Investor Summit Jump Starts Conversation for More Middle-Market Seniors Housing: A Three-Part Series

This blog post by Jane Adler was originally published in NIC Notes: Insights in Senior Housing & Care, July 3, 2019

Panel speaking at event

Operators Highlight Successful Approaches 
As new research shows that the number of middle-income seniors is growing quickly, forward-looking seniors housing providers are already experimenting with new and more affordable models of housing and care. Innovative ideas include smaller building footprints, private-public partnerships, and efficient designs and staffing models.

These ideas, and others, were recently showcased at an investor summit May 21 in New York City. The NIC-sponsored summit brought together industry stakeholders to share ideas to cut costs and streamline operations to improve affordability for middle-class elders.

The investor summit followed the release of a new study, “The Forgotten Middle,” which highlights the need for more housing options for the growing number of middle-income elders. The study was recently published in the journal Health Affairs and discussed at an April 24 policy forum in Washington, D.C.

The study shows that the number of middle-income seniors will double, and most will not have the savings needed to meet their housing and personal care needs.

The investor summit included three separate panels of industry participants: equity investors, debt providers, and property operators already piloting middle-market options. Each panel discussed what is needed to make middle-market solutions work from their perspectives.

What follow is an edited transcript of the third panel discussion, focused on building operators.

The operator panel was moderated by Kai Hsaio, CEO, Eclipse. Panelists included Thomas Grape, chairman and CEO, Benchmark Senior Living; Gaurie Rodman, director, development services, Direct Supply; and Judy Marczewski, CFO, Leisure Care. NIC Founder Bob Kramer wrapped up the investor summit with remarks about the next steps for the industry.

Hsaio: The question is whether we can make this middle-market operating model work. Tell us about your companies.

Grape: Benchmark Senior Living has 58 communities, mostly in the Northeast. We have rolled out a shared occupancy model with reduced construction costs and staffing changes.

Rodman: Direct Supply supports operations. So we see a wide array of concepts brought to the market. Innovations in technology can have an impact on the cost of operations.

Marczewski: Leisure Care has 50 communities of independent living, assisted living and memory care from middle market to middle upper market. We just opened our third middle market product in Raleigh, North Carolina.

Hsaio: Why are you doing middle market buildings? And what were the initial steps you took?

Grape: We were drawn to it for the same reasons that motivated the study.  We knew there was an underserved middle to tap into as rents and costs increase. We’re pleased with our success.  We tried the first community as an experiment to see if we could make it work. Now we have a couple more ready to open.

Marczewski: We wanted to design a product that met our philosophy for seniors housing but at an affordable price. In 2014, we designed a product based on monthly rent of $2850, which matches where middle market turned out to be. We started from scratch to design and operate this model from a customer perspective within that rent price.

Hsaio: Where did you get financing?

Marczewski: We just opened our third project and each one has a different equity partner. The secret is to build an efficient operating model. An efficient capital structure is what’s missing.

Grape: We targeted rent of $50,000 per year, an average of $3,300 a month for assisted living and memory care is higher. That’s 25% less than competitors. We reduced staffing by 15 percent compared to our other properties but without touching care levels. Instead, we reduced overall staffing by tinkering around the edges. Building size is 25% percent less than our traditional buildings. We used conventional financing. It would be great to have a financing mechanism like the low income housing tax credit to marry with this kind of operating model to help target the middle market.

Hsaio: If I looked at a pro forma for your traditional product and for your middle- market product, how would they compare?

Grape: We are located in a more blue collar market where land costs are less. Construction cost per unit was 25% less. We did a smaller building size and memory care is on a single floor and assisted living on two floors. We did wood frame construction in the two-story portion to keep costs down. On the operating side, we reduced staffing by 15% percent. We have no dining room manager and we reduced the activities staff by half of a full time equivalent. We nibbled around the edges without touching the care staff.  We did not market the building as lower cost, but as a high sociability option.  The vibe in the building is electric. There’s a great sense of volunteerism from residents and families. The more compact building size and common areas have created a great culture and it has worked with less staffing. The smaller building requires fewer housekeeping staffers and maintenance workers. The margins are about 5% less. The NOI per unit is $2,000 less, but we get the same unlevered returns and the same projected IRR over the whole period.

Marczewski: Similarly, we focused on efficiency. Thoughtful design helped us to reduce staffing levels. We offer high quality food, but fewer options. Food is prepared throughout the day rather than all at once to allow for better staffing. We spent time very thoughtfully designing the building from the inside out. We focused on operations, not on how to make it look pretty on the outside. We operate at significantly less cost.  In 2014 dollars, project cost was $26 million, or less than $200,000 per unit. Our portfolio has been built over 40 years with expensive and moderately priced buildings. For what we are doing, repurposing another building would not work. Operational efficiency is where you get returns.

Grape:  Our cost was $440,000 per unit, but $221,000 per bed compared to $339,000 for a typical building, or 35% less. The trick was shared occupancy. We could not build today for those numbers because of the rise in construction prices.

Hsaio: How do you think about the middle-market product?

Rodman: We look at every layer of the development and operating process from the beginning.  It might mean finding land in communities where you can have a conversation around getting real estate taxes reduced, increasing the floor area ratio (FAR), and leveraging community taxes for infrastructure improvements.  It means looking at partnerships with local home health agencies, hospitals, universities, and high schools for volunteers. Technology is providing a lot of innovation that we need to embrace.

Hsaio: Any lessons learned?

Marczewski: Our first project did not fill that fast. It’s in too small a market. The second one is doing well. The building design as well as the operational efficiencies has proved out. Our margins are incredible and the third building is off to a wonderful start. We will start our fourth building depending on how quickly the third one fills.

Grape: Our first building has done well and opened near full. It had shared occupancy units. The next two buildings have a few one bedroom units to add some variety.

Hsaio: Looking forward, which will grow faster: middle-market or other products?

Grape: For us, we’ll see how the next two do before we launch more. We are feeling our way.  We want to understand the customer and operations and know we have it down. We’re not there yet but we’re encouraged.

Marczewski: It depends on land and construction costs. It’s challenging now to build because construction costs are up. The next cycle is coming, so we’ll see.

Rodman: Regulations have to change. We need to take a look at the required number of ADA compliant units and see if we can build for less and still meet consumer needs.  Maybe it’s the difference between building a closet vs. adding a wardrobe in the unit. Little things can add up. Maybe we can leverage the land with another user to produce different revenue streams. Our next population of residents will desire that. We need to start thinking out of the box.

Hsaio: Is CapEx different for these projects?

Marczewski: The kitchens in our moderate buildings are the most expensive kitchens we’ve built.  We put high-quality equipment in kitchen to reduce staffing. You can trim expenses through less staffing with good design and equipment. The equipment is easy to clean and maintain and the costs associated with that can add up.  We are not willing to compromise on providing great communities for residents. We don’t do shared units. There are a lot of ways to do this, but the building has to be thoughtfully designed.

Hsaio: What about acuity levels?

Marczewski: Our middle market product is independent living, but with space for physical therapy, occupational therapy and home health which operate in the building. That allows us to keep pricing down. We’d like to do assisted living too and that is coming next.

Grape: We offer assisted living and memory care, no different from our other product.

Audience Q: Are these places the vision of the life residents will want?

Marczewski: We designed a model not around what we have done in the past but what people will be looking for in the future. It’s a modern, social model with the kind of apartment future customers would want based on their psychographics.

Grape: We market the community as a sociability model, not as an inexpensive alternative. The building is located in a modest income community but people are drawn to the sociability and that’s what they want. The community is based on research of people who want a social setting.  We’ve done a good job in this middle market community by not having people feel like it’s a middle-market product but one that’s highly social because that’s what they wanted.

Rodman: We shouldn’t call it seniors housing just because people are in the later stage of life. We need to think about it differently.

NIC Founder Bob Kramer summarized the ideas presented at the investor summit and offered insights into the future of middle-market seniors housing.

Kramer: If you look ahead to 2029, the middle-income segment represents a huge market for seniors housing which will only grow in the following two decades. How are we going to take advantage of this opportunity and meet the need?

We’ve touched on the need for a combined public-private approach to this challenge. And if the private sector is not part of solution, we will pay a price because there will be pressure on safety net programs such as Medicare and Medicaid. Should seniors housing only care about the wealthy? If so, tough regulations will come and there will be mandatory set asides for middle-income folks.  The reality is that this is an untapped market and a huge unmet social need. We will have more flexibility going forward as an industry if we demonstrate our commitment to this market and offer practical solutions.

What I heard today is that the equity component presents the greatest challenge, but that the debt piece will be there to finance middle-market projects.

Our industry has been focused to a great extent on offering the same product with different bells and whistles. But our operator panel today showed a different way of looking at things by looking at a price point and figuring out a way to deliver what the customer wants. Efficiencies can be found with technology and a better use of staff.

It’s easier to create an independent living product that’s a fun socially engaged community where there is not as much focus on care. Real estate capital is more comfortable with that model.

The tough challenge is solving the care piece for the 85- plus population. Maybe real estate equity won’t be part of the solution. Instead, insurance plans might see the opportunity to wrap a managed care product around a seniors housing platform to serve a middle-income market they have risk for. Healthcare investment funds might be more interested in that kind of product than real estate funds.

Other ideas might be prefab, modular units with lots of technology. Labor will continue to be an issue and regulations will have to change to find creative solutions, such as volunteer family caregivers or allowing the less frail to care for the more frail. Middle-income seniors represent a huge market and a great opportunity, but we have to be more flexible.

It’s critically important as we talk about 2029 to understand how customers are changing. They are not going to accept a condescending model of senior care. They are looking for social connection and purpose. It has to go deeper than care or a real estate product. Maybe it’s the village model or co-op housing—a college-style place where you can reinvent yourself in your 70s. Activity directors could become purpose matchmakers with the care component running in the background. Today’s image of assisted living is a place where you need care. But people don’t want to move there. Selling a lifestyle and the human connection is different.

Go back with your team and discuss this. We want to bring a spotlight to ideas in four areas: development, capital, operations and regulations. NIC hopes to highlight our need to come together to provide more and different types of housing and care options for middle-income seniors. They’re hoping not just to age, but to age well, in other words, to thrive.

Photo Credit: McKnight’s Senior Living