To win the competition for residents and talented staff, companies big and small need deep local roots.
By Bendix Anderson
In order for a seniors housing facility to succeed, the operator needs strong ties to the local area.
“Local expertise has become increasingly important in recent years,” says Dan McKeever, executive director and portfolio manager for the senior housing funds of PGIM Real Estate based in Madison, N.J.
Industry giants are increasingly committed to hiring staff at their properties that really know local markets. Growing companies now take care not to become too centralized and weaken their local roots. But some seniors housing experts still favor smaller operators.
"We partner with groups whose senior management is intimately familiar with their markets,” says Chris Mauger, managing director for Lancaster Pollard’s Propero Seniors Housing Equity Fund, a private equity fund manager. “This generally lends itself to smaller and mid-size operating companies.”
Local relationships help operators
Operating companies that have strong connections to the areas where their properties are located have a better chance of attracting and keeping residents, experts say.
“Seniors housing is a local operating business — it typically draws the majority of its customer base from a five-mile primary market area,” says Beth Burnham Mace, chief economist for the National Investment Center for Seniors Housing & Care (NIC), based in Annapolis, Md. “Often, community connections and relationships are critical in creating and maintaining a pipeline of new customers.”
That’s especially true today. Developers are busy competing with each other to attract residents and talented staff as they open thousands of new properties in cities and towns across the country.
"The business is insanely competitive compared to what it was historically," says Mark Myers, executive managing director in the Chicago office for Institutional Property Advisors.
Because of this competition, occupancy rates are now the lowest they have been in seven years. At assisted living and independent living properties, the average occupancy rate in the fourth quarter of 2018 was 88 percent across the top 31 markets for seniors housing, according to data from the NIC.
The damage from overbuilding has been especially harsh for assisted living properties — just 85.4 percent of beds were occupied in the fourth quarter on average.
But operators with deep roots in the areas around their properties often beat these averages. "Partnering with local or regional operators has allowed our portfolio to perform well and lease up quickly, often in metro areas that are allegedly overbuilt,” says PGIM’s McKeever.
“Successful operators do well in large part because they are great at getting into the weeds at the property level,” says Russell Day, vice president at Walker & Dunlop. “This includes staying close to the residents’ needs and their families, as well as successfully navigating the competitive landscape.”
Operating companies also compete with each other to hire and retain talented staff.
“The biggest challenge as an operating company is finding enough really good people,” says Ryan Rasar, chief operating officer for Leisure Care, a quickly growing operating company based in Seattle.
Competition from thousands of new properties now opening across country is making it increasingly difficult to attract and keep talented employees. That includes both new properties, which have to fill out a full roster of qualified professionals, and older communities, which are often losing employees to new facilities nearby.
“There are operators who said that they were not having problems (hiring) two or three years ago — they were taking staff away from other companies,” says Zach Bowyer, senior managing director for seniors housing and healthcare in the Boston office of CBRE. “Now new properties are taking staff away from them.”
To keep their properties fully staffed, operating companies need to have a strong local reputation and relationships with people who can refer potential candidates. “Knowing a market and knowing the people there can make a huge difference," says McKeever.
For example, when one of PGIM’s operating partners needed a new executive director at a property, they quickly found a perfect candidate, hungry for a promotion and working at a property nearby. The operator was based in the same metro area with a strong cluster of assets located nearby.
“Our operator was able to immediately call upon its director-level bench of talent," says McKeever.
Also, the largest operating companies may also be less able to retain their talented employees in this competitive environment, according to at least a few experts.
“We do see higher property-level staffing turnover at the behemoths,” says Bowyer.
Size has its advantages
However, a company that operates tens of thousands of properties in markets across the country does gain some advantages from the scale of its operations.
“There are certainly benefits such as sharing best practices throughout the portfolio, branding, purchasing power and increased investments in technology that can benefit the entire portfolio,” says Day.
For example, a national operator can have an advantage in contract negotiations compared with a smaller operator and may get lower prices for items it buys in bulk, according to experts.
These large companies are also able to spread the costs of designing the corporate logo and other parts of its brand identity over its hundreds of properties.
“It’s not an effective use of an executive director or sales professional at the community to create flyers or place media,” says Robb Chapin, CEO of Bridge Seniors Housing Fund, a private equity fund manager specializing in seniors housing with offices in Orlando, Fla.
“Medium to large organizations tend to provide this direct support either regionally or corporately, allowing the community teams to focus on building relationships with existing and prospective residents alike.”
The question experts are now wrestling with — and sometimes disagreeing about — is whether a company can both be an industry giant and still be responsive to the unique needs of the local markets where its properties are located.
“Clients of ours have varying ideas about the maximum size of an operating portfolio, but they all agree that at some point a larger, more cumbersome operation will come at the expense of delivering quality care at the property level,” says Day.
The limits of scale
In 2014, Brookdale Senior Living (NYSE: BKD) merged with Emeritus Corp., another publicly traded seniors housing giant, in a transaction valued at $2.8 billion.
"This strategic merger creates the first national, predominantly private-pay based, senior living solutions company,” said Andy Smith when Brookdale announced the merger. Smith was then CEO of Brookdale, based in Brentwood, Tenn.
The idea, back then, was that a larger operating company could deliver better service to residents. “This combination will improve our ability to deliver the best, high-quality solutions for the growing demographic of aging seniors and their families,” said Smith.
According to the American Seniors Housing Association (ASHA), which annually ranks the top 50 owners and operators, Brookdale operated 96,026 units across 994 properties as of July 1, 2018, making it the largest operator nationally.
That’s nearly three times the 33,883 units operated by the next largest operator, LCS, based in Des Moines, Iowa.
But since its deal with Emeritus closed, Brookdale has been beset by problems at its properties. The occupancy rate across Brookdale’s portfolio registered 84.2 percent in the third quarter of 2018, according to the company. That figure is below the industry average, reports NIC, and is significantly lower than Brookdale’s high of 89.6 percent a few years before.
Shares of Brookdale stock traded for $7.99 on Feb. 12, 2019. That’s roughly a fifth of the Brookdale’s peak share price of $38 per share in 2015.
The stock prices of several other publicly traded seniors housing companies also have fallen since 2015 — but not as much — as worries about overbuilding tempered investor enthusiasm for seniors housing real estate.
For example, Welltower (NYSE: WELL) is the second largest owner of seniors housing on ASHA’s 2018 Top 50 Owners list. Welltower’s shares traded for $77 per share Feb. 12, 2019, not so far from their peak price of $83 in 2015.
Brookdale’s new CEO, Cindy Baier, is now planning an “operational turnaround” by tailoring its national platform more to the local needs of its communities, according to the Nashville Business Journal.
“Our strategy: Win Locally,” said Brookdale in its third quarter investor presentation.
“There are a lot of local issues that come from residents, and they can be a good sounding board for where we should focus,” Baier told the Journal. She plans to give Brookdale’s facility leaders more authority to make decisions at a local level to meet residents' concerns.
Brookdale is not the only operator of seniors housing that grew very quickly over the last decade. From 2012 to 2017, Brookdale, Holiday Retirement, based in Winter Park; Sunrise Senior Living, based in McLean, Va.; Five Star Senior Living (NASDAQ: FVE), based in Newton, Mass.; and Atria Senior Living, based in Louisville, Ky. added a total of 47,000 units under management, according to Bowyer.
“That’s a 30 percent increase,” say Bowyer. “I think a lot of the challenges experienced with the behemoths is a result of the exponential rate at which they grew.”
Operators seek connection
A giant, national operating company that expanded quickly into unfamiliar markets can sometimes overcome a lack of local experience, experts say. The secret is to hire people at the property and the regional office levels that have strong, local relationships and knowledge — and to empower those staff members.
That can go against the tendency of many national companies to make decisions in the corporate office. “I do think that it’s virtually impossible to be an excellent operator on a national scope. However, that’s not to say it cannot be done,” says Myers.
To be effective, national companies should give their regional offices the authority to make key decisions. “The regional offices should have virtually complete autonomy for management, staffing, marketing and property positioning for the assets under their regional supervision,” says Myers.
“When local leadership has the latitude to morph the product and services into what their specific customers value, those customers stay longer and, quite frankly, refer their friends,” says Chapin.
“If a national manager, due to effective choice of team members, brings an excellence in local knowledge, relationships and experience, then they may a better choice than the local management firm,” says Myers.
Not every giant operator of seniors housing is on the ropes. Several of the largest are still growing aggressively and plan to keep growing.
LCS, the second-largest operator of seniors housing in the United States after Brookdale, intends to keep growing its portfolio of seniors housing properties that it operates, according to statements made by its new CEO, Joel Nelson.
Erickson Living, based in Catonsville, Md., is another industry giant, and is also still growing. It is the sixth largest operator of seniors housing nationally, with 22,726 units in markets across the country, according to ASHA’s 2018 list. That’s up from 21,705 the year before.
“Erickson Living recognizes the vital importance of having strong relationships in local markets,” says Dan Dunne, a director of external communications for Erickson Living. “This is one of our highest priorities.”
“If an executive director is not from that local area, the local market awareness and connections are paved by having detailed market research and strong community relationships,” says Dunne.
The onsite sales and marketing team also routinely meet with community members and prospective residents that provide invaluable local insights. “We routinely hire many other professionals from local communities,” says Dunne.
Leisure Care grows quickly
A mid-sized company operating seniors housing, Leisure Care is growing quickly into new markets.
“We are slated to open ten communities in 2019 — and we are on pace to open ten communities per year going forward,” says Rasar.
As of July 1, 2018, Leisure Care operated 7,496 units of seniors housing in 2018 making it the 19th largest operator of seniors housing on ASHA’s list. The company also has aggressive plans for growth and may be several places higher on the list in 2019.
But even as it grows quickly, Leisure Care aims to empower its employees at the properties to make decisions, rather than defer back to the corporate office.
“We are not micromanaging them,” says Rasar.
“A lot of these companies required too many reports and too many conference calls. Our general managers are out of their offices as much as possible. They are not in the reporting business; they are making relationships.”
Leisure Care also tends to hire general managers for its properties who have strong local knowledge and relationships.
“Most of them are going to be local,” says Rasar.
Leisure Care is committing to maintaining the quality of its care, even if that means slowing down its plans to expand.
Because Leisure Care is not a publicly traded company, it does not come under pressure from shareholders to report growth in earnings quarter after quarter after quarter.
That means that the firm could pause its aggressive plans for growth. “Being a private company allows us an opportunity,” says Rasar. “If it wasn’t right for us to grow, then we absolutely could take a year off.”
That resolve may help Leisure Care avoid some of the pitfalls that snared other operators that grew quickly in the past.
“An accelerated rate of growth creates challenges for operators with fewer resources or lower capacity to maintain their brand as they grow,” says Bowyer. “We see a lot of smaller or regional operators getting pushed to expand.”