Formation Capital has a new CEO and is embarking on an investment strategy focused on creating new models of senior living and services.
Atlanta-based Formation has been a prolific investor in the senior housing and care sector since its founding in 1999. As of last year, when long-time CEO Brian Beckwith departed, the firm was managing private funds totaling $3.5 billion in assets.
Beckwith’s successor as CEO is David Russ. Russ joined Formation in 2010 and became chief investment officer in 2019. He has been serving as CEO since Dec. 2020.
Arnold Whitman, who founded Formation in 1999, is serving as executive chair.
Naming a new chief executive is not the only change at Formation recently, Whitman told Skilled Nursing News.
Prior to Covid-19, Formation was in sell mode, with four companies pegged for disposition. Formation sold all but one: U.K.-based care home provider HC-One. Earlier this week, HC-One announced that it has been recapitalized in part by a $750 million loan from real estate investment trust Welltower (NYSE: WELL). Formation maintained an equity position and will stay involved in an asset management capacity, Whitman told SNN.
Also over the last year, Formation sold its lending business, and while continuing to manage legacy portfolios, has been formulating its post-pandemic strategy. Now, the pieces are in place to start raising a fund to execute on that strategy, Whitman said.
“We hope to build a model that breaks down the walls of senior living,” he said.
The missing piece of senior housing
After stepping down as CEO of Formation in 2011, Whitman focused on the potential for technology and other innovative and disruptive forces to reshape senior housing and care. The new investment strategy is rooted in his beliefs about where the sector needs to go next in order to evolve and create the most value.
“The missing piece of our business in senior housing has been, we’ve built a moat around our real estate,” he said.
In other words, senior housing is typically too isolated from the surrounding communities. He sees a major opportunity to create a new model that is more integrated.
“We’re leaning into a little bit different view of where value gets created within and outside walls,” he said.
That “we” includes his partners in the new fund: Chip Gabriel, executive chairman of senior living development and operating company Generations; Scott Reed, co-founder of Alignment Healthcare, a Medicare Advantage plan provider that just raised $490 million in an IPO; and a technologist who he declined to name as of yet.
Their vision is to create a senior living model that blends housing with amenities and services open to older adults who are not residents. These amenities and services could run the gamut from fitness and wellness classes to dining to adult day or other care options, to opportunities for culture, entertainment and socialization.
As one example of what they have in mind, Whitman pointed to Generations’ Paradise Village community near San Diego. While offering independent living, assisted living and memory care, Paradise Village also includes a 200-seat theater, a credit union branch, outdoor gardens, spa and salon, and other amenities making it a destination for older adults who are not residents.
In the model envisioned by Whitman and his partners, such services and amenities would be available to residents of the communities, but also could be accessed via a membership model to people who still live in their single-family homes. This could create a pipeline of future residents.
Technology would be another pillar of their model. Tech has been a major focus for Whitman; after stepping down as Formation CEO in 2011, he founded a tech-focused investment firm, Generator Ventures. He also has worked closely with senior-focused tech incubator Aging2.0.
Medicare Advantage plans are being considered as ideal partners, and Reed brings expertise from that sector. MA plans offer an increasing array of benefits related to social determinants of health, which could be provided on a senior-focused campus. Whitman believes that doing so can help boost engagement in these programs, which in turn would deliver better health outcomes for MA beneficiaries and lower costs for the insurers.
“Conceptually, you’re basically looking at an opportunity to partner with risk,” Whitman said.
Such a model would translate across income groups, Whitman said. Members could conceivably pay as little as $25 to $50 a month to access some services and amenities, and enrolling in an MA plan would be another route toward payment.
As for how to acquire the sites for these types of communities, Whitman anticipates a mix of acquisitions and ground-up development.
“We’ll be looking for situational asset purchases or portfolios that for some reason or another, their model doesn’t work anymore, or we could be an ideal partner,” he said.
For instance, there might be situations in which a group that was building senior housing were disrupted by the pandemic and now needs a longer runway with capital, as well as a pivot to a new model. In some cases, Generations might step in as the operator, although the investors are also open to working with other operators. Still, the group is looking in particular at markets where Generations already has a presence.
But Whitman said he is not anticipating as much Covid-related market dislocation, and resulting bargain prices, as some have predicted — in fact, prices might soon be going up.
With the economy starting to re-open due to increasing rates of Covid-19 vaccination, he thinks that senior housing occupancy will make rapid gains over the summer — something that some other industry leaders have also predicted. This will help maintain valuations, plus he sees a tremendous amount of capital on the sidelines waiting to be deployed.
Still, Whitman and his partners are poised to start fundraising and shopping for assets.
“We think we can make investments in the next few months where value is created because we find something we can redevelop, repurpose, or build new,” he said.
Skilled nursing at inflection point
The new fund and strategy will mark the next chapter for Formation, which rose to prominence largely due to its investments in skilled nursing.
Among Formation’s high-profile investments was Kennett Square, Pennsylvania-based skilled nursing giant Genesis HealthCare. Genesis was under the ownership of Formation and JER Partners from 2007 to 2015, when the operator went public.
Like many skilled operators, Genesis was hit hard during the pandemic, and recently was taken private again.
But don’t expect Formation to be getting back in the skilled nursing game again in a big way, at least any time soon.
“At the moment, skilled would not be my first choice,” Whitman said, of investing in the sector today.
He does believe that there is a “huge opportunity” in skilled nursing, but he believes that a new industry model needs to emerge, which will take more time.
“It reminds me a lot of back in 2005-2006, when PPS came in, and everybody said nursing homes are dead and assisted living is going to run over them,” he said. “They figured out, we can be a short-stay rehab business, and modernized buildings and wings and created a whole new line of business.”
Now, the short-stay patients are no longer enough to subsidize the industry and the skilled sector is in need of another reinvention. That might involve a nursing home being an alternative to emergency rooms or hospitals as a venue for high-acuity patients, Whitman suggested. He could see more specialty care programs in nursing homes, and more involvement with the patient after discharge — “more of a continuum relationship with their customers.”
But such a model is still not close to fruition.
“There’s a lot of there’s a lot of wood to chop between the theoretical and the reality of that coming true,” Whitman said. “I do believe that the business will not only survive, it will do well, but I think it’s a ways away.”
Private equity ownership of skilled nursing has been under fire from the federal government recently, as well. Whitman declined to comment on the criticisms of PE levied by lawmakers. But he did offer one big-picture thought:
“One thing has been consistent throughout my entire career of investing, and that is that quality of care equals quality financial outcomes,” he said. “It is not about anything else: quality is the measure, and if you think you’re going to go into any of these businesses and cut and burn and slash, and understaff and under-provide care to make money in this business, it’s just not realistic.”