EXPERT OPINION: A Conversation with Jim Stroud
April 21, 2014
In this "Expert Opinion" interview, Jim Stroud, President, Stroud Companies, discusses prototypes, HUD, the Great Recession, memory care, and more.....
Watch the video Read the transcript
James Stroud has served as a founder, director and officer of Capital Senior Living Corporation (CSU:NYSE) and its predecessors since 1986. Capital is one of the nation’s largest operators of residential communities operating 112 senior living communities with an aggregate capacity of approximately 14,600 residents.
In 2009, Mr. Stroud returned to Stroud Companies, the real estate and investment Company he founded before Capital. Stroud Companies is a privately held real estate and investment company that has developed, acquired and sold senior housing and commercial real estate in excess of $1 Billion. Stroud Companies is currently developing assisted living and Alzheimer communities.
Mr. Stroud has served on the Owner’s and Operator’s Board of the National Investment Center for the Seniors Housing and Care Industry, and served on the Board of the Assisted Living Federation of America. He founded the Texas Assisted Living Association, and served as President and Board Member of the National Association of Senior Living Industry Executives. He is an Inductee to the Stifel Nicolaus Senior Housing & Healthcare Real Estate Hall of Fame.
Mr. Stroud earned a B.B.A. with highest honors from Texas Tech University, a J.D. with honors from the University of Texas Law School, and a L.L.M. with honors from New York University Law School where he was editor of the Tax Law Review and a Wallace Scholar. He is also a licensed CPA.
Watch the video of the interview:
I’m here today with Jim Stroud. He is the Founder of Stroud Development, and in his career he has done a lot of things in senior’s housing and I’m not sure if I should say you’re in your second, third or fourth career in the industry and other things. Jim, you’ve obviously had a long career in senior housing. When you left Capital Senior Living several years ago, I can’t remember when, you got back in the development business, though I think it was in the multi-family side initially, maybe for a couple of years.
Then you started back up in the assisted living and memory care business. What did you think your differential advantage was in that sector to get back into the development?
Well, I think several things. I think, one, the experience from 1990 through 2009, when I retired from Capital Senior Living, someone, when they were giving me an award at Capital they calculated that we had served 57,000 seniors. So, I think that one differential is that there were a lot of lessons learned of what to do and not to do. So, I think that’s one thing.
The other differential was when I got back in the development of senior housing in 2010 there still was kind of the hangover of the Great Recession, so you had to have capital, access to capital, access to debt. I had access to capital because I was using my own capital. And then the debt were lenders that I had been involved with for over decades.
So, when I came back to them, I said I want to get back in the development business of senior housing because I have an idea and the idea was a new design and a new culture. When I went to the lenders they had faith in us and I actually got pretty excited about it, so that’s why we got back into it.
In 2010 I’m a little surprised it would be exciting because we were coming out of the Recession and there really was not much development, but when you did this in 2010 what were other providers not doing right that you were able to exploit when you started developing?
Well, we really took a year to work on our design and we came up with a design that we believe is not only consumer preference, it’s also cost competitive. Because our mission was always to be able to build and serve the middle class and we always looked at it that we had to be able to open our doors and be $300 to $400 less in rent and total all-in fees than the competition.
So, we went ahead and we designed the building that was a state-of-the-art technology that has a state-of-the-art type of construction because during my 19 years at Capital I had been involved with over $490 million of new development from the ground up. If you include the multi-family background before that, it was a very significant number of developments. So, we were able to kind of take our best practices as a developer and then go to the architect and say this is the concept, this is our market. We’re going after the middle market. We want to be affordable.
This is the goal of how to accomplish it and then will you design it? Whereas most architects, developers will go to them and the architect will say, well, I have this idea. So it’s from the architect down to developer and ours was the other way around.
But 2010 people were still hurting quite a bit and the economy was not great from the Recession. Was there that much pent up demand for your product?
There is if you focus on who we serve, because we’re serving the middle income area and I’ve always felt that those that have pension funds and private insurance are at kind of the top of the pyramid, they’re the higher income seniors and they could pay $5,000 to $6,000. Those in the low income, they had Medicaid, they had tax credits, there were various platforms and programs for them, for their housing.
And what we were burdened about was the middle income. How do you really service that middle income? When we went out into the marketplace and through our design and our experience with construction cost, because we could build, generally, for $10 to $20 a hard cost less than our competition and then we could open underneath their rent scope, we were really serving our mission.
And then also at the same time it was the timing. 2010 there wasn’t such a great demand on the debt side, so when I went to the lenders I could negotiate because there weren’t a lot of other sources for them in the senior housing area. So, we negotiated very competitive rates financially.
And there was very little on the provider side, there was very little competition?
There’s always competition and we would go in...
At your price point.
At our price point there was not and that’s where we could go into a market that others may view that could be saturated with existing product at the high end and we would come in underneath it at $300 to $400. Keep in mind, a lot of people that were in the higher end product were all of a sudden getting an income squeeze because their yields on their retirement funds were dropping rapidly through the Great Recession.
So, they were looking at how long can I afford this style of life and is there a spend down issue? So, we were serving those. We were able to service seniors from the higher end that were coming down to the middle class area.
Why weren’t there others seeing what you saw and trying to develop a similar kind of product for that middle market?
I think it gets down to your equity source. We were building with our equity, and so we have a long-term hold mentality and so we could go in and we could be very satisfied with a 10% return. If I looked at the bond market for a comparable time period, I would prefer to have control of our equity and our investments versus putting into a bond or municipal fund that may have a credit issue.
So, we were able to go ahead and invest at a 10% return, whereas if you look at most of the other; if you go to outside third-party equity they’re going to want a mid-20s return. So, they’re a 25% return, we’re at 10%. We’re more competitive on our construction costs because of our experience and the new design that we had. And then you layer in the financing.
For instance, we did use the HUD program, 232. We locked in 40-year financing, non-recourse construction, full permanent and it was at a rate of 2.5 to 2.75.
You can’t beat that.
And then you look at it today it’s up 200 basis points over that. The all-in rate now is generally around 4.75%.
So, what’s so different about your buildings?
Well, we have two different prototypes. One is called the Orchard, which is a larger facility. Generally, it’s 75 units. A third of that is memory care, certified Alzheimer’s. The other is high acuity assisted living. It’s about 70,000 square feet, so we call that the Orchard.
Then we have another one called Sonoma House, and Sonoma House is generally about 60,000 square feet, but it’s in multiple buildings. There we also serve the assisted living and memory care Alzheimer’s as well. So, we have two different prototypes and what we end up doing is we look at a market and make a determination of which would be best to serve the seniors in that area.
The other that’s beyond the bricks and sticks, which is probably equal to the design quality, is the person-centered care. What I recognized during that 2010, there’s this whole new movement in the skilled nursing area called the Green House and Dr. Bill Thomas, who is Harvard educated, a gerontologist, very focused on how to increase the quality of life in skilled nursing and the mindset was to call it the Green House.
And they actually designed a house that could provide skilled nursing. It was generally designed for 10 residents and we really looked at that and analyzed it and digested it, very similar to when we co-founded Capital Senior Living back in 1990 and then determined that model, we could change it for assisted living memory care and it really became person-centered care and it’s a name that I think you’re going to hear more and more about.
And what that’s going to do is really drive the value for our product. We’ve always recognized it starts with the bricks and sticks. But that’s the start. The key to it is what you deliver. And that’s one reason I think Capital Senior Living, we focused on a culture of really quality care and empowering employees. And that’s why the executive team that’s there has an average of over 14 to 15 years because that culture worked and it’s grown and it’s worked in the public market.
What I’m doing now is really growing a culture that’s going to work in the private sector, could be public, but that’s not our focus. But the private sector, that will be the next generation culture to serve the baby boomers.
Now, let me play devil’s advocate a bit and I know the Green House for nursing homes, but is there any kind of inefficiency of having the same campus, but several smaller buildings?
It’s interesting because the Green House is really an add-on product. So, you take an existing campus, as you mentioned, and you do an add on. What we’re able to do now is with Sonoma House we’re able to, in Texas you can build a licensure called small house. It’s actually called small house and it’s for less than 17 residents. So, you can have 16 residents or less.
And then what you’re able to be is much more efficient on your building costs. You can reduce your building costs because you don’t have to have as many items that you do in a larger facility. And then what we end up doing is we build a neighborhood. So, we’re not just building one community. If I just built one community, one house, it would be inefficient.
But what we’re able to do is we come in and we build a neighborhood of these houses and that way I can have an on-site executive director, on-site activity director, the registered nurse is there, but we’re still able to maintain the residential effect. You walk into it and it’s a feel of this is the house I wish my mom or dad could live in.
One last question. After the Great Recession everyone was doubling their expected fill up times on new construction and they got really aggressive many years ago and lenders were requiring that. Are you finding you are filling up faster than you expected?
We’re really filling up as expected.
Better than the industry averages?
Better than industry averages. And, again, Steve, it’s not that we’re smarter or brighter or more capable. When you serve 57,000 seniors and you’ve been doing it for 19 years you kind of realize where the pitfalls are and what to do and not to do and the number one thing for us is it’s a combination, starting with a design, starting with a construction technique, starting with the actual culture and then having a rent that’s competitive where we’re $300 to $400 below the competition.
Our theory is with the right culture, a newer product and better design and at the right rent, and we’re not looking to increase the rent. We’re not looking, even though we could price above the market in certain situations, we still come under the market because we don’t want to lose focus of what our goal is and that’s to serve the middle market.
Well, I hope you have many more years of serving.
I appreciate it. Thank you, Steve.
All right, thank you for telling me about all of this.