PGIM Real Estate is looking ahead. The real estate asset management arm of American life insurance company Prudential Financial, has now invested three quarters (74 percent) of the $996 million it raised for its last closed-end fund dedicated to seniors housing.
“The time has really come for a senior housing strategy that has a more perpetual structure,” says Steve Blazejewski, managing director and senior portfolio manager for the senior housing strategies at PGIM Real Estate, working in the firm’s Atlanta offices.
WMRE asked Blazejewski what an open-ended strategy dedicated to seniors housing could mean for investors and operators of seniors housing. And why hasn’t it happened before?
This interview has been edit for style, length and clarity.
WMRE: Can you explain the shift to the new structure?
Steve Blazejewski: Frankly this is a concept we’ve been talking about for 10-plus years. All of the previous funds in our dedicated senior housing series have been closed-end.
When private equity investment in seniors housing started it was a much smaller sector, much less sophisticated, much less institutional. People viewed it as a very niche-type product. The institutional money that wanted to invest and get seniors housing exposure really was focused on a closed-ended, value-add-type fund product.
But times have changed in the last 20 to 30 years. The space has gotten much more sophisticated and institutional. We are at a point where there is sufficient size and liquidity within seniors housing to be able to create liquidity for an investor if and when they want to exit that investment.
WMRE: How are your investors changing?
Steve Blazejewski: If anything, I would say that perhaps there is increased interest from global investors and in even in participating in fund structures.
WMRE: How are the conversations that you have with your investors changing?
Steve Blazejewski: There’s a lot of talk about how we’re managing interest rate risk and how we’re hedging and hedging strategies and whatnot but I would say fundamentally… we still have a very compelling story from a demographic perspective and investors know that.
WMRE: So, in a bigger world of more sophisticated investors and more consistent capital, you don’t have the worry that you’re going to have the capital all leave at once or flood in all at once.
Steve Blazejewski: Exactly. You know PGIM Real Estate more broadly speaking within the U.S. is largely an open-ended fund platform. We have over $30 billion invested in various open-ended fund structures. There is an opportunity for the senior housing sector to move in that direction.
There are competitors of ours that invest in senior housing through diversified funds. They’re doing alternatives which might include student housing and medical office and other sort of niche or alternative type sectors.
All my senior housing strategy team does is eat, sleep and breathe seniors housing and so investors frankly appreciate that. We’ve had a number of conversations with investors who say they are targeting specifically seniors housing exposure.
Creating a more evergreen structure gives them semi-permanent exposure with liquidity, taking away so-called ‘vintage risk.’ For a lot of these big funds, investors continually have to re-up into a new closed-end fund. It becomes frankly a tedious and oftentimes difficult process.
We think it’s time for the industry to have permanent capital available to operators to capitalize their communities and their projects that is not a publicly-traded real estate investment trust and is not subject to public reporting requirements.
WMRE: Has PGIM Real Estate finished investing its last closed-ended seniors housing fund?
Steve Blazejewski: We launched our last closed-end strategy in August 2019 and so our investment period ends in August of 2023, which is later this year. Then the fund term actually ends in 2029. Historically we’ve done 10 year funds, which is 10 years from first dollar in to the last dollar out. So we think we have frankly a lot of runway within the closed-end fund for this for the sector to recover, the capital markets to recover more broadly.
WMRE: How are these investment structured, and how is this changing?
Steve Blazejewski: In prior funds, we had an overall leverage limitation of 65 percent loan to value. As we capitalize new deals they’re typically between 50 and 60 percent now, which might have been 60 to 65 percent even a year ago.
The pressure for the next couple years is probably lower leverage which makes overall deal returns obviously more challenging to accomplish. I think our return profile will probably be somewhat comparable to what we’re doing now.
WMRE: How is your strategy changing to invest in seniors housing?
Steve Blazejewski: Our strategy in terms of being with the best operators in best markets with the best communities is not changing at all. We’re going to come out with what we think is going to be called a core-plus type strategy, blending a high-yield strategy with core-type investing along with value-add and development and with the intention of a longer hold than we’ve previously done but with the desire to give more permanent exposure to investors.
We feel very strongly that newer communities and newer products are going to outperform going forward. We can’t really buy what we think will succeed going forward. So, we want to be in a position where we are still acquiring, we are still doing value add turnarounds, but we also have a very strong development component. That’s also going to help with the returns.
We’re also going to hold for longer periods of time which gives us an ability to optimize leverage ratios and performance at various communities. We do expect to be able to achieve a healthy return looking forward.
WMRE: What’s the average size of the properties that you acquire?
Blazejewski: I think we should be investing in what I would deem to be large continuum-of-care type communities that might be 200 units—maybe assisted living or independent living and memory care—but also somewhat smaller ones that might not offer all levels of care. If I had to look at our portfolio I would say our average community size it’s probably somewhere around 140 units give or take, typically with assisted living and memory care, often with independent living.
WMRE: How long do you hold your properties?
Steve Blazejewski: In a 10-year fund, broadly looking back now through six funds, four to seven years is probably a pretty good average. It typically takes us a few years to deploy the fund. In our prior fund, we’re going to see a little bit longer hold—maybe six to eight years—largely because of the disruption of COVID.
WMRE: What markets are you in geographically?
Steve Blazejewski: We continue to look really for a diversified strategy. Like every other investor, we’re looking for higher barrier-to-entry, higher wealth, higher density areas… infill mid to high-rise communities and town centers that are very walkable. We’re also investing in suburban, two-story, senior living communities in the suburbs.
In our previous fund we’ve invested in Coral Gables, Fla., and West Palm Beach. Those markets have benefited from COVID migration. They are also in town, they have access to trains and to coffee shops and are a couple of miles from the beach.
WMRE: It seems like I can’t write a seniors housing story right now without hearing about Coral Gables. But everyone that I’ve written about who is building in Coral Gables—ZOM, Belmont Senior Living—had to spend something like a decade trying to get their site.
Steve Blazejewski: Right—that’s part of what makes it attractive.
WMRE: How are the partners changing as you buy and build these deals?
Steve Blazejewski: Certainly, they’re becoming more sophisticated. They’re seemingly increasingly focused on the relationship rather than just the easiest or cheapest capital. Frankly I think they appreciate the fact that we’ve been investing and continued to invest throughout COVID and through this capital markets disruption. We rely on them extensively for what we deem to be off-market transaction opportunities or acquisition opportunities. Typically, they’re the first ones to know community is going to be sold or recapped or they want to develop in a certain market.
I want to position PGIM Real Estate to be the very first call they make when they need to capitalize a project. I want to be the preferred capital partner for every operator in the business.
WMRE: How are rising interest rates affecting your investments?
Steve Blazejewski: There are certainly situations where we’re having to restructure or resize loans. We make a risk-based decision on each of those cases. At times we’re investing capital where maybe we need to. At times we might look to exit an investment if we think it’s not worth putting additional capital in.
I think we’re at the very leading edge of the buying opportunity—but that opportunity is going to be governed by who has capital and who has liquidity. We’re starting to see that distress that people have talked about for the last two to three years, particularly as you see lenders start to lose patience and get pressure from their corporate leadership or from regulators.
WMRE: How has the changing occupancy rates for seniors housing changed the decisions you make?
Steve Blazejewski: I think it’s changed everything. On the existing asset side, we’re having to make decisions about whether this or that asset can recover occupancy or has the market changed—have three new competitors opened up? We’re also staring right now into the demographic wave that is coming. We have generally held investments for anywhere from four-to-seven years. We’re going to see a little bit longer hold periods—maybe you know six-to-eight years—largely because of the disruption of COVID.
I’m a staunch believer in winners and losers in terms of occupancy. I mentioned functional obsolescence of communities. Sometimes it’s the HVAC, sometimes it’s ceiling heights, sometimes it’s innovation in design that’s come up over the last couple of years. We’ve looked at plenty of value-add opportunities that are in great markets and they frankly just become cost-prohibitive.