Senior Living Industry Must Learn from Public Operators’ Contracting Portfolios

One of the nation’s largest senior living operators will be smaller in the future, as Five Star Senior Living (Nasdaq: FVE) will soon exit management of 108 communities.

With this recent news, now all three of the largest publicly traded U.S. senior living operators — Brookdale Senior Living (NYSE: BKD); Capital Senior Living (NYSE: CSU); and Five Star — have contracted substantially over the last six years.

The trend highlights the pitfalls of acquiring big and diverse portfolios, provokes doubts about the wisdom of being a public company in the senior living sector, and raises questions about the future of some other large operators.

Meanwhile, Five Star’s go-forward plan further solidifies the strong position of continuing care retirement communities (CCRCs) coming out of the pandemic, while also demonstrating how full-continuum communities are being reshaped.

Smaller at the top

In 2015, the 10 largest U.S. senior living providers were operating a total of 2,680 communities, according to data from Argentum.

By 2020, the 10 largest providers were operating 2,354 communities, with the most dramatic contraction coming at the top of the list: Brookdale went from 1,123 communities to 763.

In that 2015 to 2020 period, Five Star actually grew from 243 communities to 264, while Capital Senior Living remained basically static, going from 126 to 124 communities. But the last year brought big changes at Capital and, now, Five Star.

	Communities in 2015	Communities in 2021
Brookdale Senior Living	1,123	695
Five Star Senior Living	243	144*
Capital Senior Living	126	68

*after planned transitions

The Brookdale situation has been one of the great cautionary tales in the industry, as the company executed a blockbuster acquisition of Emeritus but then struggled to integrate that portfolio.

About a year after the Emeritus deal, Brookdale tapped former Walmart executive Labeed Diab as COO; but whereas Walmart is renowned for placing nearly identical big-box retail stores in markets across the country, Brookdale’s portfolio was a diverse mix of communities of different sizes in a variety of locations; in 2016, Stifel analysts estimated 10% of the portfolio was “non-core.” Diab left Brookdale in 2017, the same year that rumors swirled of a private equity takeover of the company.

That buyout never materialized, and the company continued to trim its portfolio as part of a turnaround effort. In 2018, Brookdale identified 20% of the portfolio for disposition by this year. The company is about 40% smaller than it was immediately post-merger.

The situation at Five Star was different, but the company also grew through acquisitions after its founding in 2001. As of the end of 2020, Five Star’s portfolio spanned 31 states, with communities of various sizes serving the whole continuum of care, from active adult through skilled nursing. Like the industry as a whole, Five Star was under pressure in recent years, including from oversupply and heightened labor challenges. Financial performance deteriorated, resulting in a going concern warning and restructuring with its primary REIT partner, Diversified Healthcare Trust (Nasdaq: DHC).

As an indication of how diverse the Five Star portfolio had become in terms of community size and performance, consider the numbers:

• The 108 DHC-owned communities now being transitioned represent only 12% of Five Star’s total 2020 operating and management revenues

• The communities that Five Star will continue to manage for Diversified had an EBITDA margin 280 basis points higher than the transitioning communities in 2020

Capital Senior Living may have built the most uniform portfolio of the three public operators, generally executing smaller acquisitions focused largely on the Midwest and Texas. But, Capital also had to consistently answer questions about how the company intended to grow shareholder value, including through acquisitions.

And ultimately, Capital’s portfolio also included a mixed bag of strong performers and consistently struggling communities, with the laggards dragging down the company’s financials as the operating environment became challenging. Under pandemic pressures, the company last year opted to hand over 18 communities to mortgage holder Fannie Mae, reducing debt by $217.7 million. The 68 communities now in Capital’s portfolio had pre-pandemic occupancy rates in the mid- to high-80% range and margins in the mid-30% range.

To be sure, each of these public companies faced challenges apart from having ungainly portfolios. But consider the other companies on Argentum’s largest providers list. Several of those that have managed to maintain or gain scale in the last six years have more uniform portfolios than the public companies.

For instance, Holiday Retirement is focused exclusively on middle-market independent living; LCS and Erickson are primarily focused on CCRCs; and Sunrise — though a more diverse company than some realize — is known for its repeatable “mansion” model.

We may see some other large, privately held companies also emerge from the pandemic smaller — LTC Properties (NYSE: LTC) is already transitioning 23 Senior Lifestyle Corp. communities to other operators. But the public operating companies might be the poster children for the wrong way to gain scale in senior living.

“Clearly, going backward is not good and it has left some feeling out there that an operator will struggle being a public company, under the pressure of earnings,” Discovery Senior Living CEO Richard Hutchinson said in a recent SHN+ TALKS appearance.

Discovery just joined the top-10 club, and is taking a different approach to scaling up, by creating regional sub-brands under their own management structures. Another top-10 provider, Atria Senior Living, also is executing a multi-brand strategy. So, lessons may have been learned that will lead other operators to more successful growth strategies — and Brookdale, Five Star and Capital are still around and planning their next moves.

“It’s unfortunate that they had to shrink, but I think that’s part of the [industry’s] evolution,” Hutchinson said.

Future of Five Star

Going forward, Five Star intends to focus on larger independent living, assisted living and memory care communities, as well as standalone active adult and independent living properties.

This strategy is yet another indication that CCRCs and lower-acuity communities are more attractive coming out of the pandemic, as they have displayed surprising resilience — something Eric Mendelsohn, CEO of National Health Investors (NYSE: NHI), emphasized during a recent SHN+ TALKS conversation. And remember that Healthpeak (NYSE: PEAK) is in the midst of selling off its entire senior housing portfolio, except its CCRCs.

But notable in Five Star’s plan is the decision to close and reposition all the skilled nursing units in its CCRCs in the Diversified portfolio. The move will contribute to near-term choppiness for Five Star, with local news outlets already running stories about the layoffs and the resident transitions involved.

Longer-term, the move might pay off. Skilled nursing experienced tragically high infection rates and precipitous occupancy loss during the pandemic, and was the subject of tough press coverage. Now, emergency government funding will be ending and closer regulatory scrutiny might follow. And in moving away from skilled nursing in CCRCs, Five Star further simplifies its portfolio and joins a larger industry trend.

For example, Avamere’s Ovation product forgoes skilled nursing in an effort to create an “active lifestyle village,” where care needs are largely met through partnerships with home care, therapy and other provider groups — including those owned by Avamere.

Similarly, Five Star launched its Ageility wellness and rehabilitation brand in 2017, and this arm of the company has been a bright spot for growth in the ensuing years. As of 2020, Ageility had grown to 38% of Five Star’s total management and operating revenue, with plans for two to four new Ageility clinics to open per quarter.

Being able to connect CCRC residents with Ageility services could help extend their longer-term health and wellness, and support the move away from traditional skilled nursing.

Reducing the senior living portfolio and expanding Ageility also aligns with the strategy that CEO Katie Potter was laying out even before Covid-19. In March 2020 — the same week that news broke of the Kirkland Covid-19 outbreak — she told me that senior living providers cannot be “all things to a lot of different people,” that a different management structure would be needed for the company’s diverse portfolio, and that Five Star was eyeing the active adult market for growth.

She elaborated on these ideas in Sept. 2020, when she spoke about Five Star as an “aging services” rather than a “senior housing” company, and noted that lines are blurring between senior living, home care and other businesses. Brookdale also is staking its future in part on this “blurring of the lines,” with its recent home health JV with hospital giant HCA opening up new potential avenues of growth.

But Five Star’s success will hinge in part on excelling with its portfolio of larger communities, and the company may have some work to do on this front. Recently, Five Star was the subject of unflattering press coverage in The New York Times and other outlets, related to the situation at a New York CCRC. This is only one community out of many in the portfolio, though, and Five Star should have increased the bandwidth for managing the CCRCs following the transitions.

Whether Five Star’s new approach proves successful, the company is at least taking needed steps to change up its approach. Maybe all the disposition and restructuring activity on the part of the public operators points to one advantage they hold: Shareholder pressure compels action rather than a “wait and hope” approach that could come back to haunt complacent providers, who are banking on demographics to save them rather than creating stronger offerings for an increasingly complex market.