Senior Living Communities CEO: Oversupply Will Last Longer Than Many Expect

Workforce and occupancy are the top 2019 priorities for Senior Living Communities (SLC) CEO Donald Thompson, but he’s also taking a longer view. He foresees that current market pressures will last longer than many in the industry expect, and that there will be fruitful investment opportunities on the horizon.

“I don’t think this overbuilding is going to go away as fast as people think,” Thompson told Senior Housing News.

In the last 10 years, the average move-in age shifted from 78 to 83. If the move-in age continues to creep up at this rate, the wave of baby boomers will not start moving into senior living until 2022 to 2025, about five to eight years later than many forecasts call for, he said. This would lead to a stubborn oversupply problem given recent construction rates. In two of its markets, Senior Living Communities has seen available beds increase 200% over a two-year period.

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“I had a bank the other day tell me, ‘We can help our developers live through this for a couple years, and it will be fine,” Thompson said. “I’m thinking, ‘What if your move-in age moves a whole year in that phase? You’ve got three years to catch up, not two.’”

Having been in senior living since 1980, Thompson has seen his way through other cycles, and anticipates that attractive acquisition targets will be plentiful as a result of the current dynamics. With this in mind, he’s been in discussions with potential private equity investors. Succession planning is part of the calculus here, too.

“I’m trying to transition the business to each of these junior partners, people who work for me,” he said. “I’m 61. My goal is going to be to transition over the next five years, and I’d like to increase our equity stack, because there’s tons of opportunities.”

In the meantime, Thompson is leading Charlotte, North Carolina-based SLC through the current occupancy pressures related to new competition, and workforce challenges stemming from tight labor markets and rising wages.

Occupancy pressures drive CapEx investment

SLC’s portfolio consists of 14 properties — 11 of which are continuing care retirement communities (CCRCs) — in six states. The company’s recent occupancy rates have varied across markets and levels of care.

Assisted living is most variable, and is around the current industry average overall, Thompson said. Independent living occupancy is up slightly this year, and skilled nursing is up even more. This is a credit to SLC’s focus on providing a high quality of life for skilled nursing residents, with the same focus on wellness and socialization as in other levels of care, Thompson believes.

Memory care is the most challenging area at the moment, with occupancy down about 2%.

“Every place in America now seems to have 14 memory care buildings,” Thompson said.

To remain competitive with the new buildings coming online, Senior Living Communities has invested about $45 million in renovations over the last three years. That’s reinvesting almost 100% of the company’s margin into capital expenditures (CapEx), Thompson noted. But the investment has been worthwhile to both prevent more severe occupancy erosion and to keep the communities rate-competitive with new entrants. While higher than normal, it’s also in keeping with SLC’s general commitment to high CapEx.

About $500 a year per unit is a typical CapEx budget in senior living, and SLC budgets around $3,000 to $4,000 a year, Thompson said. This is due in part to the significant number of independent living units in the portfolio, which are larger and therefore more costly to renovate.

Of SLC’s roughly 2,400 total units, about 1,500 are independent living. Keeping these units occupied has become a trickier proposition, given that people are moving in older and frailer and therefore length of stay has gone down from about seven or eight years to about five years, in Thompson’s estimation.

Adding to the challenge, the initial sales process is long and to some degree out of a CCRC’s control, dependent on factors such as the local housing market. This leads to lumpiness in entrance fees, as has been the case recently for SLC, but recent results have been positive.

“Our net entry fees in the last six months really weren’t acceptable in October, November, December,” Thompson said. “January was great, February was not so great. March was good, and April was knocking the cover off the ball.”

Getting ahead of the curve on workforce

Historically low unemployment rates have made it difficult for senior living providers around the country to hire enough workers, and this dilemma is compounded by the industry’s stubbornly high turnover rates. At the same time, wages are on the rise, driving up labor-related expenses.

Senior Living Communities is not immune to these challenges but has improved its workforce retention over the past two years and is “a little ahead of the curve” on its labor-related goals, Thompson said. The company has a range of different initiatives on this front.

SLC offers tuition support for workers’ continuing education, taking the same approach as the U.S. military.

“You work for us for three months, you get three months of school,” Thompson said. “Six months, you get six months of school.”

A few years ago, Senior Living Communities partnered with a workforce training group that spun off from Chick-fil-A. The quick-service restaurant is widely admired in the senior living industry for its high level of customer service and low turnover rates.

The training group comes to SLC’s communities to do sessions that are tailored to the needs of senior living, Thompson said.

On the wage side, pay rates are being evaluated every 90 days to keep them competitive with the market. Given current dynamics, this means wages are generally going up every six to eight weeks. The raises aren’t large but help with retention, according to Thompson.

SLC also changed its vacation policy, allowing workers to add a certain amount of paid time off back into payroll. For those who have been the company for a sustained period of time and have accrued substantial vacation, this could equate to as much as a 7% or more increase in take-home pay each year.

For Thompson, the focus on workforce is as much about mission as margin. Frontline workers in senior living often do not have a college education, and in many cases they are single parents. Thompson wants SLC to provide a better, more supportive option for these individuals than other employers offer.

“If I was a single mom and I was living in a manner that’s not quite paycheck to paycheck but close, why would I work here rather than, say, the Amazon distribution facility or Hampton Inn down the street?” he said. “We’re thinking from that perspective … we look for shared mission, shared values, and how can we help you?”