Having kicked off the new year by completing a recapitalization, LCS is pursuing growth in 2022 and beyond, including by expanding its real estate development services business.
That is the message from Joel Nelson, president and CEO of the Des Moines, Iowa-based company. LCS is the second-largest senior living operator in the United States, with a portfolio of more than 130 communities. The LCS Family of Companies also includes a development arm, group purchasing business, and a real estate private equity enterprise, as well as a nonprofit foundation.
The execution of this recap was in line with the LCS board’s expectations, given that the last such transaction occurred in 2010, Nelson told SHN.
“It was about timing and really being able to go and seek our next partner at a time when we were in a position of strength,” he said.
Evidence of that strength includes LCS’ growth throughout the Covid-19 pandemic. The company pushed forward with senior living development projects and onboarded 15 new business relationships in 2021.
Still, LCS has not been immune to Covid-related pressures, including labor market disruption. The recap also will enable LCS to invest in workforce programs and other initiatives to meet these challenges, Nelson said.
And LCS has long been owned in part by employee shareholders, which has helped drive engagement and tenure, he emphasized.
LCS did not publicly disclose financial details of the recapitalization, but employees will remain as shareholders, as will existing investor McCarthy Capital. They will be joined by Redwood Capital, a company with an intimate knowledge of senior housing, having acquired Erickson Living in 2010.
In announcing the recap on Monday, LCS identified three strategic priorities going forward:
— grow real estate ownership
— strengthen infrastructure and support for third-party management and ancillary business lines
— invest in people and growth initiatives
In terms of expanding real estate ownership and growing its overall book of business, LCS intends to build on its 2021 momentum.
The company has 50-plus investments in senior living communities and added to this tally by closing on a new partnership in December 2021, through a recap/monetization transaction precipitated by a fund investor timing out. LCS also has the acquisition of a large continuing care retirement community (CCRC) under contract, Nelson said.
Last year, LCS also built out its teams, including hiring Welltower (NYSE: WELL) veteran Joe Weisenburger and making a series of promotions. Now, LCS is ready to expand on the services that the company historically has offered.
In the past, LCS has typically provided developer services for communities that the company itself owns or manages.
“Going forward, we are providing that third-party development service, whether it’s renovation, repositioning, or new community development … to serve broader not-for-profit and for-profit development needs for [organizations] that already have their own operator, ” Nelson said.
In particular Nelson anticipates further opportunities to expand third-party management and development services to smaller organizations that are in need of assistance and sophisticated capabilities to meet current, challenging market conditions.
“One of the strengths and core competencies of LCS is to go in and partner, and assess those organizations that may not have the economies of scale, the efficiencies, the breadth and depth of the resources [needed] in these times of the pandemic,” he said.
Indeed, LCS onboarded 15 new relationships last year.
And LCS also has been moving forward with ground-up development projects, having recently opened a luxury community in the St. Louis metro area that was co-developed with Ryan Cos.
“We’re not cocky about it, I don’t want to portray that — we’ve been able, with our capital partners and the strength of our company, to continue through Covid,” LCS Executive Vice President and Managing Director Chuck Murphy said at the recent Senior Housing News BUILD event in Chicago.
Keeping the focus on people
While Nelson is eager to seize on opportunities for growth, he emphasized that investing in LCS’ people is the foremost priority.
“That’s been the number one focus that’s gotten us to where we are today,” he said. “And it’s just a continuous investment in the development of our people and our leaders.”
This focus is even more critical in the current labor environment, with employers of all kinds facing workforce shortages and rising wages. Staffing pressures in senior living are in some cases constraining occupancy growth and constraining margins.
LCS intends to increase training and expand recruitment strategies to bring new workers into senior living generally and LCS specifically. And Nelson sees the company’s employee ownership and profit-sharing as an advantage in attracting and retaining talent.
Employee ownership traces back to LCS Founder Fred Weitz, who formed an employee stock ownership plan (ESOP) as part of his succession planning. When he retired in 1995, employees were eligible to become direct shareholders.
LCS has specific criteria for who can be nominated as a shareholder, but “the beauty of this program is it goes pretty deep into the organization,” Nelson said.
He himself was given the opportunity to become a shareholder when he was an executive director with the company. And employees across all functional areas — including accounting, finance, human resources, sales and marketing — can be nominated to become a shareholder.
“From the LCS perspective, it just aligns very, very well with our focus on employee culture and employee engagement,” he said. “And our culture and engagement is focused on the long-term vision of the company, the long-term career opportunities that one might have when they join LCS.”
Nelson declined to disclose the total number of employee shareholders, but said that 100% of employee direct shareholders voted in favor of the recap and opted to roll forward their investment in the company rather than cashing out, with the average roll-forward in excess of 90%.
While gaining an ownership stake in LCS is a longer-term incentive for people to rise through the ranks at the company and participate in wealth creation, the company also has a profit-sharing program.
“I believe you have to have both,” Nelson said. “You have to have profit-sharing, which covers every employee that comes in each and every day to serve our seniors.”
As they seek ways to attract and retain talent to create more workforce stability, other senior living providers also are considering employee ownership and profit sharing. Canadian operator Sienna introduced an employee stock ownership program last year, for instance.
“I know a lot of people are exploring it,” Nelson said.
He offered one piece of advice:
“I think one of the most critical things that one needs to think about, if they’re considering profit sharing or direct ownership into the company, is both of those opportunities, both those plans, really do require a long-term commitment from the company. At least, that’s what has worked for LCS, to our advantage.”
Alignment with Redwood
The involvement of Redwood in the recap brings LCS into a new partnership. Nelson is confident in the relationship between LCS and the investment firm, which is the family office of Jim Davis, co-founder of staffing and recruitment giant Allegis.
Specifically, Redwood meets four key criteria, Nelson said:
— Understands the business of senior living
— Long-term capital that shares the LCS vision
— Values the LCS brand
— Shares alignment with McCarthy Capital and employee shareholders
Redwood’s understanding of senior living comes in no small part from the firm’s ownership of another large provider, Erickson Living. Redwood acquired Erickson out of bankruptcy in 2010.
Erickson, which specializes in vast CCRCs, offers a very particular product and distinct brand from LCS, Nelson said. The plan is for LCS and Erickson to remain completely separate entities, with LCS focused on its own strategic path and building on its strong brand, build over the course of 50 years.
“This capital and partnership is as long-term as one could get, as we look toward the next 50 years,” Nelson said.
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