. They never have to leave, but you can have people move in at very young age, and the sooner they move in the longer they live. This is an interesting fact. Statistically speaking, if you try to stay in your home as long as possible, you will not live as long. If you move into a setting where you have socialization, where you have all these activities, when there's 200 other people bouncing around, you have pig roasts, you will live longer than you would on your own at home.

Greg Dowling: (08:11) Interesting. I would have thought the opposite. I would have thought your more independent living at home would be better, interesting fact. All right.

Paul Froning: (08:19) Well, but COVID taught us that.

Greg Dowling: (08:21) Yeah.

Paul Froning: (08:22) You want to really see how fast your loved one can decline? Leave them alone.

Greg Dowling: (08:27) Yeah.

Paul Froning: (08:25) Leave them in their house. You can't get to church. You can't go sing with your weekend groups, and that's a small factor, but it's the same thing. COVID increased demand in senior housing.

Mike Feinstein: (08:37) And the removal of that taboo in our business is one of the most interesting things to happen in COVID. If you think about seniors in the US, fewer than 10 percent of them, far fewer, actually live in senior housing. My wife's parents, for example, housed their parents in their home. That was commonplace. That was what they expected to do for the elderly. Now that taboo has been lifted, which is why you're seeing a lot more demand in what we do around the country, which is why we're excited.

Greg Dowling: (09:06) That makes sense to me that that would extend your life and overall satisfaction. Michael, maybe we'll stay with you. Can you talk about the demographic tailwinds? I think most people kind of get this, but maybe put some numbers to this.

Mike Feinstein: (09:16) Over the last 10 years that we've been investing In our current format, 3 million people turned 80. Over the next 10 years, 6 million people are turning 80, twice as many over the coming decade than we have seen heretofore, and that is because the baby boomers are turning 80 at a pace that we haven't seen yet. That demand and the removal of that taboo that we were talking about provides for great days ahead for the senior housing operating business. The interesting part about that ultimately gets down to supply-demand economics. Lots of demand, lots of aging seniors in search for socialization opportunity, where do they go? Where is the industry from a supply perspective? And that's part of the equation that we're investing into.

Greg Dowling: (09:59) And the baby boom generation is also one of the wealthiest generations as well.

Paul Froning: (10:03) I would argue it's the wealthiest the world has ever seen.

Greg Dowling: (10:06) So great demographics. You've got big pocketbooks, limited supply. Why does anybody need you guys? It seems like it's easy. Like, "Well, it's just -- Can't everybody just make money in senior housing?"

Paul Froning: (10:18) It's an interesting question, yet somehow that has not been the case. We think that we bring a very particular nuanced approach to the business. It's kind of funny. When I started in senior housing, which was 30 years ago, I have at this point run, restructured the three largest companies in the sector. The reason I have slept in so many communities, I stopped counting at 100 or 120, it is because initially, when I was restructuring a company in the '90s, they were broke. And they were so broke that I had to travel the country and try and figure out how these buildings should be run, what they were doing right, what they were doing wrong, how we needed to steer the company in the future, and we couldn't afford hotels. We had a lot of empty units, and what I found was if you really want to be successful in senior housing, if you really want to understand how the business works, which is necessary to control a business plan and do all of that, you need to wander around at 3 o'clock in the morning. You need to be able to walk past memory care and say, "Huh, it's 3 o'clock in the morning, and of our 20 residents, 11 of them are sitting in the common room up watching 'Matlock' or something." If you see that --

Greg Dowling: (11:29) Maybe "Murder, She Wrote."

Paul Froning: (11:30) It could be. It depends on which channel. I will say that on Hallmark Movies and Mysteries at 3 o'clock in the morning, it is typically "Matlock."

Greg Dowling: (11:38) Okay.

Paul Froning: (11:39) "Murder, She Wrote" finishes at midnight. But what I would say is when you walk around and you look at that and you say like, "Okay, our night staff is going to be overstressed," because in memory care, your typical overnight staffing will be two employees. They are not there to amuse and entertain residents. They are there in case something goes wrong. Eleven people awake, that's not what they're there for. Your day staff is doing something wrong. Your day staff is overmedicating agitated residents. They are not keeping them active. They're not getting them tired. They are not getting them ready for bed, and that is what you're getting paid for. When you talk about sort of length of stay, our job is to make someone's mom who is dealing with this terrible, terrible disease have the best life she can, live longer if possible. And you do that by keeping them active during the day, by doing your job during the day, not overmedicating them, not putting people to bed, not parking them in front of televisions. You can't figure that out unless you walk around.

Greg Dowling: (12:36) So is it true then that many of these other operators maybe underestimate the operational side of things? Again, demographics are great. Not a lot of supply, wealthy boomers, what are people screwing up?

Paul Froning: (12:50) I think other investors do not necessarily understand the underlying businesses. It's a great business. In many ways, it's the greatest worst run business in America.

Greg Dowling: (13:00) Yeah, that's what you want to look for in investing, right?

Paul Froning: (13:02) Yeah.

Greg Dowling: (13:03) Great, poorly run businesses.

Paul Froning: (13:06.07> Which is why we overstaff relative to our competition. We function like a virtual operating company. We have stables of people that follow us around the country. When we take over a building, if it's a distressed building, if it's poorly run and we're taking it over, when we take over on day one, we want to have our staff in place. We want to have new people. We try to keep everyone we can. If the building is a well-run building, then we don't make any changes to the property. It's not an apartment building. You need to recognize the human elements of this. It's not a data warehouse. It's not even a hotel. It is a business that it's the greatest business, but you have to recognize that it's a business, and you have to approach it as such.

Mike Feinstein: (13:49) Perhaps another answer to that is people have made missteps in our business. They've invested incorrectly. Some would say that they invested just too early. That's the typical answer as to, "Hey, why have you lost money in this sector?" "Well, we were too early, and now the baby boomers are turning 80." That's a small part of the answer. I think the larger part of the answer is the operational answer. If you don't understand the underlying business, you can be on time. You can be early. You can be late. You're going to get it wrong. If you understand the operating business, you have a much better chance of getting it right. And that's, in my opinion, why the institutional community needs us because it's not just the demographic forces. It's our expertise in operating these buildings as true operators that's driving a lot of our investment return.

Greg Dowling: (14:29) Maybe you can give us a example of a value add that you recently have done at a couple of different properties.

Paul Froning: (14:36) Mike, why don't I tee you up for talking about a building in northern Virginia? We think of everything in terms of levers. We look at a business plan because we're very comfortable operationally that we know what's going on. We'll look at an opportunity, and we will say, "How complicated is this business plan?" and make sure that we have it very well documented so that on day one, we're in position to execute what we think we're going to do. We had an opportunity to buy an off-market acquisition in a market that we were very excited about demographically. It was a very good building, but it was owned in an estate. It was a very complicated thing to acquire. But at the end of it, we saw an opportunity to get into a market where housing prices were off the charts, where there was all sorts of housing liquidity, where there was very limited competition and convert the building into our ideal kind of building. And this was Michael's baby, so I'll let him talk about it.

Mike Feinstein: (15:35) Yeah, and it almost blends the answer to the question, too, of, "Why do people need us?" Well, this building had been operating for 15 or 20 years. And in our opinion, it was operating wrong, providing the wrong services and catering to the wrong acuity mix of a building. But principally, it was a 300-unit building, steel and concrete constructed, and it was run very inefficiently. It was full assisted living, and there was nursing and dining and care staff at every corner of the building. It was complicated to buy. It took us a year and a half to buy, but our vision was to turn around the operations and also significantly invest in the physical plant. We ended up doing a $67 million renovation to that property. And by doing that, we were able to create the business we wanted to create, and we were able to ultimately lease to 100 percent occupancy on those 300 revised units and drive almost $15 to $20 million of annual net operating income out of that building, which is a probably we bought when there was $2 million or less in place, and we did that through COVID. And it became a huge success for our investors, but it's also an institutional property now that will have a place and deliver resident value for decades to come.

Greg Dowling: (16:45) That's a great example.

Paul Froning: (16:46) Well, and it also speaks to, look, happiness is a low basis, right? But I can't control interest rates. I can't control cap rates. I can heavily influence net operating income and what the cash flow from a building is. And that, as an example, was something where we took a building that had $2 million of in-place NOI, and we had a vision to get it to between $15 and $20 million of NOI. So if your all-in basis is $110 and you're going to make $20, it'll work out.

Greg Dowling: (17:17) Yeah.

Paul Froning: (17:18) I don't know if the cap rate will be a five, a six, a seven, a 10. It'll be fine.

Greg Dowling: (17:23) All right. So you go in. You pull some levers. Could be a couple, could be a lot, right?

Mike Feinstein: (17:28) A lot.

Paul Froning: (17:31) Yeah.

Greg Dowling: (17:32) Could be a lot.  How are you making money? Is it through rent increases? Is it through flipping the properties in a couple years on your exit? Is it kind of both? How do you make money in this?

Paul Froning: (17:42) We typically underwrite everything to be a 7-year hold, to make sure that we have time to execute a business plan, to make sure that we're getting on the order of 50 percent of our return as cash through the middle. We may do class A staple buildings, in which case we'll get 70 percent of our return as cash through the middle, and then we'll do, as Mike was talking about, these very complicated five-lever deals. It's going to be more back-ended on disposition, but it's all about creating NOI. If you look at our historical track record, what has really led to our success is hitting our terminal year NOIs in years 2, 3 or 4 and then selling the building. So it's all for us about creating NOI. It's not about market timing. We want to be below replacement cost on everything, but even if you're not, if you have a path to significant NOI increases, then that is going to work out to be a good investment. We bought a fully stabilized building that is brand-new, that's in a great market, that's our kind of big, all-inclusive campus, and we bought it from an institution that is very well regarded. But we saw opportunity to rationalize pricing, improve care and care fees and care tracking, and we were able to increase NOI by more than 20 percent the first year we owned it, and we bought it from an institution. That's kind of our secret sauce.

Mike Feinstein: (19:05) Paul is describing a lot of our operational improvement work, and we're very good at that, but we also look for opportunities to buy things off-market. Three-quarters of our investments have limited competition. That translates into the low basis that Paul was talking about, so when you marry those two together, a good entry point and cash flow growth, that creates the likelihood for a great outcome.

Greg Dowling: (19:24) All right. Any fun value-add changes, like you've improved the Jell-O or the pudding?

Paul Froning: (19:29) Yeah. One of the first things we try to do, particularly if we're buying a building that has been distressed -- When a senior housing building gets distressed, you will find that particularly generic, got-a-tail private equity people, they try to cut costs. And that is such a mistake because you can't cut your way to success in senior housing. You have to be providing value. So we'll take over buildings, and we'll find -- A great example is when people outsource food service. It's a business where there's a nuance as an investor because your customer and your consumer are two totally different people. Your consumer is an 85-year-old, typically woman, 85 percent of our residents are single women. And the person making the decision is their adult daughter. Well, for your day-in, day-out resident, one of the most important things is their experience at meals. That's when they're social. It happens three times a day, and that is something they will remember. They are really interested in the experience they're getting. They want good food. They want good experience. They want activities. They want all of that, which is different from your customer. Your customer wants to make sure mom is safe, that there's someone around in case mom needs help. So you have to cater to and satisfy both of those people. When people try to cut costs, they might outsource food service. And there are some companies that are fine in other services, but in senior housing, you want the chef to be known by the residents because it's so important to them. We take over buildings, and we try to improve food service day one. That is something very tangible in the resident experience. It's really important to them. If you can fix that quickly, you can go a long way to fixing a building.

Mike Feinstein: (21:19) Let's stay on food service for a moment. In every building we have, we have very large dining rooms and lots of F, F and E: furniture, fixtures and equipment. One of the things we see often, and Paul is maybe shy about this, is we see furniture that is dangerous for our residents, lots of sharp corners. So we came up with a plan with our designers and architects to create our own dining chair, actually.

Paul Froning: (21:39) Well --

Mike Feinstein: (21:42) Soft edges --

Paul Froning: (21:42) To be fair, they insisted on just creating it because I was driving them insane. Every time we'd go to renovate a building, we're buying 300 chairs, and they would always spec a different chair. I'm like, "No, no, no. I don't understand."

Mike Feinstein: (21:56) And it could be dangerous.

Paul Froning: (21:57) "This is what we want."

Mike Feinstein: (21:58) Sharp corners hurt our residents. And at the end of the day, we were able to design our own chair. It's now in production, and we call it the Paul. We insert that at every building we buy.

Greg Dowling: (22:06) The Paul, I like that.

Paul Froning: (22:08) By the way, we didn't call it the Paul. The manufacturer did because then they said, "You know what? This actually works. Do you mind if we sell this to other people?" So we go into competitors' buildings sometimes like, "Oh, that's the Paul."

Greg Dowling: (22:20) Yeah, I'm sure the manufacturer -- That's a term of endearment, I suppose. Right?

Paul Froning: (22:23) Yeah.

Mike Feinstein: (22:24) Without royalties.

Greg Dowling: (22:25) Without royalties.

Paul Froning: (22:26) Yes, yes.

Greg Dowling: (22:27) Oh, that's great. I've heard you say this before, but one of the things that I've taken away from all of this is just that it is typically the adult daughter who is behind all this. And I just think to myself, "Thank God I have two daughters and one son," because my son won't do a darn thing. I could -- That rings true at this house, thankfully.

Paul Froning: (22:44) Yeah.

Greg Dowling: (22:46) Hopefully they'll take care of me.

Mike Feinstein: (22:46) I have the same house, and I've thought exactly the same.

Paul Froning: (22:51) Yeah. I used to say, "You want daughters until they're about 12. Then you want sons until they're 25. And then you want daughters for the rest of the time."

Greg Dowling: (22:56) Yeah, yeah. That's probably about right. Michael, you talked about COVID. I want to talk a little bit more about risk. This all sounds great. You guys are brilliant and right place, right time, but you added your secret sauce. But gosh, during COVID, I just think of other health care investments, how labor was a big issue. Not only the cost, but just finding it. What are some other costs that you really have to monitor and control?

Mike Feinstein: (23:24) Gosh, it spans the P & L. We think about food costs, which is one of our most expensive, obviously, behind labor.

Greg Dowling: (23:30) Yeah, I could imagine that's gone up quite a bit. Yeah.

Mike Feinstein: (23:31) We're feeding our residents three times every single day all across the country. We're very cognizant of insurance costs. We are very cognizant of real estate tax costs as municipal budgets get stressed. They pass that on to real estate owners. But we believe our underwriting of cost is on par with everybody, perhaps the best in the industry because of our experience as operators. We know how buildings run. We know how to project costs. We actually have been ahead of the curve on projecting increasing labor costs, and we look at our actual performance versus projected performance year by year, decade by decade. And we are generally spot on and in line with what we thought was going to happen, sometimes for the right reasons, sometimes for different reasons. But we've been thoughtful about labor and insurance and food and real estate taxes and all the like for our entire careers.

Greg Dowling: (24:22) Do you have the ability to pass on any of those expenses and higher rent if we have a wave of inflation, or is that just a risk that you kind of have to be cognizant of?

Mike Feinstein: (24:29) We don't think about it as pass-throughs. We think about it back to our commentary of value. If we're delivering value, we are finding ways to actually lead the marketplace on rent growth. And we're proud of that because at the same time, our occupancy is at near 100 percent or maximum capacity. And that was perhaps, to your question, illustrated in COVID. Our portfolio recovered occupancy faster than any portfolio we could find data for, whether public or private. We were able to, between February 2021 and call it mid-2022, recover all of the occupancy in our portfolio that had been lost 2 or 3 years faster than any other large-scale operator in the country.

Paul Froning: (25:12) And actually, I would say COVID is one of the things that demonstrates really how truly different we are than competitors. It shows up in the numbers, as Mike mentioned. We completely recovered occupancy years before anyone. And frankly, the industry as a whole has not yet gotten to pre-COVID occupancy, and we hit it within 12 months. But I'll give you an example of how, during COVID, we're so different because I don't think any of our competitors, even very large competitors, have some version of the following story. At the beginning, if you remember, no one could find personal protective equipment. You couldn't find masks. You couldn't find gowns. You couldn't find face shields. So our controller found a guy who had a plane in the air, so he said. And he said, "Look. Someone missed a deposit. I have 100,000 masks, face shields, all this other stuff. If you wire me $20,000, you can have the shipment." Right? "That'll be the deposit." So Kurt and I looked at each other and said, "All right. Well, if it's out and out fraud, it's my nickel and your nickel. We can't build a fund. We can't do that to our investors, but we have to take the chance." So we did some research. And 2 days later, Kurt, my partner, is unloading with his three sons 110,000 masks and face shields and gowns into his garage. And then we found a distribution company that would break down all the boxes and ship them out. And every week we're having multiple conversations with every one of our properties, and we're distributing out PPE. It's that kind of level of detail. Any of our competitors did not have that experience. No one's garage was full of 100,000 masks and face shields that they then spent the next year sending out to properties.

Greg Dowling: (26:54) Given just the silos that you operate in under senior housing, do you completely avoid regulatory risk and reimbursement risk, or is there still an element of your business that kind of has that government risk?

Paul Froning: (27:09) There is a very small element market specific that you have to deal with. But we, by and large, try to really stay out of particularly when it comes to payment source. Assisted living and memory care are, in fact, regulated industries. And so we take that very seriously as part of our duty and our duty as an investor. It's the public payment, Medicare, Medicaid, that we try to completely stay out of.

Greg Dowling: (27:29) All right. Turn this around. You're getting better rents. You go to exit, and you said you underwrite that 7-year hold period. Who are you exiting to? Who's a typical buyer of these?

Paul Froning: (27:41) There are a number of public REITs that represent hundreds of billions of dollars of assets and transactions a year. We've exited to institutional investors, private investors, individuals. It all depends on the particular market and the building itself. People need to realize that the senior housing business, as new as it is, as an investable universe, is roughly the size, if not larger at this point, than hotels. So just in terms of scope, there's enough people to invest in hotels. There's enough people to invest in senior housing.

Mike Feinstein: (28:14) And I think we're only at the forefront of the liquidity in this market for stable institutional class A buildings. I think 5 years from now, as the industry continues to gain steam, there will be larger funds, core funds, public REITs, all flooding to buy class A stable assets, creating even more liquidity on the exit.

Greg Dowling: (28:37) You mentioned it, public REITs. There are some senior housing-focused REITs. Should I just buy one of those and not invest with you guys?

Paul Froning: (28:45) I think the challenge to those is a couple things. First of all, if you want to invest in senior housing, there isn't a private pay senior housing REIT. You're getting legacy portfolios as well. Whereas in our funds, we are buying and turning assets into class A assets. REITs are great competitors, some of them very well capitalized. Some of them have great portfolios, but they also have portfolios that have been assembled over the last 20 or 30 years. Whereas in our funds, we're creating assets that are today assets. But we're also not buying medical office building. We're not buying life science. We're only doing private pay senior housing, and so that specific strategy, if that's the goal, is a little bit more murky on the REIT portfolios that you might buy. More liquid, perhaps, but you're getting exposure to all those different sectors that you may or may not study.

Greg Dowling: (29:33) Interesting. So I wanted to turn it a little bit, maybe just for anybody, because I think we're all going to have, unfortunately, experience with this, whether it's for ourselves or one of our loved ones, grandma, grandpa. Do you have any advice for someone who's checking out a senior living facility, other than whether or not they have the Paul in their dining facility? What's some advice you'd give?

Paul Froning: (29:59) That shows an attention to detail that should be admired. I think I'll have an answer in my <Indistinct>. It's actually pretty straightforward. You, as likely the adult child or a family member, when you walk in, people should be very proud of what they do. We have our investor meetings at our buildings. We are really proud of what we do. We don't hide from it or hide it. We eat in our buildings. We stay in our buildings. When you walk in as a potential customer or consumer, what's your first impression? When you walk in, does it smell funky? Turn around and leave. It shouldn't.

Greg Dowling: (30:31) The smell-funky factor would be high for me.

Paul Froning: (30:33) Yeah. But by the way, you should not go to one of the buildings you're considering without eating a meal, a generic meal. Do people look happy? You can learn a lot from staff. Is the staff welcoming and engaging? When you're touring, even with a marketing director, do residents approach them? Do they say, "Oh, hey, Betty. Did you see so-and-so or this happened or the food was great today?" Are staff engaging with residents or do people walk by everyone without saying hi or good morning? It's really simple stuff, but it really is true that that's the experience of the resident. And you as the customer, as it were, need to be able to recognize that.

Mike Feinstein: (31:15) Have mom participate in an activity. See how the community thrives and lives, and that'll tell you a lot. A lot of our investors actually call us and ask for advice on the topic. And we end up, because they ask us to, we'll pull regulatory reports. We'll look at some of the buildings. We'll look at wherever they might be located. And that's all great data, but the choice should be made more from the heart than from the mind. And as you walk into the building, you will see these things. You'll participate in the fabric of their daily life, and that will tell you a lot. You'll know.

Paul Froning: (31:45) And you can see -- when you get up into higher care, there's an important thing, and one of our -- going back to walking around at 3 o'clock in the morning and how people deal with memory care as an example. If you walk into a building and there's a bunch of people slumped over and asleep in the lobby, it's not good care. You need people active. You're paying for people to make sure that mom is active and exercising and all of that. So it's kind of obvious stuff, but it's really important stuff.

Mike Feinstein: (32:14) I have a family member living in one of our buildings, and so I take the perspective --

Greg Dowling: (32:16) I like the alignment of interest here.

Mike Feinstein: (32:18) -- there's a lens that is, on the one hand, investor, but on the other hand, user, consumer. And we take the perspective of all of our consumers. All of our customers have to have that experience or this just won't work. Forget the investment. The building won't work. So that's the approach we take.

Greg Dowling: (32:34) I think that's spot on. That's some great, tangible advice, but you also read stories. And in fact, I believe there was one in the Wall Street Journal maybe a month ago or so about somebody paying into an elite community that went through a bankruptcy, lost their money. And I think maybe you've experienced that in some of your properties as well. How do you figure out the financial backing of something that you're not committing to a property that's been in three bankruptcies?

Paul Froning: (33:00) So it's a great and nuanced example. There is a small portion of the senior housing business, which is what we would call entrance fees. And in any building, whether it's those big deposits up front, if someone is asking you for a million dollars, you absolutely should understand what their balance sheet looks like. If you have a million dollars to give to someone, you probably have enough accountants, family members and wherewithal to look and say, "Hmm, this building has a $150 million mortgage that's due next year." You should factor that into whether or not you become an unsecured creditor of that building. When you're visiting a building, and in addition to all the soft skills that Michael and I just talked about, it is fair to try and figure out, "Hmm, is this place distressed? Are they losing money?" And you can see it when people cut costs. You can see it when the food stinks. You can see it in, "How are the staff? Are staff disheveled? Are staff wearing nice, crisp, clean uniforms, or are they all showing up in mismatched flip-flops and smocks?" You do want to find places that are financially viable and are therefore going to be in a position to provide better care. You want employees to be happy. When we renovate buildings, we go out of our way to try and improve employee areas, employee facilities because we want people to want to come to work. We want it to be a nice place to work. You can pay them $0.25 more an hour, but if they like coming to work, they will show up more often.

Mike Feinstein: (34:30) I think it's important to note, too, that we do not invest in going concern entrance fee models. Our business is more predicated on the rental model within senior housing. And to your point, a lot of the entrance fee communities have found themselves in certain distressed situations. We've been looked at, in many cases, as a white knight or a savior to those situations by keeping buildings open, converting them to rental property, ridding the consumer of having to come up with a million dollar buy-in, which is dangerous for all, and fixing those buildings and completely transforming their operational profile. That's the work we do. There happens to be an opportunity set of those buildings today, situationally. But again, that's a small subset of the senior housing industry in total.

Greg Dowling: (35:13) Yeah, but when you come across it, I think it is very important -- Paul, you said it. Unsecured creditor, that's often the position that you're in. So if you give that money, just be very, very aware of it. And, Michael, I love the alignment of interest, family member in one of your properties. You guys are sleeping there, and you're in the studio here today largely because you're visiting one of your properties that's kind of in our metro area. And so you're not kind of absentee owners. You're there.

Paul Froning: (35:40) Oh, yeah, yeah, yeah, yeah. We talk to our communities very regularly. If we're doing a complicated business plan, it'll be at least weekly, just on a normal basis. If the thing is 98 percent occupied and crushing budget, then we'll leave them alone and talk to them once a month. But we visit every one of our properties, someone from the company, at least once a quarter. Mike, Kurt and I, the three partners, visit every building every year. It's very important. You have to be providing that service, and you can't tell until you actually go by and see it.

Mike Feinstein: (36:12) And it's a beautiful property. Listeners won't know, but it's by a very large park in the northern suburbs, and I guess maybe the best thing is it's kind of a cool building. I didn't even know. I've driven by this building a hundred times, but I didn't even know it was a senior facility.

Paul Froning: (36:27) Yeah.

Mike Feinstein: (36:27) So it just looks like a cool market-rent apartment.

Greg Dowling: (36:31) So anyway, guys, we really appreciate you making the time on this visit to come see us and share some of your wisdom on senior living, so thank you very much.

Paul Froning: (36:40) Hey, we are passionate about what we do. We really thank you guys for your partnership and look forward to going on and successfully investing for you and your clients for the foreseeable and distant future.

Mike Feinstein: (36:51) Our pleasure. Thanks for having us.

Greg Dowling: (36:51) Thank you. If you are interested in more information on FEG, check out our website at www.feg.com. And don't forget to subscribe to our communications so you don't miss the next episode. Please keep in mind that this information is intended to be general education that needs to be framed within the unique risk and return objectives of each client. Therefore, nobody should consider these to be FEG recommendations. This podcast was prepared by FEG. Neither the information or any opinion expressed in this podcast constitutes an offer or an invitation to make an offer to buy or sell any securities. The views and opinions expressed by guest speakers are solely their own and do not necessarily represent the views or opinions of their firm or of FEG.