Two senior housing operators — one for-profit and one nonprofit — are taking different approaches to cutting rents and costs to accommodate the demand for a growing middle-market consumer base.
Presbyterian Homes & Services Vice President Jon Fletcher and Affinity Living Group CEO Charlie Trefzger shared their strategies during a webinar Tuesday sponsored by the National Investment Center for Seniors Housing & Care (NIC).
The webinar, hosted by Seniors Housing Business, promoted NIC’s April study that showed the growing need for middle-market senior housing, and its research that showed cutting resident costs by $10,000 to $15,000 per resident would make senior living affordable for 2.3 million older Americans.
The strategies employed by Affinity and Presbyterian are the result of a disciplined approach to reviewing operations, but Fletcher stressed that these are not one-size-fits-all solutions to the middle-market equation.
“There is no silver bullet,” he said. “It’s a collection of strategies.”
Access to benefits
Hickory, North Carolina-based Affinity has a portfolio of 140 communities in operation or under construction in 9 states across the southeastern U.S., 90% of which have rates attractive to middle market renters.
But many of Affinity’s residents also turn to senior living when they have nowhere else to turn, Trefzger said. The average age of an Affinity resident is 83 years, with up to five chronic conditions and on 12 different daily medications. Their average length of stay is 23 months. The average income of an Affinity resident is $36,000 annually and 40% of its total census earns less than $20,000 annually.
And these residents stay at home past the point point where they should, and utilize home health care services as long as possible until they can no longer continue.
“Affinity is very much a need-driven model,” Trefzger said. “You need our services and have little other options from which to choose.”
To provide for these residents, Affinity builds on economies of scale. It takes a regionalized approach to operations, sharing resources, holding down costs and being ever cognizant of the financial impact associated with new initiatives and building operations.
Affinity is specifically focused on staffing and its costs, as well as key vendor relationships to provide these economies of scale, often running through its balance sheets with a fine-tooth comb to find new cuts. Trefzger stresses this does not mean Affinity is skimping on quality or staffing. But this laser-focus on expenses ensures it understands the importance of its mission.
“We literally try to run a financial statement every day in our communities and understand what we’re doing at all times,” he said.
Affinity also works to connect its residents to services and benefits for which they may not have recognized they qualified. Often, they assist residents with applying for VA benefits, Medicaid and other government programs that will help them get the care they need.
On the facilities side, Affinity has implemented efficiencies and modernized operations. It centralized call center operations to its home office, which routes calls to the appropriate community. And there are other projects underway which will allow Affinity to use technology to realize more efficiencies.
Patience and discipline
The foundation of Presbyterian’s middle-market strategy is in its ownership model, Fletcher said. The Minnesota-based operator controls 48 communities with 8,100 units, and has a construction pipeline of 22 communities and 2,950 units in seven states.
Presbyterian is a long-term holder of its assets, which Fletcher identified as a key component of being able to access middle-market renters over time. Its unit mix, weighted toward independent living, is another factor. This allows the company to drive revenue with lower service costs, and help support residents when they enter the higher acuity levels of care.
Sixty percent of Presbyterian’s portfolio is geared toward middle-market renters, 20% is marketed to market-rate housing and the balance is for affordable. The market-rate component subsidizes the affordable segment, and the middle-market segment is self-sustainable. The unit mix toward independent living allows Presbyterian’s middle-market housing to have the highest GAAP margin, with solid occupancies and the best yields which are reinvested into missional work and benevolence.
The majority of the units have no or low entrance fees, depending upon the age of the community.
Another component to Presbyterian’s middle-market strategy is building modestly. Unit sizes range between 800 square feet and 1,000 square feet, but the finishes and amenities are built and designed to grade. This translates to lower marketing and turnover costs — residents stay longer.
“Our residents tell us the larger units wind up feeling more like a home,” Fletcher said.
On the development side, Presbyterian aggressively pursues external cost savings, searching for any and all subsidiary opportunities it can find and specifically targeting those that don’t have regulatory requirements, usually at the municipal and county level.
The operator is also working to expand the definition of affordable housing in markets so that middle-market is considered as a part of that definition.
Finally, Presbyterian keeps its rents low by managing revenue and expenses tightly with inflation. It tries to operate with the same capital investments as market rate communities, but intentionally matches rates to inflation.
In Minneapolis, Presbyterian gained 25% in market share over 20 years with this process. What it loses in rent growth it makes up for in high occupancies. Presbyterian’s total portfolio occupancy is above 97%.
“Over time, you gain affordability,” Fletcher said.