Following the housing bubble and subsequent burst, the senior housing industry is facing an ongoing phase of consolidation, with many, many more deals on the way that will come in response to the post-boom era.
For many non-profit organizations, it means consolidation ahead, but perhaps not in the traditional form. Many will opt to affiliate with larger groups or other single-standing properties in order to boost financial stability or for other, newer, reasons, say those who assist communities in maintaining their economic position in the market.
“We’re seeing a gradual consolidation phase,” says Dan Hermann, senior managing director and head of Investment Banking for Ziegler. “For the leading not for profit sponsors, many are multi-facility systems that have been desiring to grow and have recognized that growth through affiliation is as logical and rational as growth through development.”
The agreements that have already taken place are paving the way for more, Ziegler says, as companies face certain challenges following the downturn in the market.
“Usually they need two to three factors,” Hermann says. “Those might be aging physical plant, declining occupancy or financial distress.”
For two Kansas-based CCRCs, Kidron Bethel Village in North Newton, Kansas and Schowalter Villa in Hesston, located six miles apart from one another, joining together took the two from being competitors to enjoying many operational efficiencies under the new partnership.
“As non-profits we always viewed the people close to each other as colleagues but also as competition,” says James Krehbiel, president and CEO of Bluestem Communities. “We were two organizations that drew from the very same marketplace.”
Today they are one operator: Bluestem Communities. Yet three years ago, the operators were only talking about the efficiencies available if they were to join together as one.
Both were strong in quality and functioning, but with uncertainty and Medicare reimbursement cuts, a conversation began among the two communities.
“We saw what we needed to do with specialization,” Krehbiel says. “Why not be proactive and look at the possibilities of: here are two organizations six miles apart. What about becoming one non profit? Would there be advantages?”
After 18 months of conversations among board members and work with Ziegler, the communities entered a phase of consulting with stakeholders and beginning to broach the topic with them.
Ultimately, they looked at the potential partnership as coming to terms in several areas: the mission, financial impact, specialization opportunities and additional efficiencies. They agreed the efficiencies they would gain through a partnership would benefit both communities financially, and across the board.
“We did not anticipate how much intersection there was of how we do it here and there and figuring out solutions together, from maintenance and grounds meeting to say how do we do grounds better, to chaplains communicating on how to do spiritual life better,” Krehbiel says. “We did not anticipate it to the degree it did.”
Like Bluestem, Ziegler sees much more opportunity on the horizon for mutually beneficial partnerships between communities. Rather than seeking options to refinance or become acquired, there are other options available, and they will be used increasingly, says Rebecca Neth Townsend, senior vice president, investment banking, for Ziegler. In some cases they are spanning multiple denominations.
“They tend to be careful when they step into sponsorship transition,” Townsend says. “But the concept of ‘I’m a not for profit and we’re going to extend to another not for profit’ seems to play well as a less threatening approach.”
With many conversations currently under way spanning geographic regions as well as community types and specialties, Ziegler expects the market to see many more partnerships among those communities that have weathered the economic storm but are looking to improve and remain competitive.
“We’re seeing a gradual consolidation phase,” Townsend says. “Not for profit senior living tends to be slower to react to initiatives with risk associated.”
Written by Elizabeth Ecker