After a few brutal years for standalone memory care, supply pressures are easing and occupancy is ticking up. But a rebound will be gradual, as hard-hit companies in the space try to reset, and owners and operators glean lessons from this recent period of distress.
Construction of freestanding memory care communities peaked in the fourth quarter of 2015, at 14.6% of existing inventory, according to data from the National Investment Center for Seniors Housing & Care (NIC). As those new developments came online — along with memory care units that were part of larger assisted living buildings — the market became strained. Occupancy in freestanding memory care hit a recorded low point of 80.7% in the first quarter of 2017.
By August 2017, distress in standalone memory care was making headlines, and the sector has continued to struggle. Two of the biggest names in freestanding memory care have taken blows this year.
Irvine, California-based Silverado was the fifth-largest U.S. memory care provider in 2018, operating a portfolio of about 40 communities. About half that portfolio was in a joint venture with real estate investment trust Welltower (NYSE: WELL), which transferred the 20 communities to a new operator — Frontier Management — effective July 1.
And Dallas-based The LaSalle Group, one of the largest developers of freestanding memory care in the nation, filed for Chapter 11 bankruptcy in May. LaSalle owner Mitch Warren stepped down as the company’s CEO, although he remains CEO of TLG Family Management; under the Autumn Leaves brand, TLG continues to operate about 40 memory care communities owned by LaSalle and other firms.
Standalone memory care is almost certain to remain a viable product type in the years ahead, but more cautious, creative approaches to development and operations should be the legacy of this current, difficult period.
Analyzing the memory care breakdown
The surge in memory care construction came during an overall boom in senior housing development. New developers have been lured to senior living by the promising demographics — but some mis-timed the demand for senior housing generally and memory care in particular.
“A lot of novices thought, baby boomers are getting older … people get dementia in their 70s, boomers are now 72,” TLG’s Warren told SHN. “But with Alzheimer’s in particular, it takes some time to set in — a five-plus year process before you need a full-time care setting.”
Given that the average age of Autumn Leaves residents is 84, Warren believes the recent development push came 5 to 10 years too early to serve the large boomer population.
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A similar phenomenon has also occurred in assisted living, creating supply-demand imbalances in certain markets across the country for those communities as well. But there are reasons why standalone memory care was even more vulnerable to new competition.
For one, length of stay (LOS) has been declining at the same time that supply has surged. For Autumn Leaves, average LOS has fallen from almost two years to 14 or 15 months, Warren said. Across the industry as a whole, the median length of stay in memory care was 16 months in 2018, according to figures shared with SHN by Colleen Blumenthal, managing partner at HealthTrust, which compiles an annual State of Senior Housing report.
These LOS declines began during the Great Recession, when people delayed moves to memory care due to financial hardship, Warren said. Today, people are still staying longer in assisted living, or receiving home care services until later stages of their cognitive decline, before moving to a dedicated memory care community.
This adds up to a double-whammy for memory care: going head-to-head with new competitors at the same time that they had to fill beds more frequently. Meeting this dual challenge tends to be harder for standalone memory care versus memory care that shares a site with assisted living, where the AL population provides a resident pipeline.
Furthermore, assisted living providers can often cut rental rates to attract new residents, but this is more difficult for freestanding memory care.
That’s because these buildings are typically small — 30 or 40 units — yet they are equally or more labor intensive than assisted living.
“You still have an executive director, nutrition, maintenance … so, a lot of overhead relative to a larger community,” Daniel Bernstein, a Capital One analyst who covers senior housing companies, told SHN.
Compounding the issue, many of the new freestanding memory care buildings were built as a luxury product, limiting their ability to compete on price as markets heated up.
“A lot were built at a very high price point — $170,000 to $190,000 a unit, some for $250,000 or more a unit in some cases,” Bernstein observed, noting that this means monthly rates have to remain high.
And some groups pursued aggressive development pipelines of 10 or 15 buildings, which is challenging in any market, much less amid a perfect storm of memory challenges.
“At that pace, you’re going to make mistakes,” Bernstein said.
The good news: Construction as a percent of existing inventory was down to just 4.2% for freestanding memory care in Q2 2019.
Breaking that down further, only 16 of the top 99 markets tracked by NIC had standalone memory care under construction, Anne Standish, a research statistician with the organization, told SHN.
New York City has the most under construction by total unit count, at 394 units. Indianapolis has the most under construction as a percentage of existing inventory, at 78%, equating to 72 units being built.
“Deceleration in construction … might suggest we’ll see a little less pressure on freestanding memory care moving forward,” NIC Chief Economist Beth Mace told SHN.
Indeed, as the pace of new openings has slowed, occupancy has grown, reaching 82.3% in Q2 2019. That’s well below the mid-2008 high of 88.6%, but up from the 2017 low of 80.7%.
For Autumn Leaves, Texas cities such as Houston, San Antonio and Dallas were hit especially hard by new supply. But as of Q2, Dallas had 48 units of standalone memory care under construction, representing 2.25% of total inventory — below the figure for the top 99 markets.
“I’m cautiously optimistic,” Warren said. “The 5- to 10-year range, I’m very optimistic … There will not be, in my opinion, a big spike in occupancy in 2020.”
What the future holds
While tapering supply and increasing demand will solve some of the problems besetting standalone memory care, future development and operational practices should be shaped by lessons that organizations learned the hard way over the past few years.
For Warren, one takeaway is to be more public about his company’s plans, rather than trying to “surprise the market.”
“We used to keep our plans tight to our vest,” he said. “I did change this several years ago, but not soon enough. I think being more public about what [we were] planning could have deterred some competition from opening.”
Warren also would have organized LaSalle Group differently, in terms of its financial model. Having been a mom-and-pop that scaled, LaSalle worked with about 20 different lenders and half a dozen or more investment groups. As a result, projects were siloed from each other, and profitable communities could not shore up struggling properties.
“We’ve always been profitable, but where LaSalle got in trouble was that [communities] were spread out, and you can’t co-mingle funds,” he said.
Considering the risk profile of standalone memory care, providers may want to pursue revenue streams that could serve as a cushion when the core business is under duress. Possibilities include offering more adult day services or starting a hospice business.
“Every situation is unique, but those are the things I would be considering if I were in the shoes of a property that is struggling,” Green Street Advisors analyst Lukas Hartwich told SHN.
Autumn Leaves does provide “a ton” of adult day and respite services, but it’s not a significant source of revenue, Warren said. Rather, the company offers these services at reduced rates to show families the benefits of the standalone memory care environment.
The future might also see providers shifting away from pure-play standalone memory care toward more blended models, whether that means co-locating assisted living and memory care on the same site or diversifying their overall portfolio to include a variety of care levels and mixes.
Warren is open to managing memory care that shares a building with assisted living, if it’s done in such a way that the memory care part of the building is designed similarly to a standalone environment and is not an afterthought operationally. A forthcoming project near Chicago, The Whitley, will have assisted living as well as memory care, and the memory care will be under the Autumn Leaves brand — a first for the company.
Phoenix Senior Living, an expanding operator based in Roswell, Georgia, is doing something similar, adapting its existing freestanding memory care model — dubbed The Pearl — into new developments that also include assisted living.
Phoenix’s six Pearl communities are part of the company’s larger, multi-brand portfolio with communities of different service levels at different price points. This multi-brand approach allows Phoenix to deploy its freestanding memory care brand opportunistically in promising markets, and these communities in turn are supported by an organization with a larger scale, company founder and CEO Jesse Marinko told SHN.
For example, Phoenix is continuously recruiting workers and can place new hires in settings where they are most likely to thrive. People with hospitality or retail backgrounds tend to do well in the company’s assisted living settings, while those who have had a personal experience with dementia “raise their hands” to work at Pearl buildings, Marinko said.
Phoenix also makes significant investments in workforce training for its Pearl communities, paying for staff to become certified dementia practitioners. This runs to a few hundred dollars per person, Marinko said. All told, he estimates that there is a 25% to 40% greater investment in standalone memory care labor, including all the costs and time spent in professional development, compared to standard assisted living.
“Investment and training in the staff is paramount,” he said. “When you’re caring for those with dementia/Alzheimer’s, you need to know their triggers, their pinch points, what settles them down, and care staff needs to be educated overall and on the individual resident level.”
The formula is working so far. The first three Pearl buildings opened in 2017, as memory care occupancy was at a bottom. Despite this, occupancy at five of the six Pearl communities is currently in the 92% to 100% range, according to Marinko. The sixth Pearl community opened in March and is still in lease-up, but is about 35% to 40% occupied.
Whatever hardships they have endured recently, Silverado and Autumn Leaves set industry standards for freestanding memory care that Phoenix embraced in its Pearl model, Marinko said.
In fact, Phoenix recently acquired a property in South Charlotte, South Carolina, that previously was operated by Autumn Leaves. The building was 100% occupied at the time of the acquisition, and it has design elements that Phoenix requires in a freestanding memory care property, such as generous outdoor spaces.
While the current levels of distress are making other standalone properties available for acquisition, Phoenix has not found any others that meet its standards, Marinko noted. That said, “the faucet is not off,” should opportunities present themselves. The company also is not pursuing any new standalone memory care development at the moment, preferring instead to create continuum-of-care buildings that bring The Pearl’s memory care operating model alongside assisted living.
Another benefit of the Phoenix model is that best practices in assisted living sometimes translate well into memory care, and vice-versa, Marinko said. So, having a diverse portfolio helps spur innovation, as teams share their approaches and discoveries. Whatever the future holds for standalone memory care, this type of cross-pollination should support the continuing success of The Pearl brand.
“The best senior housing has yet to be invented,” Marinko said.