Exactly one year ago, Brian Beckwith ended his tenure as CEO of Formation Capital and began to think about his next moves.
Sheryl Marcet was also considering her future. At the time, Marcet was managing director of Formation, and she had first worked with Beckwith when they were both at GE Capital.
Beckwith and Marcet decided to launch a new company, Arcus Healthcare Partners. Now, with an institutional partner, they’re looking to put $100 million to work over the next 12 to 15 months through investments in seniors’ residences and skilled nursing.
“We thought it was a good time to take a lot of the things we learned at GE and elsewhere, to really put them into practice with our own touch, our own brand,” Beckwith told Skilled Nursing News.
Beckwith is CEO and Marcet is chief investment officer of Arcus. They “brought together a few team members,” Beckwith said.
Arcus’ origins can be traced to a portfolio of five skilled nursing mezzanine loans that Beckwith acquired from Formation. In January 2022, Arcus closed a 118-unit assisted living and memory care property that was in receivership. Omega Senior Living is their operating partner in this community, where a turnaround is off to a good start, Marcet and Beckwith said.
Going forward, they are primarily targeting investments in assisted living, but are also considering skilled nursing – although this remains a surprisingly competitive market from a price point of view.
“It’s strange to me that it’s still so competitive, with uncertainty looming on the horizon,” Beckwith said.
This uncertainty is financial, as the Covid relief funds are coming to an end. And there is regulatory uncertainty, given the comprehensive reform package proposed by the White House.
The reform package specifically targets private equity and REIT ownership in nursing homes, with the Biden administration saying profits outweigh quality of care. The skilled nursing industry has pushed back against these claims.
“The way we approach it is simple: better clinical care, better financial performance – they are strongly correlated,” Beckwith said. “So the transactions that we would consider, that we would do, will generally be with operators that are higher on clinical quality, quality metrics.”
Formation was one of the most significant private companies to invest in skilled nursing, acquiring industry giant Genesis HealthCare in 2007. Since then, Formation has exited the space and is now pursuing a new strategy focused on the life of the elderly.
Government criticism of private ownership of skilled nursing facilities has been going on for 20 years, but is up and down in “phases”, Beckwith observed. He would appreciate conversations with regulators or politicians genuinely interested in the industry, as he believes that policy-making and rhetoric can be more about demagogy than a real driver for improvement.
“It can be a distraction, but it’s not something that makes me think we shouldn’t be involved in that part of the industry,” he said.
On the senior living side, he and Marcet are interested in more distress opportunities, similar to their first acquisition. They view these transactions as opportunities to evolve their industry relationships and expertise to improve operations and produce attractive returns.
Small, “complicated” deals that are off the market or don’t catch the eye of real estate investment trusts are likely to be where Arcus initially makes its mark, Beckwith said.
New buildings struggling with 60-70% occupancy that will benefit from more sophisticated owner and operator involvement would be particularly attractive, Marcet said.
However, distressed opportunities are not common at the moment. Still, given that assisted living has not received strong government financial support throughout the Covid-19 pandemic, Beckwith and Marcet anticipate deals will emerge.
Arcus can “play an important role” for communities that have been successful over the past decade but have not invested enough in the business and are now facing a new, more challenging operating environment.
“I think the margins have systematically changed,” Beckwith said.
Staffing in particular will be a challenge for the foreseeable future; even if labor shortages ease, costs are likely to remain high, he argued.
Going from companies such as GE and Formation to a startup was a game changer for Beckwith and Marcet.
“I don’t know if you’re already fully prepared for the hat you’re wearing: you’re IT, you’re HR, you’re payroll, you’re underwriter, you’re business development… I don’t know. watch your title, it’s just work, and so you do it,” Marcet said.
She and Beckwith shared laughs over some complications they now have to deal with; something as simple as getting a document notarized and mailed to complete the acquisition – which could have been processed in minutes at an established company – required Marcet to go to the bank.
Beckwith “really loves” being an entrepreneur, but admitted “it’s hard”.
“I learn very quickly where my skills have diminished or weren’t there,” Beckwith said. “There are a lot of things I’m learning.”
Ultimately, he and Marcet are betting on themselves, their partners and colleagues, and market conditions.
“The time seemed right to do it, so you dive in,” Marcet said.