12/17/2012 | by Carisa Chappell

Edgewood REIT, a smaller, private and externally-managed equity REIT that invests in senior housing, has found it more advantageous to build than to acquire properties.

Most of Edgewood REIT's properties are triple net-leased to Edgewood Group LLC ("Edgewood"), a senior housing operator that also owns a development and construction company. While based in North Dakota, Edgewood also operates senior housing communities in South Dakota, Minnesota, Montana, Nebraska, Wyoming and more recently Idaho, regions of the country that Russell Kubik, executive vice president and chief operating office of Edgewood Group, says are witnessing increased demand for senior housing.
 
"It's a tough market out there and we found that it's easier for us to design and build a facility that we want from the ground up. The fact that we have a development and construction arm is a huge benefit," according to Rex Carlson, Edgewood REIT's chief operating officer and treasurer. "While it may cost $700,000 to $1,000,000 to get it stabilized in terms of operating expenses, it still makes more sense to do that than to overpay for an existing facility that has a lot of problems, or that is simply overpriced."

Carlson said the company has been growing over the years through both acquisitions and building its own facilities. Edgewood currently operates 43 assisted living, independent living and memory care facilities that focus on residents that suffer from memory loss, dementia and Alzheimer's.

He said the company has made acquisitions on its own as well as partnered with another REIT, Investors Real Estate Trust (NYSE: IRET) on acquisitions.

"They've been a good partner with us in senior housing. When we find a facility that is available that we'd like to have and if it's a little more than our current REIT can do, or if it's a larger portfolio, IRET has been able to step in and acquire the properties and then lease to Edgewood," he said.

However, he expects that the future growth of the company will be driven primarily through new development, reiterating the fact that it's difficult to find existing properties that he said are properly and fairly priced.  According to Carlson, Edgewood expects to develop up to five new communities in the next 18 months, with two currently under construction in North Dakota and Idaho.

"As far as acquisitions go, one of the real challenges we have is just finding the appropriate acquisition at a price that makes some sense," he said. "Right now pricing is very high due to low interest rates and high demand. You've got lot of larger players in the marketplace that are able to just pay a little bit more for them." Carlson said while the larger companies' average cost of capital is lower, Edgewood REIT offers an attractive yield.

Whether building or upgrading its current senior housing facilities, Kubik said it's important to note that the residents' demand for amenities has changed over time. He added that today's resident are more sophisticated and have a higher of level of demand making the facilities built 20 years ago "stark compared to what we're building today," he said.

Most of the facilities Edgewood builds today include a lot of common areas and amenities for residents including movie theaters, beauty salons, fitness centers, convenience stores and chapels. Edgewood's first facility, built in 1993 and still operated by the company today, was recently upgraded with a new addition, including a fitness center, theatre, coffee shop and physician offices.  Kubik said the company will continue to upgrade its current facilities to make sure they are competitive.

In terms of some of the trends in the industry, Kubik said that the average age that residents enter nursing homes continues to increase. This has resulted in the need to offer services that are targeted to a much older population seeking senior housing, such as the memory care facilities.

"The average residents coming into the building are a little more frail and require a wider range of services," he said. "I think as a company we respond well to that, we haven't been static in any way shape or form. We recognize that but it's a challenge to the entire industry."

Edgewood is focused on filling in its footprint and expanding within the same region where it already has locations.

Kubik said that in the markets the company is located the demand has been good over the years.

"I think the company does a good job in finding the right place to be," he said.