Since Kristin Ferge joined Capri Senior Communities in 2016, she has helped lay the foundation for the company’s rapid growth through a mix of new development and acquisitions.
Today, the Waukesha, Wisconsin-based company is the largest senior living developer and operator in the state by total number of units, according to 2018 rankings from industry association Argentum. Capri’s portfolio includes 24 communities and two more under construction, she said in a recent interview for Senior Housing News’ “Bottom Line” series.
In this interview series, SHN is connecting with senior living CFOs to gain greater insight into today’s financial risks and opportunities, and to learn how these leaders are helping guide their companies into an exciting but sometimes uncertain future.
For Capri, that entails continuing its smart, accretive acquisition and development strategy, while also developing a talent pipeline to attract new workers, through partnerships with local high schools and colleges, as well as unique programs.
Ferge, who joined Capri from Brentwood, Tennessee-based senior living operator Brookdale Senior Living (NYSE: BKD), has been instrumental in Capri’s success the last three years. In addition to being responsible for all finance and accounting related matters including investor relations, acquisition underwriting, and employee benefits, she was instrumental in securing a $160 million tax exempt bond offering that allowed for a non-profit entity, Covenant Communities (now known as Chiara Communities), to acquire 14 communities and enter into a 35-year management contract with Capri last August.
The following interview has been edited for length and clarity.
Would you say it’s true that senior living has gotten more operationally and financially complex over the last few years, and if so, how has that placed new demands on you as a CFO?
As I look at how it’s changed in the 20 years I’ve been in the industry, it’s truly remarkable the sophistication and advancement our industry has experienced. It’s much more complex, operationally and financially. And it’s allowed us to get more creative as an industry.
People who are aging into senior living now are coming with a rich and diverse set of experiences that they don’t want to leave behind. We now have 80-year-olds who are looking for robust and comprehensive social activities and dining options. They want to have apartments that are comparable to where they lived the past 20-30 years of their lives.
With that, you add the demand for specialized health care, primarily in assisted living and memory care, which has added to the complexity. When we look at the demands and desires within our industry, and intersect that with the lowest unemployment numbers in recent history, it’s become incredibly challenging.
That said, we have developed unique partnerships and strategies to build our talent pipeline. For example, we find that as more young people desire to enter the nursing or medical professions, colleges are demanding that their applicants have measurable experience.
We are in a perfect setting to provide that experience and mentor young people. This helps us fill temporary and permanent shift gaps. Perhaps the biggest upside to these partnerships is our residents’ excitement and enthusiasm for this intergenerational engagement and experience that we’re providing.
When you started with Capri, where was the company at and what were your main priorities?
It was extremely entrepreneurial. Capri was founded by Jim Tarantino in 1992 with three communities. He had a vision of growing the company. He is also a developer and was looking at ways to build a platform.
When I joined, our goal was to continue to use my prior experience from a big company, and let’s look at different development and acquisition opportunities, create policies and procedures, standardize the way we were reporting things and working with investors to move the company from being very entrepreneurial to having the creativity and nimbleness, as well as a core foundation where employees knew what to expect and investors understood the quality they would receive on a routine basis from the accounting and finance.
Can you talk about one or two or three moments during your time with Capri (or in your time working in senior living, generally) that were moments of particular challenge or change, and how you worked through or are working through those?
I joined Alterra Healthcare, which was a start-up senior living company, out of [a career in] public accounting. This was in the 1990s — the go-go days of senior living — where Alterra was opening a community every three days. We grew the company from 50 communities to over 500 by the late 1990s, through acquisition and development.
I think some acquisition pricing is crazy high.
We were able to work through a Chapter 11 restructuring, sell the company to private investors out of New York, do a subsequent IPO, the name change to Brookdale subsequent to that, and were able to close numerous mergers and acquisitions. It was a great way to learn the business, operating a publicly traded company and the rigors that go with that.
Since I’ve been at Capri, we’ve grown our revenue by 60% mostly through acquisitions and some new developments. That has positioned us as one of the largest operators in Wisconsin. Because of that size, we are now able to foster partnerships with local community leaders and educational institutions, and we’ve been able to recruit a lot of new staff thanks to our reputation.
What about the decision last year to enter the management contract with Chiara? What was behind that?
The transaction was a real estate transaction where 14 different investor groups sold their interests to a non-profit company called Chiara. Chiara then entered into a 35-year management agreement with Capri. To finance the acquisition, Chiara issued $160 million of tax exempt bonds.
The upside of the this transaction is it allows for any savings in real estate taxes to be used to reinvest in the properties and local communities, such as developing a foundation to provide rent assistance for residents or scholarship opportunities for employees.
For Capri, it further enhances our platform in terms of being able to understand and operate in the for-profit and not-for-profit worlds.
How are you thinking costs/expenses for 2019? Are there items on the balance sheet that are of concern (labor costs?), or areas where you expect to make significant investments, or achieve any cost reductions?
We’re fortunate from a balance sheet perspective, as Capri has no alarm bells that worry me.
We do have a couple communities with debt maturities in 2020, but given the stability of the properties and their cash flow, there’s nothing there that would get in the way of a refinance. We’re constantly looking at new developments and acquisitions.
From a budget perspective, our biggest area of concern is labor. With low unemployment, retention concerns and wage pressures, it’s hard, but we know aren’t alone. We have the right leadership and culture in place where we’re getting really creative with our workforce development, focusing on those partnerships with local high schools and universities.
Another example of controlling costs is we launched a pilot program working with young people aging out of the foster care system, where they’re going to come live in our communities and work for us. We give them free room and board; they provide us employment. Support services are provided by a social service agency with whom we’ve positively formed a partnership to help them get the education necessary to advance in the health care field.
Another example of where we’ve tried to be creative in managing costs is we have some markets with shortages in care staff but a strong supply in LPNs [licensed practical nurses]. So we’ve moved to an LPN model with more per shift and fewer caregivers. We found the retention is higher, LPNs show up more often for every shift, and our resident satisfaction is greatly improved because they like seeing those familiar faces every day.
I love being able to empower young team members. Being a small, nimble company, they’re eager to find ways to say ‘yes.’
Because caregiving is tough, we conducted a focus group with large cross section of staff to understand what they want. We thought we had a good understanding of what keeps our caregivers happy. We quickly learned that we had no concept of certain things that were true game changers to their job satisfaction and retention.
That focus group led us to directly explore our partnership with Marquette, which is a national leader for their commitment to addressing trauma in the workforce. We’re providing counsel and therapy for our caregivers who have had traumatic experiences, allowing them to find comfort and move forward.
What relationships does Capri have with local colleges?
We have a partnership with Carroll University [in Waukesha, Wisconsin] where their physical therapist [majors] work in our communities. We have partnerships with Waukesha County Technical College and Milwaukee Area Technical College for LPNs. We’re working with Marquette University on providing trauma-based services for our employees, which we found was a huge need we asked for.
Many of our executive team members sit on local high school health care boards, leading teams that are helping students obtain their CNA licenses and placing them with communities.
Does this give Capri an advantage in the market for new talent? Or are competitors also doing this?
I think it gives us an advantage. I do think other providers maybe recognize there is an opportunity, but we’re further along in having these partnerships in place and having these students work for us within our communities.
Are Capri’s margins under pressure this year, and were they under pressure last year?
I think they’re under pressure more this year than last, because we continue to see impact from wage pressures. We’re starting to see where some of the larger hourly employers in our markets are advertising higher starting wages between $15 and $18 per hour.
We won’t be able to compete with those wages, so we look to compete through having a clearly defined culture and mission, finding staff at younger ages and possibly even offering scholarships to help them with their educations, and then subsequently come work for us.
How’s the availability/cost of capital at the moment, do you expect any tightening of the debt or equity markets in the near term?
There is a lot of available equity in the market. As a result, cap rates remain low. Interest rates rising slightly, but nothing of great concern.
The biggest change we’re seeing is more conservative loan-to-value ratios on refinancing and construction financing. As long as that equity is available in the market, it will allow pricing to remain high and drive cap rates.
The interest rate fluctuations are being felt more on the three-year bond maturities than the 10-year Treasury bills. Are you paying more attention to the three-year rates, because of how that impacts short-term lending?
Given where our portfolio is today, we’re paying more attention to three-year interest rates, as it impacts acquisition and construction financing and has immediate implications on cash flow fluctuations on certain projects.
One takeout strategy for us, particularly on some acquisition financing, is the long-term debt market. We keep an eye on the 10-year [Treasury] rate and look for the right place for those takeouts.
What’s your take on M&A and development at the moment? We are hearing that acquisitions are tough to come by unless you’re willing to pay a premium, with a lot of private equity chasing deals. How is Capri thinking about growth in the next 3-5 years?
It’s definitely a part of our strategy. We don’t look at it as being our only strategy, because we have a development arm. We’re constantly in discussion about whether it makes more sense to acquire or develop in certain markets.
I think some acquisition pricing is crazy high. I’m not sure long term how that makes a good investment. With the experience we have on our executive team, we tend to shy away from those. We look for turnaround opportunities or value plays. Because we do have a construction and development arm, we have the ability to do refurbishments and expansions.
The Chiara Communities transaction was a real estate transaction where 14 different investor groups sold their interests to Chiara.
To finance the acquisition, Chiara issued $160 million of tax exempt bonds. The upside is this allows for any savings in real estate taxes to be used to reinvest in the properties and local communities such as developing a foundation to provide rent assistance for residents or scholarship opportunities for employees. For Capri, it further enhances our platform in terms of being able to understand and operate in the for profit and not for profit worlds.
We may be seeing Medicare Advantage start to cover some senior living services, is that on your radar, any plans to play in the MA space?
We haven’t spent a lot of time exploring that, to date. Eighty-five percent of our portfolio is private pay, 15% comes through the Wisconsin Medicaid Voucher plan. We are aware of [Medicare Advantage]. It has not been a huge priority for us. As we move into 2020, we have to look at it and see what opportunities exist.
Currently, we have partnerships with two local hospital systems. One of those, Froedtert, has clinics in two of our locations. We’re looking at ways to expand those partnerships in terms of helping them with readmissions and length of stay.
Mission vs. margin is a theme in senior living and maybe a challenge. How do you define a healthy margin in this business and ensure that you’re striking the right mission/margin balance?
Within our executive team, there is a healthy balance. We all are focused on our mission. We tend to run the company more as a nonprofit, yet we have individual investors within our real estate transactions expecting certain returns and distributions that we’re very focused on.
What we’ve found is our mission has driven our margins. We have extremely high occupancy levels over all our communities. We have extremely strong cash flow. Within our markets, Capri is known as one of the best operators with a lot of compassion and sincerity. We’ve never discharged a resident because they were unable to afford our communities.
On a personal note, how did you end up working with Capri, did you ever envision yourself in the senior living industry back at the start of your career?
I wasn’t sure I knew what senior living was. I went to college wanting to be a physical therapist. I slowly learned that wasn’t the best field for me, so I majored in accounting.
I knew wanted to work within the health care environment. Coming out of college, my aspiration was to be on the executive team of a hospital. I worked in public accounting, where my focus was on health care and hospitals. Through that experience, I wound up with Alterra as a client, which had a large real estate focus.
In 2016, I left Brookdale for Capri. Moving from a publicly traded company focused on growth 24-7 to a local operation with similar growth focus, allowed me to move outside my finance lane.
I feel like I’m a partner in the overall business, and have developed an incredible grasp of things well beyond finance. I’ve had the opportunity to build out a true executive team with people from nontraditional and traditional backgrounds. I love being able to empower young team members. Being a small, nimble company, they’re eager to find ways to say “yes.”
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