McFarlin Group Raising $100M Fund To Target Covid-19 Distressed Senior Housing

By Chuck Sudo | April 13, 2020

McFarlin Group is launching a $100 million fund to acquire senior housing assets at risk of becoming distressed in part by the coronavirus pandemic.

While many senior housing lenders and investors are retreating to the sidelines during the environment of peak volatility caused by the outbreak, the Dallas-based fully integrated senior housing firm is among investors looking to capitalize on the new landscape by leveraging supply and demand market disparities to their advantage, Managing Director Matt Johnson told Senior Housing News.

He believes there will be ample opportunities to acquire properties at a discount from lenders looking to remove underperforming properties or new communities in lease-ups from their portfolios.

“[Lenders have] no clear pathway forward to get these properties to break even. We believe they will be quick to remove these from ledgers,” he said.

McFarlin Group already planned on targeting distressed assets heading into 2020. A combination of supply and demand imbalances in major markets, an explosion of new construction in recent years, a flood of investors entering the space seeking opportunities for yields, and the trend of seniors delaying transitioning to senior housing until it becomes need-based make the market ripe for deals.

Furthermore, operators’ decisions to secure their communities to essential personnel during the pandemic limits the ability to market to prospective residents, and reduced move-ins will put pressures on operations and debt service.

“This is a perfect storm,” Johnson said.

McFarlin Group will target opportunities in the top 31 senior housing markets identified by the National Investment Center for Seniors Housing & Care (NIC), with a particular focus on Sun Belt markets that have had oversupply over the past two to four years. The firm is identifying single asset opportunities valued between $2 million and $20 million.

Additionally, McFarlin Group plans on investing in capital expenditures to modernize properties. Most operators will remain on board, but Johnson noted that communities in need of a management overhaul will be transitioned over to Mcfarlin’s operating arm, Surpass Senior Living.

Johnson founded Surpass in 2015 with five communities in the Phoenix metropolitan area. Today, Surpass’ portfolio totals 10 properties in Arizona, Georgia and Texas, offering what he calls “Marriott buildings at a Hampton Inn price point.”

Already, McFarlin has identified properties in Illinois, Texas and South Carolina, whose unit mixes include independent living, assisted living and memory care. The firm expects to exit and close the fund within seven years.

McFarlin Group is not the only business to see opportunity in the midst of the pandemic. 

Senior housing’s needs-based operating model is expected to keep the product type open to limited forms of lending, mainly through HUD loans, as well as Fannie Mae and Freddie Mac financing mechanisms. A new firm founded by Lancaster Pollard veterans Kass Matt and Steve Kennedy, VIUM Capital, modeled its business strategy to assist strong senior housing operators seeking bridge financing through HUD and the agencies which they believe will grow in demand as the pandemic continues.