Affiliations, acquisitions and new service lines are part of a multi-pronged strategy to stay competitive amid a challenging business climate.
By Jane Adler
Despite economic headwinds and an ongoing labor shortage, nonprofit senior living providers are focused on growth. Affiliations and acquisitions are moving forward as big providers partner with single-site operators to realize economies of scale. Meanwhile, regional providers are targeting nearby opportunities. The goal: an add-on to the portfolio within driving distance.
Other growth strategies include expansions of existing properties, development of satellite campuses and the addition of new service lines such as home health and private duty home care services. Nonprofits are stepping up their recruiting and retention efforts too, coupling their mission-driven cultures with innovative employment practices.
While the development of big, new life plan communities — more commonly referred to as continuing care retirement communities — has slowed because of the rising cost of capital and construction, nonprofits are thinking outside the box.
In July, CBRE projected U.S. construction costs to increase 14 percent in 2022. Borrowing costs have jumped about two percentage points since 2021. The Federal Reserve raised interest rates by half a percentage point in December. That marks seven straight increases totaling 4.25 percentage points in just nine months. Inflation cooled a bit in November. Consumer prices rose 7.1 percent in November on a year-over-year basis, down from 7.7 percent in October.
Providers are seeking new opportunities in the emerging active adult and middle-priced markets. Like their for-profit counterparts, the nonprofits recognize that the coming wave of baby boomers will want a different kind of product, or at least more housing options.
“Baby boomers want nothing to do with mom and dad’s retirement community,” says John Cochrane, president and CEO at HumanGood based in Duarte, California. HumanGood operates 22 life plan communities, and just opened its 100th affordable housing community for seniors, Makemie Court, just outside Philadelphia. “We need different pricing structures, amenities and programming. We need to change in a meaningful way,” he says.
While providers grapple with what kind of community will persuade the upcoming generation of seniors to make a move, growth plans among nonprofits are moving ahead.
“Most of the growth in the nonprofit sector can be attributed to expansion, affiliation and acquisition,” says Lisa McCracken, director of senior living research at Ziegler, a Chicago-based investment bank. “Dedicating resources to these approaches makes a lot of sense as a growth strategy.”
Since 2015, nearly 900 nonprofit senior living communities have changed ownership or sponsorship, according to Ziegler research. Of those 900 communities, about 46 percent were acquired by owners and operators from the private sector.
Nursing homes are feeling the biggest squeeze. Seven out of 10 nonprofit closures since 2010 have been freestanding nursing homes, communities with heavy nursing exposure and those with dated physical plants.
However, McCracken adds that nonprofits, dominated by the entry-fee life plan community model, fared well during the pandemic. “Overall, we are seeing stability,” she notes. Also, nonprofit providers tend to have diversified revenue lines, such as home- and community-based services, which adds to the sector’s stability.
The occupancy rate at life plan communities hit 86 percent in the second quarter of 2022 in the top 99 markets, according to NIC MAP Vision, a research firm based in Raleigh, North Carolina, which tracks industry metrics. Prior to the pandemic in the third quarter of 2019, life plan community occupancy in the top 99 markets was about 91 percent.
According to a recent Ziegler survey, more than half of nonprofit senior living CFOs plan to grow through some type of campus expansion in the next two years. Another two out of 10 CFOs are planning for some type of new campus. Many of the expansions involve the addition of independent living units and satellite campuses. Due to the rising cost of construction, new projects are being developed in more manageable phases, stretching out starts.
Asked about new developments, 58 percent of CFOs in the Ziegler survey said they were moving forward with those that had been planned. Another 25 percent put projects on hold, and 9 percent scaled back plans. About 7 percent reported mixed approaches, putting some plans on hold and scaling back others. The slowing residential housing market could also impact sales at entry-fee model communities. Many homeowners use the proceeds from the sale of a house to pay the entry fee.
“We continue to see the benefits of looking for opportunities to grow in the Midwest,” says John Datillo, president and CEO of BHI Senior Living Inc. The Indianapolis-based company operates nine life plan communities in three states: Indiana, Michigan and Ohio.
BHI completed two new affiliations in 2022. Affiliations are similar to acquisitions in the for-profit sector but involve a different legal structure. BHI joined with Clark Retirement Communities, which owns two projects in Grand Rapids, Michigan. BHI also affiliated with Maple Knoll Communities which owns properties in Cincinnati and Oxford, Ohio.
Though BHI is holding off on undertaking big new projects for now because of rising construction costs, the organization has two new active adult-type satellite projects under way at existing campuses (see sidebar). The projects include single-family and duplex homes, along with amenities such as pools and pickleball courts.
More opportunities ahead
Datillo believes a tremendous number of opportunities for acquisitions and affiliations will be available in the next few years. The inflationary environment and staffing pressures make it difficult for small operators to survive. They don’t have the bargaining power with vendors that big operators do. Also, government relief money distributed during COVID has stopped. “Scores of organizations will be looking for partners,” he predicts.
Cochrane at HumanGood agrees. But he says that most of the groups seeking partners are doing so out of necessity. “We don’t want weak partners with poor products in poor locations and with poor operating structures,” he says. “We don’t do train wrecks or rescues.”
Instead, Cochrane is looking for affiliations with strong groups. HumanGood affiliated three years ago with Philadelphia-based Presby’s Inspired Life, which owns and operates three life plan communities and 36 affordable senior living projects. Though Cochrane was warned about trying to manage East Coast properties from his West Coast hub, he says the geographic concentration of Presby’s properties in the Philadelphia area has made a difference. “It’s been a total home run.”
Like other big nonprofits, HumanGood is not planning new life plan communities because of the long development timeline and rising expenses. HumanGood is focused on developing one to three affordable senior living communities a year. “There’s a huge unmet need for affordable housing and services,” says Cochrane.
Goodwin Living is growing, too. The Alexandria, Virginia-based nonprofit acquired Hermitage Northern Virginia in August. The 100-unit property was owned by Pinnacle Living, a nonprofit based in Richmond. The transaction was an acquisition. The price was not disclosed, but Ziegler arranged $17.8 million in financing.
The community was renamed The View Alexandria by Goodwin Living. The organization operates two other senior living communities in the Washington, D.C., area.
Most larger nonprofits have strategic growth funds, cash reserves set aside for affiliations and acquisitions, and for capital improvements to existing communities. “We have resources to grow,” says Rob Liebreich, president and CEO of Goodwin Living.
Tackling the middle market
Nonprofits are taking on the underserved middle market, first identified by the National Investment Center for Seniors Housing & Care (NIC) in a 2019 study titled, “The Forgotten Middle.” The group includes seniors who don’t make enough to afford the current private pay senior living product, but who also don’t qualify for government subsidies.
“The middle market is part of our growth plan,” says Terry Spitznagel, senior executive vice president and chief growth officer at United Church Homes, headquartered in Marion, Ohio. The organization operates eight life plan communities, 60 affordable projects and several standalone skilled nursing facilities.
United Church Homes’ portfolio includes five middle-market communities in Ohio. The newest acquisition is The Polaris Retirement Community in Columbus.
The $33 million property was originally developed by a for-profit company with independent living and assisted living units. Spitznagel says the market was oversaturated with assisted living and converted the building to all independent living units.
Rents start at about $1,000 a month. Meals are included. A full-time service coordinator is on staff to help residents arrange for assistance they might need. United Church Homes operates its own home care service in two markets where the middle-market projects are located. The other projects are served by preferred providers. At Polaris, about 25 percent of residents use the home care services. “It’s working for us and our residents,” says Spitznagel.
The middle-market projects were about 95 percent occupied during the pandemic, generating the organization’s highest margins. “Rentals were very steady,” says Spitznagel, explaining that independent living rentals avoided most of the restrictions on move-ins experienced by assisted living and skilled nursing properties.
United Church Homes plans to open more middle-market projects. The company has a 136-unit property under development in Beaver Creek, Ohio, on its life plan campus there.
The organization just broke ground on a project in Plain City, Ohio. And in Dayton, United Church Homes is renovating a 100-year-old elementary school and tearing down some older buildings on the site for a 125-unit project designed for middle-
market LGBTQ residents.
LeadingAge Virginia published a middle-market playbook for nonprofit providers, which Spitznagel says has been helpful. “Every middle-market project is different,” she says.
Two of the organization’s projects for the middle market, for example, don’t offer meals. The capital stack that facilitates the low rents is complicated. But she adds that nonprofits understand the financing nuances of tax credits, HUD loans and tax-exempt bonds. “Nonprofits are perfectly designed to take on these complex deals,” she says, adding, “You have to be curious and courageous.”
Adding new services
Nonprofits are growing other service lines. Goodwin Living at Home offers centralized care coordination to seniors living in their own residences. “It’s like an insurance program where you know the provider,” says Liebreich. The program has 230 clients and is expected to grow to serve 350 clients in the next few years.
BHI Senior Living has introduced home care services by purchasing several franchises of Senior Helpers in the state of Indiana. BHI is in the process of buying a certified home health agency and has a joint venture with a therapy company. “A large segment of the population wants to live at home and access services there,” says Datillo.
Lutheran Life Communities is fine-tuning its approach to focus on the Midwest. “We have a growth strategy,” says Sloan Bentley, president and CEO at Lutheran Life Communities, based in Arlington Heights, Illinois.
Lutheran Life operates four life plan communities, three of which are in the Midwest. The fifth property is a combination assisted living and skilled nursing facility in Illinois with a total of 454 units.
The organization is divesting its life plan project in Naples, Florida, The Arlington of Naples. The new sponsor is Life Care Services, headquartered in Des Moines, Iowa. The deal is expected to close by the end of the year.
Lutheran Life also recently launched Grace-Filled Living Management to provide community management services to both nonprofit and for-profit entities with properties in the Midwest. Bentley says Grace-Filled Living Management will provide economies of scale and services such as compliance and quality control. It also offers a culture program called “Grace in Action” designed to recruit and retain mission-minded employees.
Like employers everywhere, nonprofits facing a critical labor shortage are experimenting with new ways to recruit and retain workers.
With 1,000 staff members representing 60 different countries, Goodwin Living has expanded its workforce with a U.S. citizenship program. It was the idea of residents who wanted to help the staff.
Residents raised money to help pay the fees required to apply for citizenship. Residents also tutored the staffers to prepare them for the citizenship test.
So far, more than 120 team members and team family members have become citizens. Goodwin Living has produced a citizenship playbook to share with other providers.
Goodwin Living also launched a recruiting department, built relationships with high schools and colleges, and created career paths and educational opportunities for workers. “We have experienced our best turnover rate in three years,” says Liebreich.
Technology will be part of the solution, according to Cochrane at HumanGood. He doesn’t see the shortage of workers ending anytime soon. “We really have to be creative about how we deploy technology,” he says.
HumanGood created a venture fund that has invested in SafelyYou, a fall prevention system. It uses artificial intelligence to detect and prevent falls, a leading cause of injury and death among seniors. “Nonprofits need to be more tech forward,” says Cochrane. “We need to take risks, move faster and adopt technology to remain relevant.”