HumanGood CEO John Cochrane is not happy with the state of the nonprofit senior housing and care sector.
Specifically, he believes that many nonprofit organizations are too complacent and risk-averse, resulting in the senior living industry becoming far too dominated by for-profit providers.
“Look at the market share of who owns what today: independent living, 90% for-profit; assisted living, 90% for-profit; memory care, 90% for-profit,” he said Monday at the LeadingAge conference in San Diego. “That just floors me.”
Those statistics are being caused and exacerbated by a dramatic imbalance in the amount of new development undertaken by for-profit versus nonprofit groups, as reflected in statistics shared by Mary Muñoz, senior managing director at specialty investment bank Ziegler.
Ziegler analyzed Senior Housing News’ 2019 “In the Pipeline” coverage of construction projects, and found 243 new ground-up building projects and 27 expansions and repositionings being pursued by for-profits. Meanwhile, nonprofit sponsors were affiliated with just 14 new campus projects and 14 expansions/repositionings.
Cochrane believes that residents benefit from being served by nonprofit organizations, and so the statistics about for-profit market domination disturb him.
“I am horrified and irritated by seeing us cede all the advantage of our field to for-profits,” he said.
This is not to say that he thinks for-profit providers are bad actors, Cochrane clarified to Senior Housing News after his presentation at the conference, which is the largest annual gathering of nonprofit providers in the nation. Rather, his concern is that nonprofit inaction is creating an imbalance that is bad for the industry, and nonprofits are failing to live up to their historical legacy of being innovative in the field.
While nonprofits pioneered everything from independent living and assisted to skilled nursing and memory care, today the innovations seem to be happening more on the for-profit side, he said during his presentation, citing Latitude Margaritaville active adult communities as one example.
“I looked at [Margaritaville], by the way, when it came out, and I thought, that is the stupidest thing I have ever seen, that community would have no interest to me whatsoever,” he said. “Then I realized, I’m not their target market, and they’re fine with the fact that I wouldn’t live there, because you know what? There are a whole lot of people out there who said, that’s what I’ve been waiting for, that’s what a retirement community ought to be.”
In addition, non-traditional players are eyeing senior care, including Amazon and Apple. These companies will almost certainly create further innovation and disruption, Cochrane noted. So, for nonprofits to remain relevant, they must leverage the expertise that they have accumulated over their long histories and take urgent action.
“The time to act … is right now,” he said.
The case for affiliation
To drive innovation, regain market share and deliver on their missions, nonprofits need the benefits of scale, Cochrane proposed.
“Affiliation is about amplifying our mission,” he stressed.
That belief has driven HumanGood’s strategy over the past several years. The Pleasanton, California-based provider has engaged in two significant affiliations to become a bi-coastal company that is now the sixth-largest nonprofit senior living and care provider in the nation.
In 2015, American Baptist Homes of the West (ABHOW) affiliated with be.group, forming a $1.5 billion nonprofit that went on to rebrand as HumanGood. And earlier this year, HumanGood announced an affiliation with Philadelphia-based Presby’s Inspired Life, gaining a foothold on the East Coast for the first time.
Affiliations come with enormous integration-related challenges, but HumanGood already has seen significant upside from its expanded scale, CFO Pamela Claassen said Monday. She enumerated several these newly realized advantages, which are enabling HumanGood to be more competitive and should support further expansion.
On the financial side, one major benefit has been an upgrade to an A- credit rating from Fitch on HumanGood’s California obligated group of communities. In addition, debt consolidation as a result of the affiliations has provided powerful upside.
“Our experience was a CFO’s dream this year,” Claassen said.
HumanGood is realizing $3.5 million a year of coupon savings on debt, funded a $30 million project fund, and released debt service funds and sold the bonds at a premium. Now, that money is available for reinvestment in infrastructure.
Streamlining boards and executive leadership and consolidating back office support are difficult challenges during an affiliation, but ultimately result in fewer executive and governance roles. This frees up dollars to make new, critical hires. In HumanGood’s case, these hires have included a chief information officer, a dedicated technology security officer, and a vice president of innovation and experience design.
With its increased financial and operational firepower, HumanGood intends to expand further. The organization is targeting another three or more affiliations over the next five years, with a Midwest presence being one goal.
In addition, new development is being contemplated, with a focus on creating a middle-market product. HumanGood does not see itself as competitive in the standalone independent living, assisted living and memory care spaces, but Cochrane believes there is an unfilled niche in serving a lower-income middle-market consumer. HumanGood is exploring ways to meet that demand by adjusting its existing affordable housing model.
HumanGood is not the only nonprofit provider to pursue affiliation in recent years. In fact, growth via transaction began to outpace growth via development starting in 2016, Ziegler’s Muñoz pointed out. And — as has been the case with HumanGood — these transactions have more often involved strong organizations coming together, in a shift from historical nonprofit norms of affiliation being driven by a more successful provider rescuing a troubled one.
Still, Cochrane is afraid that the pace of change is not fast yet fast enough, in part because nonprofits are overly cautious.
“We’ve got to do a better job of taking appropriate risk and scaling faster,” he said. “We have a tendency to build a building, and 10 years from now, when we are rock-solid sure that that will work, we will build a second building. Meanwhile, the for-profits have built 50 of these.”
Nonprofits’ caution has in some regards served them well. Most are strong, successful businesses, Cochrane said. But that is all the more reason to be taking a proactive approach now, he urged.
“There are still plenty of boards that are asleep at the switch. They need to wake up and be horrified,” he said. “The time to act is not when we’re desperate.”