EXPERT OPINION: A Conversation with Gene Grace
December 15, 2010
In this "Expert Opinion" interview, Gene Grace, President of Grace Management, discusses some of the issues regarding troubled properties in the seniors housing market over the last few years and what’s involved in the management process.
Watch the video Read the transcript
Mr. Grace, a Certified Property Manager (CPM®), has an extensive background in the marketing and management of senior housing services. He has worked in all aspects of service and facility management.
Mr. Grace graduated with a B.S. degree in Hotel Administration from the University of Nevada, Las Vegas. Before establishing Grace Management, Inc., in 1984, he worked for ten years for one of the nation’s largest and most diversified management service organizations, ARA Services. Today, Grace Management, Inc. is an Accredited Management Organization (AMO®), through the Institute of Real Estate Management (IREM); it is a nationally recognized, independently owned company specializing in senior housing and multi-housing environments.
Mr. Grace has had over 26 years’ experience in the senior housing industry. More recently, major corporations, financial institutions, developers, and owners have retained Mr. Grace to help them in the financing, development, marketing, and management of senior adult communities. Grace Management, Inc. specializes in loan workouts and debt restructuring associated with troubled senior housing projects.
Mr. Grace has served on the executive board of NASLIE (the National Association of Senior Living Industry Executives), he is a member of the American Bankruptcy Institute, and he is a member of most of the major professional organizations associated with senior housing. Currently he is on board of LTC 100. Mr. Grace is a frequent speaker at national forums and conventions on marketing and management issues related to the seniors housing industry.
Mr. Eugene W. Grace, CPM® (Gene)
President of Grace Management, Inc.
6225 42nd Ave North
Minneapolis, MN 55422
Read the interview transcript:
As everyone knows, there’s been a lot of troubled properties in seniors housing the last couple of years. And a lot of times lenders and receivers have to turn to a professional organization to, basically, take over the property and turn it around. And I’m here today with Gene Grace, President of Grace Management. He’s got tremendous experience in turnaround properties.
And your firm is brought in a lot of times, I don’t even know how you handle this many properties sometimes, because turnarounds are tough. What’s the major pitfall to be wary of when you and your firm comes into a distressed situation for a lender?
I think that the major issues that we find is the staff confidence and the lack of, really, distrust that they have had by the time you get to a point of foreclosure or receivership. And there’s always a tremendous amount of deferred maintenance, reputation issues, vendor concerns. So the ability to stabilize the asset and show a certain amount of strength and leadership to the staff is probably the single most important, key point that we would see as far as a pitfall. Because the staff really generates the confidence of the residents, and if you don’t have the staff behind you, you’re not going to have the confidence of the residents and their family members.
That’s all I hear is, staffing is always the biggest issue. So if you get them on board with you, I’m sure—well, the pitfall would be what happens if they don’t? People make the assumption. So that’s key.
I know you’ve been very busy the last 24 months, but do you think, if we’re kind of over a hump in the market, do you think we’re going to be seeing more distressed properties going into 2011? Or is it going to slow down a little bit?
I think, from our perspective, we’re seeing slightly more over the next 12 to 18 months. I think that there’s a lot of people who are looking at restructuring their loans, doing some loan workouts, some refinancing that are going to occur. Some have already started the latter part of this year and the first part of next year. We’ve had several calls just this week on potential loan workouts and it doesn’t always necessarily have to lead to a receivership; it can often lead to some sort of consulting. We really do our best to try and talk ourselves out of receiverships, because it’s not always the best solution, particularly when licensing and insurance issues are involved.
But I see a slight increase in it, unfortunately. And although it’s not the bread-and-butter part of our organization, it is something that we enjoy doing and benefit by seeing enriched values of properties that we get associated with.
And in the properties that you manage around the country, are you seeing, is occupancy slowly on the rise now and are you able to start putting through decent rate increases?
I think, in our case, particularly if we’re focusing on the turnaround type opportunities, we don’t see a lot of opportunities for increasing revenues or increasing rental rates. We’re really looking to stabilize. In fact, we had some cases where we’ve actually reduced rates because they were inappropriate for market conditions, which is why they got themselves into trouble to start with. Where they might have been over-leveraged and had to have the higher rates in order to support the “value” as it was perceived in a lender’s viewpoint.
In some of our traditional properties, which are more of our bread-and-butter, longer-term clients, we have had the opportunity to increase rates in the two to maybe two-and-a-half percent range. But it really depends a lot on the market area and your competition. It would be, I think, irresponsible to just make a blanket statement that we’ve been able to unilaterally increase rates. It’s done selectively and, if it is, it’s in the two to two-and-a-half range.
I will say that we really like to have some increase, even if it’s a one percent, just to have the feeling that there’s something—most residents are very receptive to that. As long as it’s competitively priced and you’re not pricing yourself above competition, I think we should be increasing rates by at least a 2% increase.
And then in some, in the properties with some occupancy challenges, to deal with that, do you guys look into Medicaid waivers? Do you look to the VA programs? Do you have any strategy on that?
We currently operate in 15 states. We’ve operated in as many as 25. So it really varies from state to state, where some states are more attractive as far as pricing and we have used a Medicaid waiver program successfully and we like it. But I think that owner-operators can have a kind of a false sense of security by having too many Medicaid waiver residents. There’s a lot more paperwork involved. And I think it can affect the overall mix and value of the income stream.
There is a certain amount of unpredictability to it, maybe, with the new revisions within the Obama health care program that so many of us are somewhat uncertain about. I think there’s going to be more cramdown on the part of the states for looking for revenues and I certainly wouldn’t rely too heavily on it.
We have experienced some increased interest and are looking more in VA programs, which is another vehicle. The monies go directly to the family members. There is a long period of time for approval process. But I think you’re going to see increasing interest on the part of, if you can qualify for VA programs.
Okay. You are basically a third-party management company, what’s the main way you compete for business? Whether it’s distressed properties or non-distressed properties, how do you get out there and let them know you’re the company to hire?
You know, I was talking to an associate this morning and I was wondering, how do people get started all over now, because, as a management company - and we have tried to help other management companies - we have an advantage in the fact that we’ve been around for 26 years. Both the principals, my wife and myself, formed this company over 26 years ago, we’re both certified property managers. Grace Management is one of the few companies that is an accredited management organization with the Institute of Real Estate Management. So it gives us a lot more credibility. We’re not a startup, we’ve been around, we’ve done it a while.
So competing in a relatively small area, at least as far as the receiverships and turnarounds, has been good for us. As far as overall competition, I think it boils down to just integrity and honesty and the quality of the financial reports that you’re preparing. We’re completely independent, so we’re often sought out by lenders and trustees and troubled situations, as well as investment groups, because we’re not trying to buy the asset.
And for a trustee on a loan or a bond issue, when it runs into trouble, if you could pick one reason why they turn to Grace Management, what would that be?
Responsiveness. We are 24/7 really. We have an incredible staff of dedicated professionals in our organization, many of which have been with us 10, 15, up to 22 years. So it’s really a stable of professionals from the Southeast to the Midwest to South Central area. We cover a pretty good-sized geographic footprint and it allows us to be as responsive.
We’ve been in cases where properties have been troubled and have been there the following day. We don’t like assignments like that, but if we have to, we’re capable of doing it.
And they know you and they know that you’re going to respond quickly, so that’s a big plus.
We had a client once that advanced us $100,000 in the afternoon to cover payroll that was due two days later and hadn’t even officially, contractually hired us. So, it gets interesting.
Well, if you have a reputation for integrity, they’re not going to worry about that.
Well, good luck. I hope you continue to manage a lot more of these distressed properties, although I’m hoping that distressed properties will start to finally decrease.
Yes, me too. I think it’d be good for all of us.
Well, I’m sure they’re going to always be around, so you’re always going to have a lot of business. Thank you for sitting down with me.
Thank you very much. I appreciate this opportunity.