One year ago, vaccine clinics were just getting underway in senior living communities, raising hopes for a better year ahead after the devastating toll exacted by Covid-19 in 2020.
While Covid-19 vaccines have been a gamechanger for senior living providers, the quotes below reflect that 2021 presented plenty of daunting challenges, including unprecedented labor pressures.
But the quotes also show that 2021 was a year of transformative deals that reshaped the senior living landscape, while some industry visionaries have started to put forward innovative ideas for how to reinvent senior living for a new generation, drawing on lessons from the pandemic.
“The best thing to do for our business is to provide the kind of protection that allows us to help our residents live their best lives.” — John Moore, CEO of Atria Senior Living, Jan. 11, 2021
Despite the devastating effects of a surge in Covid-19 infections that took place in late 2020, senior living providers were optimistic as 2021 began, with vaccination clinics underway in communities across the United States.
Early in the year, several providers — including some of the largest in the country, such as Atria — made vaccination a condition of employment.
These decisions were controversial, as a significant number of health care workers were declining vaccination, leading to fears that mandates would cause dramatic employee turnover. Senior living providers that implemented vaccine mandates argued that the policies were not only a crucial safety measure but a sound business decision.
“While a difficult decision, we believe it is critical to community safety and to finding our ‘engagement equilibrium’ again,” Juniper Communities CEO Lynne Katzmann wrote in an SHN column. “We also believe it is what residents want.”
As 2021 unfolded, senior living providers would face myriad challenges, including a labor crisis, rising inflation and supply chain disruption — all while the pandemic dragged on.
But with the vast majority of residents vaccinated and almost all large providers introducing some type of vaccine mandate for workers, senior living communities have largely become safe havens from Covid-19, paving the way for occupancy and rate growth.
And while some other industries are still awaiting court decisions related to the Biden administration’s worker vaccination mandates for health care settings and companies with more than 100 employees, this controversy is largely a non-issue in senior living. As 2022 approaches, it seems clear that widespread mandates have been effective in slashing senior living infection rates and enabling providers to focus on meeting other pressing challenges.
“As companies scale beyond 20 or 30 communities, they start struggling staying intimate with their communities and understanding the details of the market and staying nimble — that makes regional operators very, very good.” — Richard Hutchinson, CEO of Discovery Senior Living, Feb. 15, 2021
One of the most notable senior living transactions of 2021 took place early in the year, when Discovery and White Oak Healthcare REIT picked up 16 former Healthpeak (NYSE: PEAK) properties.
Although relatively modest in size, the deal was significant because Discovery used the portfolio to launch a strategy of creating highly autonomous regional sub-brands, starting with Morada Senior Living.
Having observed that many senior living providers historically have “scaled and failed,” Discovery CEO Richard Hutchinson created a strategy meant to blend the strengths of a regional provider — such as close management of communities and knowledge of local markets — with the efficiencies of scale enjoyed by a large national company such as Discovery.
Hutchinson is far from the only senior living leader to recognize that regional providers are among the most successful operators in the industry. The rise of regional providers became one of the most distinct trends of 2021, with real estate investment trusts (REITs) and other ownership groups transitioning communities to regionals at a rapid clip.
The rise of regionals has occurred as some national players like Five Star Senior Living (Nasdaq: FVE) have trimmed their portfolios, and others like Eclipse Senior Living closed their doors permanently. This is not to say that all national players have struggled; some have emerged from the last two years stronger and even larger, but the pandemic has prompted others to reevaluate their strategies or fold their tents, reshaping the industry landscape in the process.
In 2022, the new class of regionals and super-regionals will have their work cut out, integrating communities while attempting in many cases to drive operational and financial improvements. The process will test their operating acumen and infrastructure, and some unique operational approaches meant to maintain nimbleness and a local focus even in larger portfolios.
And Discovery’s approach to creating regional operators under a national umbrella will also continue to play out; the company recently formed another subsidiary management company and unveiled two new regional brands.
“I like to say that the odds are good you could do a transaction, but lately, the goods have been odd.” — NHI CEO Eric Mendelsohn, April 5, 2021
Senior housing dealmaking continued through the pandemic, bolstered by some big selloffs, notably the near-total senior housing exit of Healthpeak. The transaction activity spiked as Covid-19 vaccines became available, hitting a record high of 120 deals in Q4 2020, according to Irving Levin data.
But, unsurprisingly, the average price paid for independent living and assisted living properties fell during 2020, as struggling properties hit the market.
In 2021, the M&A markets continued to be marked by the effects of Covid-19. In early April, NHI CEO Eric Mendelsohn noted the high number of “odd” opportunities, such as newly constructed buildings, with certificates of occupancy, that never opened.
Meanwhile, stabilized buildings that were largely insulated from Covid fallout were commanding “ridiculously low cap rates,” Mendelsohn said.
The situation appears much the same now as it did in the spring. In the last 14 months, private equity firm Berkshire Residential Investments has seen only one deal involving a fully stabilized, fully staffed community with a waiting list, Managing Director and Chief Investment Officer of Senior Housing Investments Matthew Whitlock said at SHN’s BUILD event last month.
Of the 15 to 25 deals that the Berkshire team reviews each month, many are closed, are facing bankruptcy, have low occupancy, or are seriously outdated, Whitlock observed.
“The breadth of opportunities is significant,” he said. “The depth of the opportunities is very shallow.”
With a huge amount of capital on the sidelines, properties with 85%-plus occupancy are commanding high prices.
“The best marketers out there are going to derive significant value, at least in the near term, because … there’s a lot of capital out there looking for stabilized assets,” Ziegler Managing Director Donald Husi said at BUILD.
Welltower has managed to execute on $5.6 billion in pro rata gross investments since Oct. 2020, targeting prices below replacement cost; and Ventas acquired New Senior for $2.3 billion in 2021. But smaller REITs have largely paused on external growth given the pricing environment; LTC Properties (NYSE: LTC), for example, has focused on structured financing deals.
Whether this situation continues, or the M&A market gains greater depth and presents opportunities to a wider range of buyers, remains a story to be written in 2022.
“We’re leaning into a little bit different view of where value gets created, within the walls and outside the walls of senior living.” — Arnold Whitman, Founder and Executive Chair, Formation Capital, May 1, 2021
The Paradise Village community operated by Generations in San Diego features independent living, assisted living and memory care — but also a credit union, a 200-seat theater, spa and salon, outdoor gardens and other amenities and services open to the general public.
This is a model that Formation Capital’s Arnie Whitman — along with Generations’ Executive Chairman Chip Gabriel and other partners — want to expand on in the coming years. The partners are in the process of securing sites to create their vision of senior living campuses that take integration with their surrounding communities to a new level.
Medicare Advantage, which continued to make inroads into senior living in 2021, is part of their plan. One of their partners is Scott Reed, co-founder of Alignment Healthcare, an MA plan provider that raised nearly $500 million in an IPO this year.
The partners believe that MA plans will increasingly cover wellness services and other offerings that will be provided on their campuses. As a result, older adults not living on the campus would be able to pay a nominal monthly membership fee for access to these programs, which would increase the wellbeing of MA beneficiaries and drive costs down for the plan providers.
While Whitman and his partners are still in the early stages of bringing this vision to life, a similar model is quickly taking shape. Just a few days after Whitman spoke with SHN, Lifespark announced its acquisition of Tealwood Senior Living.
Lifespark provides a range of integrated services to older adults largely through value-based care arrangements. In acquiring Tealwood, Lifespark added senior living to its range of other offerings, including home-based primary care, Medicare-certified home health, pharmacy, hospice, and programs to meet social determinants of health.
The goal is to bring all these services together for senior living residents in a more coordinated way to reduce “bottlenecks” in the continuum. The operational model is being created with the help of innovator Dr. Bill Thomas. And more recently, Medicare Advantage insurer UCare invested in Lifespark, making Lifespark into a “payvider.”
The UCare transaction was a “holy grail deal,” in the words of Lifespark Founder Joel Theisen. He believes that Lifespark now is in a better position than ever to redefine the way that older adults age by coordinating care to support their wellness and lifestyle goals wherever they are living, including in senior living communities.
Clearly, senior living in 2021 continued to evolve toward a less siloed model. No longer will communities be cut off from the rest of the health care system by virtue of being a private-pay offering; instead, they will be connected to other parts of the continuum, with MA as an important payment mechanism.
In addition to the moves made by Formation and Lifespark, the last year saw an expansion in MA plans focused on senior living settings. And AllyAlign — a company that works with senior living providers on launching MA plans — secured $300 million in funding.
“We’re going to pay really close attention to how we both do things and try to find what is the optimal solution for us over the next decade, what makes sense; sometimes it might be doing something that Holiday does well, others might be what Atria does well, others might be, we want to go find and create something totally new and different.” — Lilly Donohue, CEO, Holiday Retirement, June 23, 2021
The summer of 2021 will go down in senior living history as the time when industry giants came together: Atria acquired the Holiday Retirement management company, while Welltower invested in 86 Holiday properties for about $1.6 billion.
The landmark deal combined two of the largest operators, creating a company serving about 45,000 residents in nearly 450 communities across 45 states, and making Atria the second-largest U.S. senior living provider.
The transaction diversified Atria’s portfolio, giving the Louisville-based company a large platform of middle-market independent living communities, and accelerating a pre-existing strategy of creating multiple brands to serve different price points.
In announcing the deal, Atria CEO John Moore described the Holiday communities as the “B-52s of senior living” — that is, they are like the venerable bomber jets, which are so well-designed that they have remained in Air Force service since the 1950s.
While the bones of the Holiday buildings are strong — including a preponderance of one- and two-bedroom units and well-designed common space — there is an opportunity to invest in them to create a middle-market IL offering for the rising baby boomer generation.
As Moore put it during the 2021 SHN BUILD event in Chicago, there is a plan to put “new engines” on the B-52s. Welltower plans to invest $1.5 million to $2 million per community, in some instances undertaking larger-scale projects such as the addition of IL cottages.
Beyond the CapEx upgrades, Atria and Holiday are collaborating to enhance the operating model. Lilly Donohue will remain in place as Holiday’s CEO, extending a tenure that has seen her focus first on workforce improvements and more lately on elevating the resident experience. Hallmarks of Atria’s operating model include an in-house marketing shop; partnerships with industry leaders such as Mayo Clinic and developer Related Cos.; and a homegrown technology platform that now is being licensed and sold through Glennis Solutions.
The Atria-Holiday integration will take place in phases and is still in the relatively early stages. Ultimately, the combined entity will get to “dream big,” envisioning and implementing “totally new and different” approaches to senior living, Donohue said. So, one of the big industry stories in the coming years will be whether the B-52s of senior living can reach exciting new altitudes with their more modern engines.
“There needs to be a radical shift in the way that senior living executives view their employees.” — Anna, frontline caregiver, July 2, 2021
In the first quarter of 2021, senior living COOs flagged that labor pressures were eclipsing low occupancy as their top challenge. By the middle of the year, a labor crunch was escalating into a labor crisis, which still grips the industry.
The workforce issues are not unique to senior living; the entire U.S. economy has been affected by changing labor dynamics tied to the pandemic. However, workforce shortages and high turnover have long plagued senior living, and the current crisis has led to a reckoning with standard practices.
Providers are raising wages — in just one example, Lifespace Communities recently announced across-the-board increases to the tune of $17 million in 2022. Longevity bonuses, more flexible scheduling and more robust benefits are among the other changes that providers are making to drive recruitment and retention.
And several executives have spoken about the need for more substantial changes to the hiring process and professional development. For instance, some providers have created new positions, such as the “retention specialist,” or they have hired corporate leaders to focus on the hiring process, in an effort to drive greater efficiency and unburden community-level leaders.
Still other executives have said that the process of hiring workers should more closely mirror the process of selling to prospective residents — that is, a greater investment in time and attention is needed, and each worker should be viewed more as an individual. This extends to more robust and personalized professional development of existing employees as well.
Senior living providers have historically competed for workers not only with other health care companies but with hotels, fast-food joints, retailers and a host of other employers. But to weather the current crisis and build a more stable workforce, they might need to start thinking differently about who they are hiring and how workers are compensated and recognized. As Anna, a frontline senior living worker in the Pacific Northwest, told SHN:
“I think that they need to start viewing their employees as public servants and not fry cooks.”
“We’ve got to sink or swim together.” — Welltower CEO Shankh Mitra, July 11, 2021
Before the pandemic, misalignment between senior living owners and operators was a growing concern — over the course of 2021, it became clear that the issue is more pressing than ever, particularly with regard to the industry’s standard third-party management agreements.
Shortly after announcing the blockbuster deal with Atria and Holiday, Welltower CEO Shankh Mitra shared his philosophy on alignment in an interview with SHN:
“We’ve got to sink or swim together. I don’t like the fact that an operator would win at the expense of our owners, and I don’t want our owners to win at the expense of our operators, because they might win this quarter, next quarter, the quarter after, but not long term.”
He emphasized that Atria will earn “a very significant promote” if the operator drives financial performance.
And Atria is not alone in having these sorts of incentives; Welltower has spent years refining a “RIDEA 3.0” structure, in an effort to better sync up the interests of the REIT and its operating partners.
Mitra also spoke out against the typical senior living structure, in which operators are paid a 5% management fee off the top line:
“If we don’t pay our partners well, they can’t pay their employees … The way this industry is structured, in which most operators get paid 5% off the top, that’s not enough to attract the best people. I just don’t believe that. I’ve never believed that.”
Mitra is far from the only senior living leader to voice concerns about the standard 5% management fee structure. At the NIC conference in November, Capital One Managing Director Chris Taylor said that this third-party management model is widely acknowledged to be broken.
At NIC, two other executives — Belmont Village President Mercedes Kerr and The Springs Living CEO Fee Stubblefield — also expressed doubts about operators’ ability to appropriately invest for the future on a 5% fee.
Heading into 2022, there’s no consensus on what should replace the 5% management fee model. “You see a lot of people coming up with a lot of different solutions,” Taylor observed, while Kerr said she also sees a lot of room for various innovations.
Kerr also noted that achieving financial alignment has to start with an alignment of mission. It’s a point that a few other executives have echoed. For example, Merrill Gardens President Tana Gall said that her company and its capital partners are aligned on the mission of serving the middle market, and are “still working” on what that means from the perspective of financial returns.
And Ventas EVP of Senior Housing Justin Hutchens said that the REIT drives alignment by structuring management agreements around both top-line revenue and bottom-line net operating income — and a shared sense of mission.
“The first thing that’s the most important is that we believe that a company has a mission and philosophy that is geared around taking care of people,” said Hutchens.
This might sound like common sense, as does Mitra’s “sink or swim together” philosophy. But as the industry continues to evolve toward more sophisticated capital structures, owners and operators will do well to make sure they are getting the basics right and starting from a sound foundation of shared values.
“It’s not a market gap, it’s a market abyss.” — 2Life Communities President and CEO Amy Schectman, Sept. 23, 2021
The last 12 months saw notable progress in the creation of new models for serving the so-called “Forgotten Middle” of consumers who cannot afford market-rate senior living but do not qualify for subsidized affordable housing; and a growing appreciation that the demand for these products is even greater than first anticipated.
Amy Shechtman is among the senior living leaders seeing a vast unmet need — a “market abyss.” 2Life Communities is aiming to serve this market with its forthcoming Opus product.
The model calls for a mix of volunteerism, to reduce labor costs, along with partnerships and shrewd site selection. And residents would pay a “community-share” fee, pegged to about 50% of the median single-family home price in Opus markets enabling residents to keep drawing on the proceeds of their home sale rather than tying it up in a large entrance fee.
Lloyd Jones also made progress on a mid-market product in 2021; industry veteran and Lloyd Jones COO Tod Petty calls this “the opportunity of a lifetime.” Lloyd Jones is taking advantage of acquisitions with favorable pricing, and the company’s vertical integration to support efficient CapEx deployment.
Lloyd Jones also has a range of ideas and innovations percolating related to operational models, including a robust technology overlay to facilitate more efficient care, and more targeted “fee-for-service” pricing rather than the bundled pricing that has historically been commonplace in the industry.
Perhaps most notable was the launch of Merrill Gardens’ Truewood by Merrill middle-market brand, which started with 20 properties and now has grown to 29.
The Truewood model is based on direct consumer input gleaned through focus groups, and includes components such as the “Resident Experience Partner” (REP). REPs are essentially universal workers, but with structured career pathways, to avoid the pitfall of assigning a universal worker a series of random tasks, without proper training and support.
And Merrill Gardens President Tana Gall also commented this year on the huge market opportunity, which she says is even bigger than the opportunity identified by the landmark 2019 middle-market research study from NIC and several academic institutions.
That’s because the product appeals to affluent but frugal consumers as well as those of more limited means.
“That customer base is bigger than even we think,” Gall said at SHN’s BUILD event.
“We all need to understand that integration of data and experiential programming — a high-tech and high-touch approach — is our path forward to the next generation of senior living.” — Juniper Communities CEO Lynne Katzmann, October 26, 2021
Earlier this fall, industry Hall of Famer Lynne Katzmann, CEO of Juniper Communities, shared some thoughts on her vision for the future of senior living. Also, Mather put forward a proposal for a new senior living wellness framework to replace the six-dimensional model that has been widely adopted since the 1970s.
Katzmann’s vision and Mather’s framework both revolve largely around the concept of personalization. In fact, Mather dubbed its approach the “person-centric wellness model” and released a report that posed this question:
“At a time when virtually everything else around us can be customized, shouldn’t our wellness plan be as well?”
Mather and Juniper are not the only senior living organizations moving toward customization. Watermark Retirement is aiming to offer “precision wellness” for residents, while Discovery Senior Living’s “experiential living” model enables a more customized, a la carte approach to senior living.
For these organizations and others, technology is facilitating the move toward personalization. For instance, Discovery’s business intelligence unit has crunched operational data, enabling the provider to unbundle its services with appropriate pricing and staffing in place.
In the years ahead, further technological advancements should enable even more robust and effective personalization. Katzmann already is putting the pieces in place to harness genetic information along with other data to create “lifestyle prescriptions” for residents based on individuals’ experiences, lifestyle habits and goals, their susceptibility to particular health issues, and other variables.
While the need to protect resident privacy is paramount, Katzmann believes that consumers will expect personalization, and that taking more individualized and data-driven approaches to care and services also will showcase the ability of senior living to drive down overall health care costs while improving people’s lives.
“We all seem to all cherish our individuality and seek a life that is not only true to ourselves but delivers on our unique needs and desires,” she observed in a presentation at the Senior Living Innovation Forum.
“I do expect strong RevPAR growth in 2022 — and I think it will be one of the best years in the industry’s history.” — Brookdale Senior Living CEO Cindy Baier, November 5, 2021
In 2021, occupancy started to bounce back from historically low levels, but expenses also began to balloon, particularly with regard to labor. As a result, margins have remained under pressure.
Indeed, Maxwell Group CEO Donald Thompson earlier this year predicted “a real crisis in margin compression.” While margin compression is indeed occurring, the good news is that some providers are having success in aggressively driving rate.
They have been able to do so thanks to several factors, including a 5.9% increase in Social Security payments that residents are receiving, and skyrocketing home prices. But most encouragingly, they report that consumers are attracted to the senior living value prop and are willing to pay accordingly, particularly to support healthy wage rates for workers.
Brookdale Senior Living CEO Cindy Baier expressed confidence in driving rate, leading to her bullish outlook on revenue per available room (RevPAR) and optimism for a banner year in 2022.
Granted, her comments on the company’s Q3 2021 earnings call came before the omicron variant reared up; the emergence of omicron might be slowing senior living move-ins, contributing to Brookdale’s first sequential month-end occupancy decline since February, analysts with BMO Capital Markets wrote.
So, as has been the case throughout the pandemic, the future is far from certain. But strong providers have reasons to be hopeful that 2022 will bring both census growth and margin recovery, particularly if contract labor costs moderate. Add innovative operating practices that drive efficiency, and some providers could start to see impressive bottom-line results.
“It is my firm belief that our margin will be higher than the pre-Covid margin, on a stabilized basis,” Welltower’s Mitra said last month, referring to the REIT’s senior housing operating partners.
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