As head of the largest assisted living company, Granger Cobb, president and CEO of Emeritus Corp., has unprecedented visibility into the market.
Cobb predicts occupancy and rental rate improvements on the horizon and sees a bright future overall for the sector, given the broader demographic trends.
NREI spoke with Cobb about where the assisted living market is headed and whether Emeritus, which has 485 communities, plans further expansion.
An edited transcript follows.
NREI: Is the assisted living market recovering?
Granger Cobb: I’m absolutely convinced that it is only a matter of time before we see occupancies and rental rates improve. The demographic of older people continues to expand and there’s little new supply of assisted living buildings. Occupancy has slowly started to improve. But rental rates are only averaging increases of 1 percent to 2 percent a year. That’s pretty anemic. We’re approaching 2012 very conservatively, and we’re watching expenses. We don’t expect great increases in occupancy and we believe there will be continued pressure on rental rates.
NREI: Is Emeritus offering rental concessions now?
Cobb: Price continues to be very important to consumers. But we only offer concessions in certain markets depending on the competition. It’s very localized.
NREI: Last year, Emeritus acquired the Sunwest portfolio of 144 buildings in partnership with Blackstone Real Estate Advisors and Columbia Pacific Advisors. How’s that deal working out?
Cobb: It’s exceeding our forecast. We’ve added five full points of occupancy since we took over the buildings and our margins have improved. The buildings are just over 83 percent occupied now. That compares to 88 percent for our entire portfolio on a same store basis. The group of employees who came on with the acquisition embraced our culture and we’ve meshed well. And since the specter of bankruptcy has been removed, the buildings are moving up.
NREI: What kind of returns do you expect on the Sunwest portfolio?
Cobb: If we generate a return to the joint venture above a 15 percent internal rate of return, then we share in the profits at the time of sale. The more returns we generate, the more we benefit. We did another joint venture with Blackstone in 2006 for 24 properties with a similar structure. When we bought the buildings this year, because of the incentives, $27 million was applied as a discount to the purchase price of the buildings. It worked out well. The Sunwest deal is six times that size. So six times $27 million is not too far off the potential we could generate.
NREI: Do you prefer to own or lease?
Cobb: Right now we own 192 buildings. We lease 141 communities and we have another 152 buildings that are managed by us, but owned by joint ventures. We’d still like to own everything.
NREI: Why own everything?
Cobb: In our business, it’s difficult to separate the real estate value from the business value. Our communities are valued on a multiple of cash flow. If we create value in a site by improving operations, then the landlord gets the benefit. You can structure leases to capture some of the value you’re creating on the operations side, but if you own a property, you get 100 percent of what you create.
NREI: Are you still making acquisitions?
Cobb: We’re opportunistic. We look for acquisitions where we think there’s good upside in terms of value creation.
NREI: What about changes to existing properties?
Cobb: We’re looking at markets that have recovered and where we have open land to see whether or not we might be able to expand. In other cases, we’re converting independent living units to assisted living or assisted living units to memory care depending on market demand. We converted 14 units of assisted living to memory care at Villa Del Rey, our building in Napa, Calif. It’s a low-risk deal for us.
NREI: Any other plans?
Cobb: We’d like to acquire a home health company that also offers physical and occupational therapy. It would provide better service to our residents and also give us some quality control over the services. Right now we have 100 different providers and limited control over quality. We’d like to buy an existing company as a platform and expand by giving it access to our communities over time. But we’re not ready to acquire a company yet. There’s a lot of uncertainty about Medicare reimbursements. We want to make sure we know how that business will perform going forward.
NREI: Emeritus is so big. Is big really better?
Cobb: Big is good. It gives us significant economies of scale. We are more efficient than a small operator when you measure general and administrative expenses. The challenge for us is maintaining our local focus. This is a local business and you need to respond to local markets. We are constantly aware of that as we grow.