Alternative investments are no longer “alternative” — they’re mainstream. Even financial giants like Goldman Sachs have been advocating portfolio allocations of 15% to 20% in alternative investments for over a decade. It’s a way for investors to distance themselves from the turbulence of the market and rising interest rates, balance their portfolios, provide greater downside risk protection, and potentially get better overall returns.
The seniors housing and healthcare real estate market is one sector of alternative investments that is catching major tailwinds. Recently, Wilshire Finance Partners began welcoming new investors back into its flagship fund, the WFP Income Fund, with an increased focus on this niche. It’s a short-term fixed-income alternative investment, secured by a hard asset — real estate.
“We’re seeing tremendous opportunity in seniors housing, particularly in assisted living facilities with memory care units,” Wilshire CEO Don Pelgrim told California Business Journal. “Consequently, we are inviting investors seeking a balance of strong risk-adjusted returns and downside risk protection to consider this resilient asset class. There are significant tailwinds that are giving lift to the entire industry.”
These tailwinds include: renewed demand; rebounding occupancy numbers; the first wave of baby boomers entering seniors housing facilities; new policies and protocols to help mitigate COVID-19 exposure; and a pandemic-seasoned pool of owners and operators who are ready for just about anything.
“We started to put greater emphasis on seniors housing in 2019, then COVID changed the landscape. But what was interesting is that, even though there were a number of challenges facing that industry during COVID, facilities were able to — pretty quickly — demonstrate agility and resiliency. Among other things, they quickly put strong protocols in place to protect their residents and mitigate the impact of the virus. Now, residents and caregivers in the seniors housing sector have one of the highest vaccination rates in the country and many facilities have created a protective environment for seniors,” Pelgrim says. “Additionally, if you look back at some of the historical data compiled by the NIC (National Investment Center for Seniors Housing and Care) and other associations, assisted living facilities have historically done extremely well through various economic and other challenges. They’ve been very, very resilient.”
In addition to historical performance, baby boomer statistics were important in Wilshire’s decision to bring new investors back into the WFP Income Fund. The wave of Americans aged 57 to 75 is now an estimated 73 million strong, or 22% of the population, according to the Census Bureau. Thirty percent of all assisted living facility residents are in the 75 to 84 age range, according to the National Center for Assisted Living. Fifty-two percent of all assisted living facility residents are 85 and older, and over the next 20 years, the growth rate of that population is expected to increase 118%, according to the U.S. Department of Health and Human Services.
“When these statistics and reports supported our initial conclusions, we modified the direction for the Fund and started to ramp up our lending focus on those facilities,” Pelgrim says. “Between the growth rate for people who are over 65 and their need for long-term care, the demand for seniors housing and healthcare real estate is going to continue for the next several decades. COVID is not in the rearview mirror, yet they’ve figured out many of the related issues and they’ve proven their agility. So, you’ve got the combination of need and good providers who can satisfy that need. We were looking forward and saying, ‘OK, this is going to generate positive results for the facilities, their residents, the Fund, and its investors.”
Founded partly in response to the 2008 financial crisis that seized Wall Street, the Newport Beach, Calif.-based fund manager and portfolio lender has been on the ground floor of private debt lending. When banks ceased lending, private companies began injecting capital into the marketplace. As an alternative capital provider, Wilshire provides loans for acquisitions and turnarounds and takes a disciplined and conservative approach to its real estate debt and equity investment strategies, which translates into strong risk-adjusted returns for their investors. Wilshire has two different sets of clients: the borrowers, who are owners and operators of seniors housing and healthcare facilities; and investors in the fund, who are typically high-net-worth individuals, family offices, investment advisors and wealth managers.
Wilshire started lending in the seniors housing sector in 2015, seeking strategic and value-add acquisitions. Sometimes, an experienced operator is looking to expand its business footprint with new facilities, or an owner can see potential to enhance a facility to increase revenue. Other times, a facility may face challenges with poor occupancy and little cash flow at acquisition but strong upside potential once the issues are prioritized and eliminated. In those situations, Wilshire leverages these business strategies to enhance growth for the facilities, increase services to seniors, and provide strategic investment opportunities for owners, operators, and investors alike.
In 2019, the WFP Income Fund was closed to new investors, receiving steady inflows from existing investors. Wilshire, exercising prudence, wanted to wait for more solid investment opportunities, especially in an uncertain market. In 2021, seeing favorable performance in the seniors housing and healthcare markets, even under pandemic conditions, Wilshire increased its lending and investment focus in this sector. After the first half of 2022, Wilshire decided it was the time to expand its investor base and its lending and investments in the sector.
The WFP Income Fund is a real estate debt fund where investors invest in a pool of underlying mortgages, and the interest earned on those mortgages creates returns for the investor, in the form of monthly payouts. Because the WFP Income Fund is the lender and not exchange traded, the fund has no correlation to the stock and bond markets, little to no sensitivity to interest rates and has been able to maintain a stable share price.
“We hold a first lien position at lower loan-to-values (LTV) ratios with the real estate as our collateral. If you think about it for a minute, we’re almost like a bank. If the chips are down and real estate values are moving, who gets paid first when there’s a problem? It’s the lender — it’s the bank. So, while we’re not a bank, if we’re lending at a lower loan to value which translates into a protective equity cushion, that differs from a direct investment in real estate and helps mitigate risk,” Pelgrim says.
Since 2013, Wilshire has maintained a stable net asset value — $1,000 per unit — and has delivered 4.5% to 8% net annualized returns to its investors. This track record has historically offered clients a trifecta of stable income, principal protection, and monthly cash flow.
[su_quote]“What’s different about us is balance. We’ve strived to create an investment vehicle that delivers a higher risk-adjusted return relative to other available short-term fixed-income investments and monthly cash flow, while at the same time mitigating downside risk to help provide principal protection.” — Don Pelgrim, CEO, Wilshire Finance Partners [/su_quote]
Although all real estate-based investments involve risk and past performance is not indicative of future results, Wilshire’s approach helps to create a buffer against a correction.
Private debt investing has grown up over the last decade and Pelgrim would like to see it continue to mature and become more mainstream as an asset class. He wants to see Wilshire continue to expand its approach to value-based investing, and to continue to deliver positive social and economic impacts in the lives of all involved: borrowers, investors, and seniors.
“We are a for-profit business and our investors are looking for a return, of course. Nevertheless, there are ways to do that and also create other positive impacts as well,” he says.
Wilshire has successfully identified and assisted a number of owners, operators, and facilities through its lending activities. Especially in the last 24 challenging months, the team has become heavily involved in multiple aspects of the industry, such as helping to form an assisted living association in Florida that provides training, tools, and resources to regional owners and operators of assisted living communities. Pelgrim sees the most opportunity in both those facilities that are starting to rebound from COVID-19, and those that still need assistance. Wilshire’s network helps them to identify strategic acquisitions and value-add opportunities in the market.
As Wilshire’s CEO and Fund Manager for over a decade, Pelgrim and his team at Wilshire have helped a number of owners and operators of assisted living facilities. He cites one situation where the firm learned of three nursing homes owned by the same operator that were not being managed properly to the point where the senior residents were not being fed adequately. “It was just a very bad situation,” he says.
Wilshire was able to coordinate with the existing operator and finance the acquisition of all three nursing homes by a new operator, one in Wilshire’s network. With Wilshire’s capital, the new operator was able to restore the facility to its intended purpose: a safe living space providing services for elderly persons to improve and extend the quality of their lives.
“Not only was it profitable for the investors, but more importantly, the turnaround of those facilities created a better environment for the seniors,” Pelgrim concludes. “A well-operated facility creates a lot of worth for the seniors in that community. Conversely, something that’s not well-operated—I think all of us suffer from that. By being able to identify those opportunities and those operators who have the capability of doing that, and then providing them the capital for those kinds of opportunities, it benefits the investors; it benefits the operators; it benefits the seniors; and it benefits the community. There are a lot of positives to doing that, and to me, it provides a strong sense of accomplishment.”
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