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Growing Investments in ESG Pay Off for Brookdale, PGIM, Harrison Street 

Senior living operators and real estate investors — including industry giants such as Brookdale Senior Living (NYSE: BKD) — are increasingly prioritizing ESG projects with an understanding that the long-term benefits will make for healthier, more profitable companies.

ESG stands for the environmental, social and governance portion of business planning and operations. With an increasing focus on issues such as climate change and social justice, many business leaders consider ESG to be an essential part of their strategic plans.

“We don’t look at ESG as a separate project within Brookdale, we actually plan it … into our long-term corporate strategies,” Kathy MacDonald, senior VP of investor relations for Brookdale, told Senior Housing News.

With more operators and investors beginning or ramping up ESG efforts, the key is to know what’s most important to your company, MacDonald said.

“First, focus on the topics that are important to your specific company and your stakeholders,” she said. “Secondly, know that things are evolving and there will always be more work to be done.”

And the appetite for ESG is only growing.

“All of our investors that we’ve worked with in the past two years are asking [about ESG],” Julie Ferguson told SHN. “And I’d say that about four years ago, nobody was asking those questions.”

Ferguson, who is EVP of Senior Living for developer Ryan Companies, pointed out that the environmental part of ESG is currently front-and-center for Ryan because “that’s where we have a lot of impact because we design, we build, we develop.”

While the environmental portion of ESG appears to be the most discussed – perhaps due to being the most financially measurable – the social programs and governance awareness hold an impact, too.

When Brookdale CEO Cindy Beier took over in 2018, she, along with the board of directors, made it a point to prioritize ESG, including one seemingly minor change that can make a difference in governance. That change was annual board voting as opposed to staggered board voting, according to MacDonald.

Changes like that show the ESG is on the top of the priority list for developers, operators and real estate firms.

Most of these investors already have sections of their respective websites dedicated to showing ESG initiatives as clear goals of the firm, and many are issuing lengthy annual reports about their efforts as well. Just last week, Sabra Health Care REIT (Nasdaq: SBRA) issued its second annual Sustainability Report, touting a variety of initiatives and accomplishments. Sabra highlighted its E-Initiative Roadmap, to create a more “‘green and healthy portfolio” through activities that adhere to six pillars: measure, identify, initiate, innovate, validate, replicate.

In another examplePGIM Real Estate aims to be carbon net zero by 2050. And Harrison Street’s website includes an ESG section stating, “There were no clearly defined ESG metrics or policies for the demographic-driven, needs-based real asset classes in which we invest, so we continue to create them.”

Harrison Street played a driving force in creating a healthy building scorecard for senior housing and is pursuing Fitwel certification across its real estate portfolio, including its senior housing properties.

Investments pay off

Pursuing ESG initiatives is not easy. Reporting requirements have increased, as investors seek more information from operators on ESG issues. And then there are the up-front costs involved in taking action.

But, like a child who doesn’t get dessert until the vegetables are gone, they believe the unpleasant upfront costs ultimately pay off..

Harrison Street has in the past conducted case studies to see which efficiency upgrades would save enough money to pursue.

“We’ve done case studies where we’ve gone into communities and done something as simple as putting in low-flow water fixtures that may cost [say], $360,000 to do across a section of our portfolio,” Brosig said. “But we’re saving $450,000 from the first year.”

But the impact goes beyond saving money. In fact, some research suggests that energy efficiency could lead to higher rental rates.

The Massachusetts Institute of Technology reported that having a healthy building certification created the ability to increase rates by 4%-7% per square foot in office buildings.

All these benefits are part of the picture for Brentwood, Tennessee-based Brookdale. In the years leading up to the pandemic, the company dropped about $3 million on energy efficiency upgrades to its portfolio.

And not only did the company create a long-term gain by improving energy efficiency, it also received environmental efficiency financing from the government by way of debt cost incentives.

Brookdale is Energy Star compliant in more than 500 of its senior living communities, according to MacDonald, which makes for good operations, social awareness and marketing.

When operators look at improving the environmental component of their operations, they should ask, “What’s the risk, what’s the benefit, and put it into their capital program,” said MacDonald.

While environmental impacts appear to be the aspect of ESG with the clearest ROI possibilities, the social aspect may not be far behind.

“Everything that we’re doing should be creating value for that building,” said Brosig. “So if you have lower utility costs, if you’re doing wonderful social programs that are actually attracting residents, attracting staff — maintaining staff — that’s a huge positive.”

It’s been well-reported that labor costs continue to weigh down the senior living industry with seemingly no end in sight. For operators looking to improve their workforce, the only agreed-upon solution appears to be making the senior living community a better, more fulfilling place to work.

The trick for investors comes in measuring just how financially impactful the social aspects of ESG are. Harrison Street’s investors know that those social programs are impactful, they just don’t know how, according to Brosig

Growing dedication

PGIM Real Estate is among the investment firms prioritizing ESG as a main component of its future development plans. In fact, the Madison, New Jersey-based firm started an in-house ESG team in 2010.

The team, led by Global Head of ESG Christy Hill, consists of five members whose focus is ESG strategy for the firm’s global debt, equity and securities businesses, according to Jon Glass, VP of asset management for senior housing for PGIM.

PGIM will conduct audits of its operating partners as a way to make suggestions for improvements. The audits come in one of two varieties: surface level or deep-dive.

The surface-level audit will include looking at balance sheets and invoices for big-picture cost saving opportunities such as utility usage. The deep-dive is significantly more involved and more impactful.

“An auditor would come into a building to inspect the various light fixtures, kitchen equipment, HVAC equipment and report back with where the opportunities lie,” Glass said. He added that in the senior housing sector, the most important part of activating an ESG-based strategy is working with the right operators, according to Glass.

“I couldn’t imagine trying to execute on an ESG strategy without having brought in any of our operating partners for a particular building and letting them know what their role is in our ESG strategy,” he told SHN.

PGIM is in the middle of beta testing an ESG strategy with an operator called the Aspenwood Company — formerly known as RCM — on a project that would take the Google Nest Thermostat and put it on steroids, as Glass put it.

First, the suped-up Nests needed to be installed in the two trial communities, then they needed to be tracked.

Now, Glass and PGIM touch base with Aspenwood and its frontline building on a bi-weekly basis to track how things are going before broadening the program to more communities in the senior housing portfolio.

“We’re not just going to implement something in every community that we own, we’re going to try it out in a smaller pool first to see what our results are,” said Glass. “And we also understand that not every solution fits every building and every operator.”

Harrison Street invests in a number of asset classes in addition to senior housing, such as student housing. Perhaps counterintuitively, the two types of real estate share some similarities among their residents.

“These are probably the two generations — students and seniors — that care the most about sustainability,” Brosig told SHN. “But … it’s not just a feel-good [movement].”

Indeed, for Brosig the emphasis on ESG is a differentiator that directly improves the bottom line by creating products that are simply better.

“It’s all about collaboration, not competition,” said Brosig. “I can give you a building that’s completely [carbon] net zero, and is resilient to every element that’s out there. But, if I’m the only one doing this, I’m not moving the needle.”

The post Growing Investments in ESG Pay Off for Brookdale, PGIM, Harrison Street  appeared first on Senior Housing News.

Source: For the full article please visit Senior Housing News

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