Installation #1 – Asset Mgmt Advisory (Operator Transitions)

(In response to many questions recently about what we do.)

Problem: There was a flood of owners who developed/acquired senior housing in the late 20-teens (or started devs that opened during COVID) who were not product specialists. The NAREIT index demonstrated healthy returns, and outside investors flooded in. Many of these underestimated the need to establish 1) good operating partners 2) with the right terms/structure. Or they elected to self-operate. These assets still have not stabilized and are in an environment where they cannot sell and cannot refinance. The operating environment is not getting simpler any time soon.

Solution: These assets need new operators who have tested their mettle during COVID (a lot of wheat/chaff separation occurred that was not obvious in the late twenty-teens) and can provide fresh operating excellence. @SophosEquities leads the operator selection process, budgeting process, and coordinates the transition (PR, systems, licensing, etc.). We also structure an incentive management agreement that aligns interests and meets owner goals (short-term refinance/exit vs. long-term hold). For those not in the industry, going with a friends’ friends’ operating company does not work. There is a dramatic level of market-by-market, asset-by-asset nuance. Owners need to ace the selection of the operator and transition/regulatory counsel (can be separate parties) and they have one shot at getting this right.

Common Objections:

1. “This process costs too much.” Call me back in 6 months then when you have lost that much or more, have a lender breathing down your neck, and now still need to pay for the transition.
2. “Why do I need to hire Sophos for this?” To quote The Social Network, “If you guys were the inventors of Facebook, you'd have invented Facebook.” In the year 2024 the time for action has been around for a while, and owners have one shot to get this right. We wouldn’t be having a conversation if this had been a self-fix issue.
3. “I self-operate and don’t want to give up the mgmt fee revenue.” Not sure your lender sees things the same way.

At the end of the day, senior housing is an ops business that happens to be wrapped/financed as real estate. Partner with the wrong operator, and the real estate is impaired. This is not a multi-family quick fix – these ships take time to turn. The best time to start would have been years ago, the second-best time is today. We're in the business of taking care of people, and that cannot happen unless the business is a going concern.

I understand this is strongly worded, but it is the result of hundreds of conversations that are rooted in a denial of the current operating environment and capital markets realities. Only once the problem is identified can the solution be executed. We can work past these issues and partner to a stronger future.